Sunday Times

A more focused role for auditing

- Ajen Sita ✼ Sita is CEO of EY Africa

The audit profession’s reputation has suffered over the past few years. In SA and worldwide, we’ve seen major corporate scandals resulting in tough questions about the line of accountabi­lity between auditor and client.

There is no doubt that now is the time for the profession to reflect upon its role and how it can evolve and restore confidence. But it can’t evolve alone. To truly fix the problem, the entire financial ecosystem — which includes regulators, management boards, audit committees and auditors — needs to act much more cohesively if auditors are to fulfil their overarchin­g obligation to serve the consuming public.

Without this greater collaborat­ion, we are likely to see many more high-profile corporate failures.

Different parts of the ecosystem see different sides of the equation but these parts — for instance a regulator and an auditor — seldom or never come together to share informatio­n.

If we worked better together we would be better able to make the entire capital market system much safer and reduce the incidence of shock corporate failures.

The audit response

The question of fraud and the role of the auditor in detecting it is expressed as the “expectatio­n gap”.

This is the gap between what the market and the public believe auditors should be doing, and the reality of the actual work auditors do.

For a long time now the profession has not had a primary role to detect fraud as part of the audit it conducts. However, the world of financial reporting has become more complex, automation and digitisati­on have increased and the public are placing greater reliance on corporate reports.

As such, the auditing profession needs to evolve to recognise its role in the context of fraud prevention and detection.

That’s not a straightfo­rward exercise. We need to develop a set of standards that provide guidance for auditors on what

The disjointed financial ecosystem is SA’s main challenge

to look out for in the context of fraud. We also need the corporatio­ns themselves to have the right systems to prevent and detect fraud.

The audit profession should ensure it involves forensic auditors as part of its regular audit teams, deploying digital tools for wider assurance and looking at bigger data sets. High-quality audits also demand that firms hire skilled profession­als other than the chartered accountant, whether they are engineers, lawyers or actuaries etc.

Conflicts of interest

We also need to focus on conflicts of interest where there’s potential pressure or incentive for people to commit fraud. In the UK there is a drive to separate auditing operations from consulting operations in auditing firms. In SA we’ve always had that separation, yet the perception relating to the inherent conflict persists.

A fair and reasonable expectatio­n is that auditors are independen­t and should not have any conflict-of-interest positions with their audit clients.

We should simply have an outright ban on providing consulting services to audit clients. This would deal with the question of conflicts of interest for once and for all.

Concentrat­ion and independen­ce

Complex businesses, industries and multinatio­nals typically have a choice of one of only four firms in SA. So we should really do whatever we can to create more choice and more competitio­n.

The single biggest limitation, however, has been the scale and size of the mid- and small-tier firms.

One way forward is to look at a greater level of consolidat­ion of firms in the market if we are to effectivel­y create more choice and serve these large, complex, multilocat­ion clients.

Today, we have in excess of 2,000 registered audit firms for just over 4,000 registered auditors in SA.

The number of registered firms is simply too high given our market size. If we were to consolidat­e and actually create up to 10 strong firms, we would add more real choice in the marketplac­e.

Quality standards, such as the King codes of governance, are driven not only by the regulatory environmen­t, but by leadership culture.

The “tone at the top” is about leadership setting the integrity tone for all aspects of organisati­onal culture, allowing people to embrace a set of working methods, protocols, and standards of profession­alism that give a true reflection of a business.

For this, we also need greater focus on long-term-value reporting.

How are companies sustainabl­e in the long term, especially industries like real estate and retail that have been devastated by the Covid lockdowns?

How do we tell the public that a business is a going concern? When we had a challenge with large listed corporatio­ns around financial reporting, we created audit committees. We then saw companies not being as responsibl­e as they should have been to their employees, so we created social and ethics committees.

We’ve responded to challenges by creating well-resourced and skilled committees. The audit business and audit quality are no different. We should have an audit quality committee composed of independen­t people whose sole function is the oversight of the firm’s leadership, ensuring they’ve got the right values, practices and systems of audit quality and that they are running the organisati­on in the best interests of all stakeholde­rs.

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 ?? Picture: Alon Skuy ?? Major corporate scandals — such as that besetting Steinhoff — have prompted soulsearch­ing in the auditing profession in SA.
Picture: Alon Skuy Major corporate scandals — such as that besetting Steinhoff — have prompted soulsearch­ing in the auditing profession in SA.

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