Op-eds

Critical watchdog roles that auditors and forensic investigators must play

By Riaan van Jaarsveld and Bernard Agulhas

19 Nov 2024

If fraud, corruption and financial misconduct are to be addressed proactively and holistically, there should be statutory consequences for all the role-players, including internal auditors, audit committees and board members.

The thing about watchdogs and bloodhounds is that they should never drop their guard. The moment they take their eye off the ball, opportunities that are up for grabs will be seized, with consequences which are often difficult to reverse.

Similarly, while International Fraud Awareness Week reminds us that we are constantly surrounded by incentives, opportunities and rationalisations to commit fraud, those who have responsibilities to protect investors, creditors and the public in general need to be vigilant at all times as expectations from them are great.

Losses suffered as a result of fraud, financial or otherwise, are often of such magnitude that professional assistance needs to be enlisted. Unfortunately, this comes post facto and reminds us of the adage that “prevention is better than cure”.

Auditors vs forensic investigators

This brings us to the role of auditors (we term them “watchdogs”), and forensic investigators (with no offence intended, let’s call them “bloodhounds”). These terms will at least start to explain when and how these professionals deliver on their respective responsibilities, which are often misunderstood.

Auditors, for the purposes of this article, are statutory auditors registered with the audit regulator, the Independent Regulatory Board for Auditors (Irba) which licenses them to express an opinion on an entity’s annual financial statements and are members of a professional body (let’s refer to these as guide dogs).

Being regulated, they must comply with auditing standards prescribed in their governing legislation, the Auditing Profession Act, as well as Irba’s Code of Professional Conduct. The benchmark for performance is necessarily high, as users of their audit opinions must be able to rely thereon when making critical financial and economic decisions.

If such reliance proved to be false, millions (often billions) of rands are at risk, including financial losses suffered by pensioners and investors who have placed their confidence in their auditors – this is because auditors sell trust in their role to protect the public.

While auditors express opinions on financial statements which represent past events and transactions, they are also expected to shine a light on any wrongdoing early enough to prevent misconduct from reaching the proportions we have seen with local business failures such as Tongaat, Steinhoff and VBS Bank.

Forensic investigators, on the other hand, often enter the financial ecosystem when suspected fraud or other misconduct needs to be further examined, involving a more in-depth inspection of documentation, transactions or events specifically agreed upon between the parties.

Their reports mostly have limited distribution and the investigation in essence doggedly “follows the breadcrumbs”. This means that transactions and events which could have led to suspected fraud or other misconduct are interrogated much deeper to produce evidence that could stand up in a court of law. Fraud is a criminal offence which could lead to severe penalties and consequences, including imprisonment.

It therefore comes as no surprise that forensic investigators are often used by liquidators, and in inquiries into insolvent companies to provide evidence that there could have been fraudulent activities which might have led to the insolvency of a company. It is also not unusual that, once such evidence is provided, potential liability might ensue.

Auditors’ responsibility to detect fraud

Auditors, on the other hand, do not have any statutory responsibility to detect fraud, as they are not trained or qualified as bloodhounds. However, the auditing standards do require the auditor to develop auditing procedures which might detect the existence of potential fraud and include specific fraud risk factors to which the auditor should be alert.

Once the auditor identifies such fraud risk factors, the auditor must develop an audit response, meaning that the auditor should gather any audit evidence to provide him or her with the comfort that the fraud risk factors did, or did not, result in actual fraud (which can only be determined by a court of law).

The need for transparency

It should be borne in mind that the auditor does have to comply with confidentiality requirements when performing an audit, and it is for this reason that the Auditing Profession Act includes provisions which require the auditor to report any reportable irregularity, as defined, to the audit regulator, who will on-report to any appropriate regulator. Failure to report a reportable irregularity could result in a fine, imprisonment or both.

Auditors also have specific responsibilities to report any suspected fraud under the Prevention and Combating of Corrupt Activities Act (Precca) or suspected financing of terrorist activities under the Protection of Constitutional Democracy Against Terrorist and Related Activities Act (Pocdatara). Such reporting is usually made directly to the relevant authorities due to the risks involved.

A questioning mind

To effectively discharge their responsibilities, auditors and forensic investigators must apply professional scepticism – this is the ability to apply a questioning mind to information and evidence received.

While auditors cannot make a legal determination regarding documents, they have a responsibility to obtain sufficient appropriate audit evidence to substantiate the audit opinion expressed. Auditors have unrestricted access to a client’s records, explanations and information. An inappropriate audit opinion could lead to an audit failure with serious consequences for the auditor if proven.

In terms of the Auditing Profession Act, auditors will be liable to any party only if it can be proved that the opinion was expressed maliciously or fraudulently, or that the auditor had been negligent and the auditor knew, or could reasonably have been expected to know, that reliance would be placed on such opinion.

In the case of forensic investigators, the evidence gathered must be capable of being presented in a court of law and must therefore necessarily also be sufficient and appropriate. Unlike auditors, they can apply to the relevant authorities to subpoena documents and witnesses.

The financial reporting ecosystem

One should not forget that auditors and forensic investigators operate in a broader financial reporting ecosystem in which, currently, only auditors are regulated. This does result in an uneven playing field, with consequences for auditors who do not comply with standards, codes and legislation, but not necessarily any for the other role-players.

If fraud, corruption and financial misconduct are to be addressed proactively and holistically, there should be statutory consequences for all the role-players, including internal auditors, audit committees and board members, who often forget that requirements such as independence and exercising professional scepticism apply equally to them.

South Africa has produced countless examples of business failures which resulted from these role-players becoming complacent and careless, either because of incompetence or a lack of independence, among other factors.

What else is needed?

Regulation and oversight will not necessarily address the level of fraud and corruption which exists worldwide. While it might assist in igniting a conscience, other contributors to an ethical society and business include, inter alia, the tone at the top and demonstrating the right behaviours.

In such an environment, it is easier for fraud and corruption to be stifled, and while it cannot necessarily be prevented altogether, it will remind us of our responsibilities towards, and the need to protect, the greater public.

What the world does not need right now are players who turn a blind eye to fraud and corruption and do not appreciate that everyone has a role to play in eradicating these practices – instead of acting helpless in a world marred by undesirable practices, now is the time to show up and step up.

Showing up and stepping up becomes especially critical, not when all is well, but when the first rumblings of thunderclouds and the inevitable storm appear – we expect pilots to take off and land their aircraft smoothly in good weather conditions, but their true mettle comes to the fore only when they have to navigate life-threatening weather conditions, and it is then that the best professionals are allowed to soar above the dark clouds.

This should be no different for auditors and forensic investigators as well as the relevant agencies which train and prepare them to protect the public on their (often bumpy) journeys. Failure to do so should result in appropriate consequences, lest any hard-earned trust evaporates like mist under a harsh sun.

Not everyone can be watchdogs or bloodhounds or guide dogs – but nobody wants a puppy dog. DM

Riaan van Jaarsveld is the director of RixForensica, a forensic firm which provides forensic services, and Bernard Agulhas is the former audit regulator, a co-opted member on the ACFE SA Board and an adjunct professor in Auditing at the University of the Free State.

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