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Greed remains at the heart of audit scandals

The rot in the auditing and accounting profession was laid bare during a recent round table discussion between regulators, industry bodies and Corruption Watch.

The root cause of the problems has been attributed to “pure greed and corruption”. Industry players warned that blaming “systemic problems” alone will not solve the problems. People need to be held accountable.

South African firms such as professional services company KPMG, law firm Hogan Lovells and the international management consulting firm McKinsey have been embroiled in one “state capture” scandal after another. It has revealed shortcomings in the South African regulatory and oversight models, and has led to a number of investigations that will likely result in significant interventions by government.

The South African Institute of Business Accountants (Saiba) organised the round table to explore the state of the profession, what led to the current crises and likely outcomes from the fallout.

David Lewis, executive director of Corruption Watch, said the current crises cannot be attributed to a few errant auditors and accountants.         

“When a firm has to fire eight members of its executive team to clean up the company, you do not have a bad apple problem. You have a bad barrel problem.” He is not surprised at what has happened in the profession.

“The corruption landscape for the past decade has been dominated by a bunch of business people who are not really business people. They are in fact hoodlums or criminals who hitched up with criminals in government. The outcome was that they reaped a considerable amount of public resources.”

Lewis said when proceeds of that scale have to be hidden, you need the help of auditing firms, managing consultants and even lawyers. “The reform focus is now directed at these principle facilitators of grand scale corruption.”

Rory Voller, commissioner of the Companies and Intellectual Property Commission, said that while people were looking at possible “systemic issues”, which affects the assurance model, the crises should be seen for what it really is: pure greed.

It is about “chasing fees” not only in the auditing profession but also in the legal profession. “It all starts with directors getting too close to the assurance watchdogs … we need to have better oversight and we need to hold people accountable.”

The auditing profession’s watchdog – the Independent Regulating Board for Auditors (Irba) – firmly believes that auditors are not sufficiently independent and are driven by lust for money. “Professionalism has been taken over by commercialism. Partners at the firms are measured on the revenue they generate and the clients they attract to the firm,” said Bernard Agulhas, CEO of Irba.

In the process, they take on clients they were not supposed to have taken on in the first instance. Changing incentive models at auditing firms may start making a difference. Lewis said that instead of being the watchdogs of business, auditors and accountants are business people in their own right. “Their suits are as sharp, their headquarters as opulent and their salaries as large.”

It used to be the profession that held powerful people and powerful institutions accountable. “They are now simply businessmen. The profession has become indistinguishable from the businesses whom they audit.”

Agulhas has called for mandatory audit firm rotation to address concerns around independence. When auditors know a fresh pair of eyes will be looking at their work, they will be less keen to try to hide things. The possibility that the Big Four may become the Big Three if KPMG does not weather the storm has raised questions about capacity in the market and the impact on large businesses.

Agulhas believes it will actually address concentration in the market. “We have 2 000 audit firms in South Africa, not four and there are 4 500 auditors, not eight.” When companies say some auditors do not have sufficient experience, we say they will never get it if they are not given the opportunities, Agulhas said.

Saiba CEO Nicolaas van Wyk said it was critical to take a long and hard look at the profession because smaller firms were struggling to break into the market. “Access is not equal in many ways.” He commented on the millions government is spending on consulting work, however very few smaller firms get a slice of the work.

Fanisa Lamola, acting CEO of the South African Institute of Chartered Accountants (Saica), said the institute is doing research, in collaboration with a local university and an international partner, on the potential outcome and impact if auditing and advisory services were split.

“Saica is of the opinion that it could be a solution, but the institute does not want to come up with a quick solution only because we are fighting a fire right now,” she said.