A compromised profession, a race for trust restoration and a need for comprehensive regulation

The auditor occupies a unique role in our society and economy. Lots of people have things to say about the running of any major company, for good or bad. But only the auditor combines an independent viewpoint with unparalleled access to the internal workings of the company. The auditor has the right and virtually unlimited opportunity, should he or she wish, to interrogate the company’s directors, management, employees, systems, processes and information.

Sir Donald Brydon

At a wink of an eye, the principles enshrined in the Accountant’s Code for Professional Conduct of the International Federation of Accountants (IFAC) offers a glimmer of hope for a profession that is trusted and enhances confidence for the investing public and related stakeholders. Grand of this principle is is what is termed “professional skepticism“. Professional skepticism can loosely be defined as “being alert to conditions which may indicate possible misstatements due to error or fraud.” Perhaps, it is for this reason that the investing public expect auditors to look with a keen eye to conditions that if undetected may leave their interests exposed to huge losses.

It was a summer of 2017 in the Republic of South Africa, when an international conglomerate in the name of Steinhoff reported that their financial results would be delayed due to technical issues arising from technical disagreements between itself and its auditors. A deluge of similar cases in subsequent years emerged. Government, institutional investors, pensioners and private individuals lost money as a result of these corporate failures – a R100 loss is too much a loss for a prudent investor.

These losses are not only confined to a geographical location in the global South – they are present across the globe. Whenever, auditors and other assurance providers are challenged on their failures to detect and report on fraud that ensued in these companies, often a times an excuse of “expectation gap” is advanced.

Is a reason for “expectation gap” good enough an excuse for failures of auditors to detect fraud if an important principle in “professional skepticism” creates an expectation for them to detect misstatements and fraud?

It has become so unfortunate that these events has led to a point where the accountancy profession’s social contract has lost its ideal for being a preserve of public value. The accountancy profession has become tainted with all sorts of negative press ranging from suggestions that accountants have become enablers of state capture to ideas that auditors have lost their mandated purpose as they chase revenues and client retention at whatever cost. This notion suggest that the accountancy profession has become compromised and is losing its flair – perhaps its relevance.

In restoring trust, legislators across the globe are working tirelessly through various measures of audit and accountancy reforms – a task that requires huge investment in time, expertise and financial resources. How can a profession so revered lose its relevance so willy – nilly?

Stakeholders remain dissatisfied, practitioners continue buying yachts and the United Nations’ ideals of zero hunger as contained in the Sustainable Development Goals remain an elusive dream.

Sir Donald Brydon in his speech delivered to members of the Audit and Assurance Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) remarked that the auditor exists fundamentally to help enable shareholders and other users of company reporting form a view on whether the audited company deserves to be a recipient of their confidence. Clearly confidence is an instrumental tool in this profession, yet each corporate failure erodes trust in the audit product and other assurance report.

To respond to the race towards trust restoration, lawmakers in the Republic of South Africa have in October held a public hearing where interested stakeholders were called to make submission into the proposed amendments into the Audit Profession bill. The bill seek to impose greater sanction and refine ways in which accountability and discipline can be enforced. Many stakeholders made brilliant suggestions in line with what the Parliamentarians requested. I, as an interested stakeholder in the profession submitted that it wouldn’t be beneficial for this bill to only regulate auditors, whilst the reporting value chain extend beyond that domain. I then suggested that the bill be expanded to include the regulation of other parties in the accountancy space. I held a view that comprehensive regulation will strengthen the oversight mechanism expected of the Independent Regulatory Board for Auditors and will indeed hold those who intentionally perpetrate fraud in financial reports.

Comprehensive regulation has been a phenomena that has been suggested to the South African Ministry of Finance in 2013 by the World Bank in its Report on the Observance of Standard & Code (The ROCS Report) as a necessary legislative reform to enhance the accountancy profession in the country. It is a no brainer that auditors are heavily sanctioned across the globe for their audit failures – sometimes fines fetching a tune of ￡5.6 million pounds in countries such as the United Kingdom – whilst company directors are left unchecked. This does not include a poultry R200 000 fine imposed on South African auditors – a sanction many view as a slap on the wrist.

All role players in the financial reporting value chain, including those who happen to be in governance roles should be comprehensively regulated and heavily sanctioned as auditors when they fail to discharge their responsibilities of trust. To this extent, Sir John Kingman in his report recommended that the audit regulator of the United Kingdom, The Financial Reporting Council (FRC) be disbanded and replaced by the Audit, Reporting and Governance Authority (ARGA), an authority that will see professionals in these domain and the accountancy bodies to which they belong comprehensively regulated.

Others might argue that over – regulation might ward off interest in these domains, but self – regulation like no – regulation offers more harm than good.

The importance of comprehensive regulation is more urgent and perhaps that is the reason behind the amendment of the Public Accountants and Auditors Act in Namibia. It is however interesting to me that Namibia borrowed this law from South Africa and yet it is now reviewing it to include it before South Africa could do so. In its defence though, following public hearing, the National Treasury made a commitment to Parliament that it would be submitting this bill again before it in 2022 for lawmakers to include comprehensive regulation in this law as I suggested so as to enable the IRBA to be a comprehensive regulator – a move I believe would help in restoring trust, enhance confidence a narrow the expectation gap.

Around the globe, there is however an unprecedented pressure to reform the audit and accountancy profession with a sole aim of restoring trust and regaining the nobility of the profession. It would indeed be unfortunate if South Africa continue to trail behind in responding to the need for this ever – important regulatory reform.

As comprehensive regulation seek to strengthen regulatory oversight, this measure carries a potential of discouraging company’s directors from engaging in earning management that is often characterized by short – termism and total disregard of agency – theory!