Corruption Grows in the Audit Expectation Gap

The layperson could be forgiven for looking at SAA’s unqualified audit results between 2012 and 2016 and feeling assured that the airline was free from fraud and corruption.

As Judge Raymond Zondo made clear in the first part of the State Capture Report, in which PwC is mentioned 102 times, this was far from true. Significant blame has fallen at the door of PwC auditors for not correctly disclosing legislative breaches by the airline – correctly so.?There is however, a larger problem that plagues the audit and accounting professions. Namely, the perception by the general public, which mistakenly views a clean audit as a guarantee that no fraud or corruption exists. Zondo himself states, “The auditors appointed to SAA for 2012 to 2016 financial years failed dismally to detect any of this fraud and corruption.”?

As accounting and auditing professionals we know that an unqualified audit does not exclude the possibility of fraud. Auditors simply give an expert opinion on whether the financial statements are fairly presented in accordance with financial reporting standards and, in certain cases, whether there has been legislative compliance.

It is in this expectation gap that fraud hides undetected, overlooked by laypeople who mistakenly rely on auditors that were never tasked with explicitly searching for fraud. While this legislative nuance indemnifies auditors from liability in the case of corruption it has not, and will not, indemnify the auditing profession from the public’s outcry in such an all too common scenario.?

This cost to our economy and livelihoods is too high to continue to ignore the very real danger hiding in the audit expectation gap.?

Judge Zondo’s recommendations in the State Capture Report are supported but should go further.?

It is surely in both the public and our profession’s interest to amend the Companies Act to reconsider the role and function of the audit requirement. As it stands South Africa took a big step away from mandatory audits with the adoption of the new Act in 2013. Prior to the new Act all companies were required to be audited. Now an estimated 90% of all companies are exempt from the audit based on SME criteria.??

The remaining 10% of companies now require our attention. They may not be as plentiful as SMEs, but in terms of revenue, they are the giants of industry.?

The value of an audit reached its peak during the industrial age but has arguably lost some shine in the new digital and information age. Why is this standard form of audit still mandatory? What purpose does it serve and how many big financial scandals has this prevented?

The estimated costs to the country as a result of the corruption perpetuated in the State Capture fiasco is R1,5 trillion. We must stop doing the same things that keep on giving us bad results.?

Why can a company and its stakeholders not agree to the audit that best fits their own profile, risks and context? This would not be a standard mandatory audit, but instead a vibrant, customised and highly specific audit based on the issues that are likely to cause the biggest harm to the companies’ stakeholders. Banks, investors, stock exchanges and communities should be able to specify and agree on the type of audit or assurance work that will satisfy their particular risk appetite. This would remove the expectation gap, relieve pressure on regulators, make the audit profession sexy again, unlock value and, most importantly, detect and prevent corruption.?

A company should, for instance, be able to choose to undergo an audit that also specifically looks for signs of fraud. If they make this choice, the public will have a more complete understanding of their affairs with regards to fraud. If a company chooses not to undergo such an audit, the public can interpret its reasons for not doing so as it sees fit.

While a change of this nature may seem radical, the past decade demands consequential transformation. The price the country has paid for financial misstatement, corruption or faulty audits – such as reported with regards to MasterBond, ShareMax, VBS Bank, Steinhoff, Tongaat Hulett, Gupta-owned companies, and State Capture scandals alone – amounts to trillions of Rands.?

The cost to the auditing profession, which rightly or wrongly carries the blame, is not easily measurable, but each scandal has been a sledgehammer to the auditing profession’s reputation.

For the profession to again become a byword of trust it must do all it can, not only to weed out bad apples and ensure auditing malpractice does not occur using existing legislation, but also to address the expectation gap where the roots of corruption have found such fertile ground.

We are not above the fray. There is no holy ground. Let’s go where it hurts to create something truly fruitful: an individualised audit focused on what is really important. This will be unique, relevant, and powerful.?

In a world of digitisation and automation, simply generating financial statements has become an entry level requirement. The profession now has to step up and build a bridge between the public’s expectations and its ability to meet its ethical, legislative and social responsibilities, or risk becoming irrelevant.?