A more focused role for auditing
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.