JOHANNESBURG — There’s no question that the auditing profession in South Africa is facing a massive credibility crisis. Wherever one has looked in the last few years, CAs such as Markus Jooste, Anoj Singh and several other rotten apples at Gupta-cursed KPMG have completely destroyed the reputation of a once-proud profession. As a result, two fed-up CEOs – Comair’s Erik Venter (a CA himself) and Mantelli’s CEO Simon Mantell – have written a letter to local Chartered Accountants calling on them to cancel their Saica memberships until the organisation gets its house in order. Instead of paying their annual Saica fee of R7,000, CAs should spend this money on other causes such as providing bursaries to students and helping to build schools, say the two CEOs. It will be interesting to see if Saica members start heeding their call… – Gareth van Zyl
By Erik Venter and Simon Mantell*
Once upon a time there was a professional designation whose uncompromising ethics meant any report or communication emanating from individuals using this designation were confidently accepted as fact. This profession’s reputational standing and pre-eminent status served as a beacon for school leavers, who were attracted to a course of study that, while arduous, was a key building block for a potentially successful and rewarding career in either the profession or commerce.
Aspirant students served articles under close scrutiny of audit partners who, even in the large firms, were for the most part a rather pious and boring bunch. These partners lived comfortable but not extravagant lives and drove cars in keeping with their modest offices. Statute required that all companies had to be audited meaning that their practice income, while not of the super profit nature, was effectively guaranteed providing the type of assurance which resonated well with their risk-averse and conservative natures.
These audit partners were feared by clients and articled clerks alike — no financial director would dare question the judgement of the audit partner with respect to the necessary disclosure or required adjustments when finalising annual financial statements and these relationships, while often challenging, were not adversarial and in short, things worked.
The years of articles provided fertile ground for young clerks to observe the coalface business operations of audit clients and very often these experiences provided the inspiration for qualified clerks to eventually start businesses of their own or enter the general commercial world. Relative to those remaining in the profession, clerks flying the audit coop were seen as risk takers, but in reality, years of study together with the closely monitored audit environment dampened down any significant predisposition towards unnecessary risk.
The credibility of the professional designation and everything it represented meant there was a high probability that the young professionals entering commerce would eventually become CFOs and CEOs of large companies leading to a role reversal as clerks now became clients. But these clerks didn’t dare overstep the mark because they knew that the audit partners were mindful of their responsibilities towards the profession and because these partners were independently minded and owed no-one a living.
Then, a societal shift occurred where rampant consumerism influenced day-to-day thinking to such a point that even in corporate life, executives attempted to outdo one another by developing ever more gauche head offices matched only by executive remuneration packages so excessive in nature that it should have made shareholders weep. Audit firms forgot their place as low-risk and low-reward businesses and wanted, just like their clients, to be at the high table of serious financial action. These firms figured that they could leverage off their existing client and offer a smorgasbord of services ranging from IT, tax, management accounting and everything in between. In no time, these new revenue streams enabled the bigger audit firms to enter the stratosphere of smoke-and-mirrors consulting which then warranted the bespoke glass-and-steel phallic symbol head offices in Sandton and Midrand.
Soon these firms began to lose their way as they lost their true focus, became overly familiar with their clients and most importantly, they forgot their vital skill of professional judgement. And at the same time, the IRBA (Independent Regulatory Board for Auditors) whose mandate covers registered auditors and the Saica (SA Institute of Chartered Accountants) whose responsibilities include but are not limited to training, bursaries and custodianship of the CA (SA) brand, continued to navel gaze, secure in the knowledge that the audit profession in SA had been ranked number one in the world for seven consecutive years.
The only problem was that the IRBA representation of “number one in the world claim” was creative accounting of Steinhoff proportions because this ranking had been based on fast and loose “executive opinion surveys” of fewer than 100 SA business executives conducted each year at the World Economic Forum. Evidently, the IRBA, as the guardian of registered auditors, saw nothing wrong with the promotion of a fictitious world ranking that could not be supported by hard audit evidence. And then the music stopped.
State capture, rampant corruption and a number of huge corporate failures began to shine some light on a number of chartered accountants in executive and professional positions who were up to their necks in the detritus of financial malfeasance. But it wasn’t just a few rotten apples tainting the barrel as Saica would have us believe, because state-owned enterprises, their service providers and failed companies are generously populated with chartered accountants in non-executive board and senior managerial positions who by their silence and inaction were surely equally complicit. So while the IRBA and Saica busied themselves with congratulatory slaps on the back they weren’t noticing the over-regulation of corporate governance as delivered by the ever more granular IFRS disclosures and the rampantly commercialised business of the King Codes.
This served to reduce macro responsibility of directors and auditors to a micro tick-box exercise addressing the specific closed questions in the multitude of corporate governance checklists and agendas of the audit and risk committees were now guided by the programmes designed by the likes of the King Commission and not by the years of experience previously valued in boardrooms. Similarly, the reports of the external auditors became so specific as to what these reports addressed that the profession largely absolved itself from having to consider any broader risks facing its clients, leading to an abdication of responsibility which then permeated to the very essence of the profession.
The advent of computer auditing and access to transaction data made it possible to perform a 100% transaction audit focusing on what had been captured in the client’s systems, as opposed to the logic of the resulting balances. The fact remains that there is great merit in the “old-fashioned” audit plan, which would commence with an interview of the CEO and financial director of the client to understand the evolution of the business, leading to balance sheets being audited with limited samples of transactions requiring a higher level of business experience and insight into business risk as opposed to technical processing which allows for lower standards with respect to competence, rigour and logical analysis.
And because a weak economy with competition on non-commercial terms lends itself to desperate measures to retain revenue and cover excessive overheads, financial survival can easily overrule the apparent luxury of ethics, meaning a vicious circle is closed as young clerks leaving the profession for commerce replicate any bad habits learned while auditing.
A decline in the reputation of any profession does not happen overnight, and generally the causes are pervasive with no quick fixes leading to further negative repercussions which we believe will lead to students changing their stream of study or seeking to complete articles and practice outside of SA unless drastic action is taken.
There are about 45,000 chartered accountants registered with Saica, and of these about 30,000 are chartered accountants in business. It appears that Saica has been unable to even administer its own multi-million rand bursary scheme without serious financial irregularities. The question we as the profession should be asking is whether the Saica leadership can be relied upon to fulfil its mandate, which includes custodianship of the CA (SA) designation. Annual individual membership subscriptions of R7,000 become due in January 2019 and chartered accountants in business must ask whether their collective R210m in fees due next year could not be better used to build between 10 and 20 schools in disadvantaged areas or provide full bursaries for 525 students over four years of full-time study, including accommodation.
Chartered accountants in business have to hold errant colleagues and their professional body to account, and the most effective way is to cancel our membership and rejoin when there is firm evidence of decisive action on the part of Saica. Our members are influential decision-makers who must preserve the reputation, the legacy and the legitimacy of the CA (SA) designation for future generations.
We have a collective membership of over 55 years with Saica and will cancel their membership effective January 1 2019 with a view to renewal only when Saica and IRBA get their respective houses in order. We believe it is the responsibility of the significant but silent majority of chartered accountants to follow suit and establish a trust that can administer our not insignificant annual subscriptions towards a better cause.
- Erik Venter is CEO of Comair, and Simon Mantell runs a biscuit factory.