SA report unravels malfeasance and poor accountability in auditing industry

2 Jul 2020

Lack of independence, poor accountability and a culture of silence are some of the issues plaguing the auditing profession globally. A new report by non-profit, Open Secrets, shows how cracks in the system have caused a credibility crisis in the industry and why this is a matter of public interest.

“As the world stumbles from one crisis to the next, its economy precarious and its core financial markets inadequately reformed, it won’t be the accountants who pay the price of their failure to hold capitalism to account. It will once again be the millions who lose their jobs and their livelihoods.”

This quote is written in bold print on one of the opening pages of Open Secret’s latest investigative report: “The Corporations and Economic Crime Report (Volume 2): The Auditors’.

Financial Mail Lounge, in partnership with Open Secrets, hosted a webinar facilitated by Financial Mail editor Rob Rose to unpack some of the insights from the investigation and to delve into the pitfalls of an industry seemingly in crisis.

On the panel were Mamello Mosiana and Michael Merchant, the co-researchers for the project, independent analyst and accounting lecturer Khaya Sithole and outgoing CEO of the Independent Regulatory Board of Auditors (Irba), Bernard Agulhas.

Mosiana gave an overview of the report which explores the origins of the accounting profession, the concentration of power among the big four firms — KPMG, Deloitte, Ernst & Young (EY) and PricewaterhouseCoopers (PwC), local scandals in the public and private sector such as Steinhoff and VBS and ultimately that malfeasance and poor accountability has given rise to a global crisis of credibility in the auditing industry.

“This is a public interest issue which harms citizens fundamentally. Whether it’s a corporation that is defrauding shareholders… or it’s a bank where money is stolen directly from depositors,” said Merchant.

The report comes against the backdrop of recent arrests made in connection with the R2.7-billion theft at VBS Mutual Bank between 2015 and 2018. One of the eight arrested was former KPMG auditor Sipho Malaba.

Sithole said it was a “watershed moment” that an auditor was implicated in corruption.

“The audit team couldn’t use the same argument we’ve heard in many other cases which is to say ‘we’re relying on the quality of the information that was provided to us’ ”.

“An auditor cannot say that they rely on what the client tells them,” said Agulhas on the same point. “That is in fact the very reason that the standards require an auditor to be sceptical.”

Mosiana highlighted that often juniors are silenced by senior auditors when trying to raise irregularities, or otherwise silence themselves to protect their careers.

Daily Maverick previously reported that Malaba, who helped “hide the black hole in VBS’s finances”, received more than R33.9-million.

“He spent his VBS riches on Land Rovers, a Mercedes Benz, properties, and paid off his debt with big cash transactions,” wrote Scorpio’s Pauli van Wyk.

Another glaring issue raised is the fact that many auditing firms lack independence.

“Most of them are too close to their clients to ask the right questions,” said Agulhas. “They have become too complacent and it goes back to the long relationships that they’ve had with them.”

Deloitte, for example, had apparently been Tongaat Hulett’s auditor for more than 15 years when the sugar and property company was involved in alleged fraud that cost investors hundreds of billions of rands in losses.

Another concern was the potential conflict of interest of Irba’s new CEO, Jenitha John.

As Daily Maverick previously reported, she was chair of the audit committee of Tongaat Hulett for nine years until May 2019, and an independent non-executive director for 12 years — a worrying conflict of interest.

Mosiana highlighted that often juniors are silenced by senior auditors when trying to raise irregularities, or otherwise silence themselves to protect their careers.

“People are treated very harshly when they speak out,” said Mosiana, adding that the profession becomes more lucrative once you become a partner.

“And to make partner, you have to play by the rules of the game.”

The report puts forth a number of recommendations to reform the industry such as expanding the role of the auditor-general, giving Irba greater powers of investigation and sanction to pass down harsher consequences for malpractice, and separating “auditing” from “consulting” to help solve the “independence conundrum”.

“I think that the auditing profession still plays a remarkably critical role. In South Africa in particular, it’s important for us to have the b**** to say that this is a potential crisis, it did not emerge yesterday, it’s part of a longstanding set of issues that we’ve never been courageous enough to confront,” concluded Sithole. DM

Open Secrets is a small non-profit organisation that undertakes investigations, advocacy and litigation around issues of economic crime.

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