Collapse pulls spotlight back onto audits
The meltdown of Steinhoff International, amid allegations of mass accounting fraud, has again called into question the health of the auditing profession in South Africa.
The retailer this week lost more than R100-billion in market value, following the resignation of its CEO Markus Jooste, suspected of being party to the financial irregularities at the company. The events were initiated when Steinhoff’s auditor, Deloitte, raised questions and would not sign off the company’s financials.
While Deloitte may be praised for ringing the alarm, it is not yet clear whether it should have acted sooner. If found to have acted irresponsibly, Deloitte could join the ranks of disgraced auditing firm KPMG and global consultancy McKinsey, both dragged into scandals over their dealings with Guptalinked companies and embattled stateowned enterprises.
To have another auditing firm’s integrity called into question would not bode well for the profession or the economy, said Tim London, of the University of Cape Town’s Graduate School of Business.
Scary for the system
“These auditing firms are key cogs in overall corporate governance and when they fail it’s scarier for the whole system than when the average full-profit company fails,” he said.
Khulekani Dlamini, executive director at KD Capital, said unsavoury practices in the profession were driven by paying clients.
“Turkeys do not vote for Thanksgiving,” he said. “The primary role [of auditors] is to provide the clear financial position of a company to government and shareholders. But the people who employ them are neither one of these parties but the company.”
To deepen their relationships with their company clients, auditors expand the range of services they offer, he explained. “Management typically tell [auditors] what they want the results to look like and [auditors] do not report as negatively as they should.”
Knee-jerk response
Instead of strengthening regulation, professional accountability among practitioners had to be nurtured, London said. These things are cyclical. Something happens, we freak out, we build up a lot of protection and then nothing happens for a while and we think it’s fine [to loosen the rules],” he said.
While the immediate response to the events which unfolded at Steinhoff this week was to tighten regulations, this would achieve little apart from driving up the cost of compliance, Dlamini said.
“I don’t think [the fraud] gets stamped out because regulation always lags behind the professionals who [are] creating loopholes. Regulation closes the barn door after the horse has bolted.”
Before it was audited by Deloitte Netherlands, following its listing on the Frankfurt Stock Exchange in 2015, Deloitte South Africa audited Steinhoff's financials. The company has approached PWC to investigate its 2017 financials and will determine whether prior years’ financial statements will need to be restated.
Deloitte Africa Chief Executive Lwazi Bam said the firm will co-operate with the regulators and investigative bodies probing the Steinhoff matter.