The CEO of the Institute of Internal Auditors South Africa says audit should be a civil service.
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Julius Mojapelo, CEO of the Institute of Internal Auditors South Africa (IIA SA) and Chairperson of the Public Sector Audit Committee Forum (PSACF) says that the fact that auditing is run as a for-profit business affects the quality of assurance that can be provided.
“I think that when we talk about the future of audit, the question we should ask is who we want our auditors to be,” he says. “I believe there is a need to reconsider whether assurance should ever be a business.”
Julius points out that there is a degree of conflict of interest in a business model where the company that will be audited goes out on tender, selects its own auditor and then pays the auditor’s fees. “Yes, the auditor has a fiduciary responsibility to provide the right levels of assurance, but as it stands, auditors at their core are there to run a business. I think the question is whether they should be a business, or a civil service.”
He stresses that he views civil service as less about being employed by the public sector than as a mindset. He likens this to developing a soldier’s mindset in the army, which requires drills and training. “We can’t have auditors that are looking at capitalists enviously,” he says. “If they’re focused on wanting to drive the fanciest cars, they can be bought, and then we’ve got a problem.”
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Regulators should take the lead
“I feel like there’s a continual discussion about how we make auditors better, but we’re allowing auditors to lead the discussion,” says Julius. “We have the big four firms leading discussions around auditor independence, ethics, assurance versus non-assurance work… It can't be like that. They will never say something that would close down their business opportunities.”
He believes regulators and governing bodies, such as the Financial Sector Conduct Authority and National Treasury, as well as the JSE, should be taking the lead. “Those are the people who have to insure this risk if anything happens. Look at what Steinhoff did to the JSE. It wasn’t the audit firms that were affected – it was the JSE. People lose trust if they see a firm listed on the JSE can have something like that happen. They start reconsidering whether they trust a capital market enough to put their money in it.”
The role of internal audit
Julius likens external audit to a traffic police officer out on the road and internal audit to the mechanisms inside your car. “External audit is like a traffic cop that will every now and then stop you on the road to check if your licence is valid. Often, there’s not even time for them to check things like the tread on your tyre,” he says.
“Internal audit is like the controls on your dashboard. They might flag that your fuel is low or you need to top up your oil. But they only work if you pay attention to them. Internal audit is there to help management find issues as they’re driving. If you don’t have internal audit working properly, external audit is a complete waste of time. The whole time the cop is busy, management is just praying that they don’t notice the things they know are wrong.
“Sometimes external audit will miss things, and that’s not because they’re incompetent – it’s because their scope is different. They check critical things on a sample basis, whereas internal audit sits with an organisation throughout the year. And that’s why internal audit should be the most capacitated level of assurance in a business.”
Regulation required
This is why Julius is advocating for regulation of internal auditors. “There are many organisations where internal audit is still an option, and it's not being done according to the internal audit standards. To me, internal audit is the one that needs the most improvement at this point.”
The most important change is having the right people signing off internal audits, he suggests. Just as only auditors registered with IRBA may sign-off an external audit, so too should internal audits be signed by someone with an appropriate qualification and accreditation.
“We’ve just had a story from a municipality in North West where the internal audit manager has only a matric qualification,” he says. “We understand the audit team must be diverse. We don’t want to make everyone a registered internal auditor. We need people with different skills depending on the organisation – people who are engineers or who understand agriculture. But we believe the report must be signed off by a qualified internal auditor because they will be able to make sure that the right methodology was followed, the findings are communicated properly, and quality was ensured over the work that was done. But at this point we have people with qualifications that are not even related to internal audit signing off reports.”
He says regulating that internal audit reports need to be signed off by a registered internal auditor would ensure accountability and ownership, and improve quality. “That’s the beginning of professionalism,” he says. “We should promulgate legislation that requires this, that should also prescribe the standards to which the work must be done. If we did this, we could hold people accountable to a code of ethics and investigate cases of wrongdoing if required. As it stands, if someone does a bad job, they can just resign and move on to the next organisation.”
Julius argues that instead of investigating cases where things have gone wrong, it’s more helpful to try to fix the whole system, so there are fewer cases to begin with. “At IIA SA, we believe that instead of creating resources to discipline members, we should work to create a membership that requires less disciplining,” he says. “We want people to understand ethics as a behaviour they subscribe to, not a course they once had to pass.”
Alongside this, he believes South Africa needs better protection in place for whistle-blowers. He opines that the world is run by 10 percent of people, 5 percent of which want to do the right thing and 5 percent who are self-interested and willing to protect their own interests at all costs.
“The wrongdoers are very powerful and you can see that in the fact that they corrupt whole systems,” he says. “They are very organised and while we have a situation where they can intimidate and victimise people, we can’t expect many heroes to come to the fore.”
Starting at the beginning
Julius says South Africa needs a better class of businessperson who believes in conscious capitalism, and a better class of politician with good principles and a commitment to the greater good. Creating these is no easy feat, but Julius believes it begins with education at school level, and teaching children and youth to be active citizens.
He supports the Youth Citizen Action Programme, which provides scholars in Grade 6, 7, 9 and 10, in all nine provinces, the opportunity to drive positive social, environmental and academic change while becoming active and responsible citizens.
“Our kids are ready to fix this country,” he says. “They just need a space to do it.”
