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FROM THE CEO’S DESK
Bernard Peter Agulhas
Chief Executive Officer
The past 18 months have been tumultuous, and 2018 will go down
in audit history as one when the profession hit a crossroad. Through
this time, our general advice to audit firms has been to take actions
that will restore confidence as that cannot be done by the regulators
alone. Firms have a key role to play in rebuilding trust in their quality
and integrity. We have also emphasised that all role players in the
financial reporting system, including management, those charged
with governance, internal auditors and shareholders, have a role to
play in restoring confidence in the profession.
The Steinhoff business failure cost the economy billions of rand. In
the latest scandal with VBS Bank the auditor provided a clean audit
report though millions of rand had been stolen and pensioners had
lost their hard-earned investments.
Audit is a public interest responsibility. As such, auditors must
consider the cost of their decisions on the public, investors and the
economy.
During our engagement with the profession this year it became clear
that the firms also do not see the gravity of reputational damage,
and they do not realise the extent of the measures that need to
be taken to reverse this. During past crises when there had been
a loss of confidence, the first reaction had always been to deny
that anything is wrong. Rather, there had always been an insistence
that audit quality meets the required standard, while regulators have
seen things differently, with inspection results supporting our view.
Auditors do not only require technical competence to perform a
high-quality audit – they also require appropriate behavioural
competence, and this is something that I have repeatedly addressed
this year. Most audit failures are not only linked to poor audit quality.
They have a lot to do with auditors behaving unethically, not
exercising professional scepticism and not acting independently.
Furthermore, if leadership supports a culture that makes profits
more important than ethical behaviour, this tone will permeate the
whole organisation. Initially, we thought that the unethical behaviour
was isolated, but as more wrongdoings have come to light, it is
becoming clearer that we are dealing with a systemic problem in
the profession.
It takes one “bad apple” for a firm, and indeed a profession, to
be classified as a “barrel of rotten apples”. Therefore, individual
errant partners should be dealt with swiftly as drawn out processes
of disciplining auditors benefit no one and merely perpetuate the
negative image of the profession. The IRBA is making every effort
to get these processes concluded as quickly as possible in order
to minimise the reputational damage to the profession as a whole.
I wish to emphasise that the regulator is there to assist the firms
and caution them against potential audit failures. It is, therefore,
advisable to work with us instead of opposing our attempts to help
improve audit quality.
Times have also changed with regards to the environment in which
we find ourselves. There is an increased awareness of the role of
auditors and expectations by investors, the media and the public.
The “new normal” is an active media as well as an educated and
vocal public. The advent of social media has changed the speed at
which the public forms its conclusions.
It seems that auditors have forgotten who the ultimate client is, and
whose expectations they must satisfy. Being too cosy with the client
can mean that the auditor is no longer comfortable to challenge the
client on behalf of shareholders and investors. The expectation gap
is therefore real.
The public expects more work to be done by auditors around
fraud risks. Consequently, firms must improve and adapt their
methodologies and work done around fraud risk on the engagement.
It is no longer sufficient to claim that auditors are not expected to
discover fraud. Rather, auditors need to strengthen their procedures
so as to identify and respond to fraud risk factors, especially in the
current environment of corruption and increased expectations from
the public.
Much of what has happened has confirmed the concerns we
voiced as far back as 2013 and 2014. We see that there is a lack
of professional scepticism and independence, and conflicts of
interest are not considered sufficiently. Many audit failures are a
result of cosy relationships between auditors and their clients (audit
committees, CFOs, management). Yet, auditors keep denying that
these relationships have an impact on their independence and audit
opinions.
It is time for auditors to start to take responsibility and accountability
and stop being in denial and defensive. In 2019, there must be a
commitment to clean up and focus on audit quality, especially in light
of the IFIAR Public Report on audit findings and the deterioration in
quality. Similarly, the IRBA will address any potential shortcomings in
its regulatory oversight in its attempts to rebuild public confidence.
My hope for this holiday season is that we will all reflect on the year
that was and resolve to make significant changes in 2019. I hope
firms seriously start focusing on quality, not as a risk to be managed
but as an imperative to regain public trust. Without trust there is no
confidence; and without confidence an audit opinion has limited
value.
Let’s not wait for the market to change audit and decide on
its continued relevance. Let’s agree to make the changes in the
profession that are necessary to ensure that the profession can
weather this storm.
I wish you all a good festive season and a wonderful holiday break.
My hope for 2019 is that we can finally draw a line in the sand and
move forward with renewed hope for the profession.
Issue 44 | October-December 2018
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