Delving into audit failures
Over the past few months we have seen the collapse of various private sector entities as well as state owned enterprises which include Steinhoff, VBS and SAA Express. Furthermore, there have been more serious allegations of external auditors completely missing key information that led to the laundering of funds of the state for private individuals use.
External audit forms a core part of the financial and regulatory environment as it serves of a protection of shareholder interests as well as society’s interests at large. The sheer number of failures must lead us to put in place interventions that strengthen the protection of these interests. Auditors have hidden behind complex clauses in their engagement appointments that indicate that auditors are not responsible for the detection of fraud perpetuated by management but given the high fees and proposed financial expertise brought by these auditors, it must be questioned whether the shareholders are getting a fair deal by paying over fees to auditors who then subvert accountability by hiding behind legal jargon.
The Independent Regulatory Board of Auditors (IRBA) has lobbied and passed policy that will see mandatory audit firm rotation come into effect in 2023. This is laudable and will strengthen auditor independence and allow for greater market competition, BUT five years remains a period away and we cannot afford a major failure and the extended cost to the economy in that period.
In the financial statement reporting period, often stringent deadlines are put in place for the publishing of financial information for market and regulatory purposes. This information first is prepared by the management of the entity and then submitted for audit purposes. Auditors are often expected to work under severe pressure to audit information and provide a report for shareholders. Financial reporting by its nature and advent has become more complex and this requires a greater level of analysis. Auditors need to be realistic to management of organizations in terms of timeframes in which to conduct quality audits. Audit committees should exercise greater oversight in terms of whether there is sufficient time allocated towards the audit process.
Sampling is used as a tool in audit, given that it is impossible and not the role of audit to check every transaction that passes through an entities books. Statistical sampling is a powerful measurement basis and is used globally in research work and in the work of collection and production of data. Auditors are however not appropriately trained in statistical sampling and often use the tool at a high level. This means that audits are unable to properly interpret sampling errors and patterns which lead to incorrect conclusions. The pressures previously referred to often result in auditors wanting to conclude samples as soon as possible rather than extend for greater analysis. Statistical sampling needs to be factored into the financial curriculum.
The IRBA despite its limited resources conducts quality assessments of different audit firms’ audits. The outcome of these quality assessments remains confidential between the firm and IRBA. In a world that is becoming more and more transparent, IRBA must annually publish all quality assessments undertaken, including firms and partners responsible and the outcomes of such assessments. Those making decisions over the appointment of auditors should be fully empowered with the relevant information.
Finally, auditors having to report control deficiencies to a management that is responsible for the payment of their fees continues to beggar belief. The audit fee should be ring fenced by the audit committee and released in tranches upon the provision of ongoing reports to the audit committee. This differentiated reporting line will strengthen the independence of the audit process.
Einstein indicated that we cannot solve our problems by using the same thinking that we did when we created them. We need to think differently to restore trust in the audit profession.
Waseem Carrim is the Chief Executive of the National Youth Development Agency.