Irba fines may have unintended consequences

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JIMMY MOYAHA: We kick things off with a look at the recent announcement by the Minister of Finance, Enoch Godongwana, around the fines that are going to be imposed or available for Irba (Independent Regulatory Board for Auditors) to impose on the audit profession in terms of auditors and audit firms for misconduct activities.

I’m joined by Khaya Sithole, who’s an independent analyst, to take a look at this. Good day Khaya, thank you so much for the time, as always. We’ve been found wanting in the past, to say the least, by institutions like the FATF (Financial Action Task Force). Why is it so important to make this sort of announcement where it relates to the audit profession and why at this particular time?

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KHAYA SITHOLE: Good afternoon and good afternoon to the listeners. So, the announcement is actually the culmination of a very lengthy process that the Independent Regulatory Board for Auditors started many years ago when it became very clear that the existing regime of sanctions against auditors was not achieving the desired outcomes and, of course, the desired outcomes will be better behaviour by auditors.

So historically, the fines that could be levied were really a small fraction of what the sum of the transgressions would be. What Irba argued was that in light of the very low sanctions that we are able to impose, fines of R200 000, for example, we do not think that we have a significant enough financial deterrent to discourage people from not doing their jobs and doing things the wrong way. So, moving the cap up to a number that should send a chill to anyone who’s contemplating messing up in audit is really what the intention is, and that’s where the new numbers came from.

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JIMMY MOYAHA: Do those numbers send a chill towards auditors? Are the numbers high enough to disincentivise what we’ve seen in the past?

KHAYA SITHOLE: It’s a remarkably difficult one because there is a chill, but perhaps the chill that has been sent there is not the one that we’re all hoping to see. What we are hoping to see is the chill that says to auditors, do not ever put a foot wrong.

However, the chill that is also likely to materialise is the one that says to anyone, actually, the profession is too risky, the liability profile is too high.

Therefore, rather pursue something else where you do not have this potential liability that might attach to you. So, the unintended consequence is that you may see less people taking up active auditor positions, signing up as audit partners, on the basis that should something go wrong, and remember most people will say, ‘look, I may do the best that I can, but if something goes wrong, something has gone wrong, I wouldn’t want to be able to have this particular punitive sanction that might be labelled against me’.

So that’s at the individual auditor level. It’s also going to be very difficult to persuade a new entrance into the market because you can imagine that if you are now going to start your own auditing firm, for example, the type of professional indemnity insurance that you need to be able to buy in order to cover all eventualities is suddenly going to escalate. Many people will quite simply say, we cannot afford to take up the type of indemnity that covers the potential sanctions regime that has now been implemented. So that may have unintended consequences for new entrants into the market.

JIMMY MOYAHA: Should we be looking at other sanctions beyond the monetary side of it? We know Irba has the ability to impose other sanctions, but I ask this in the context of, we take an isolated example, the recent Steinhoff debacle, where we held directors accountable more as well. Should we then not extend that in the audit profession to then say as a partner, if you are part of an audit firm, we’ll hold you liable in your capacity as a partner above and beyond the other sanctions that may be imposed.

Would that be more of a deterrent or a punitive measure to ensure that those that want to participate in these things think carefully before participating in activities they should not be?

KHAYA SITHOLE: Well, as it turns out, Irba, fortunately has a recent history of understanding the limitations between the different types of laws that oversee the different parts of the financial ecosystem. So remember a couple of years ago, the idea of audit firm rotation was overturned by the Supreme Court of Appeal on the basis that it was probably the Companies Act where such a law should have originated from rather than the Auditing Profession Act.

So, the key issue here is that for as long as the Auditing Profession Act only limits the number of activities that Irba can do, to activities like disciplinary measures, and also setting up the professional standards, it’s going to be very difficult for us to say, ‘well, actually the best way in order to hold people accountable is to say the actuaries who are involved should also be accountable’.

The internal auditors who are involved should also be held accountable because Irba does not regulate that at that part of the profession.

So what we’re seeing, increasingly, is this acknowledgement that to produce a set of financial statements requires more than just the traditional accountant, it requires more than just the normal audit process. There are many other players and role-players in the ecosystem, and so far, there isn’t a comprehensive regulation model that then says, well, actually in relation to this particular case, whether it’s Steinhoff, whether it’s African Bank, we think that the errors, or at least the oversight, were more on the actuarial computation side, for example.

So, if you’re dealing with an insurance company in IFRS (International Financial Reporting Standards ) 17, that’s probably more actuarial technical issues than it’s accounting and audit-related issues. So, in the absence of a comprehensive regulation regime around that, we unfortunately only end up talking about the auditors, and the burden unfortunately, sits quite heavily on them.

JIMMY MOYAHA: Well, maybe we should be looking at the rest of the value chain, as you rightly mentioned, because as you said, there are more participants or parties involved, and it’s not just resting with the auditors, but it is a step in the right direction. We hope that these sorts of steps do continue because we definitely cannot afford to have more Steinhoff-style scandals appear for our local companies.

Thanks so much, Khaya. That was Khaya Sithole, who is an independent analyst, giving us a sense of the latest announcement around the hefty fines that are going be imposed for auditors and audit firms alike.