IIA SA CEO calls on audit profession to practise ethical courage

Claudelle von Eck probes the factors that have led to SA's spate of audit scandals.

I have been asked by many people to express my thoughts on what is happening in the auditing profession, especially given my time spent on the SAICA Inquiry Panel looking into the conduct of chartered accountants in KPMG. It is of course difficult to talk about a report, which, to my knowledge, has not been made public by SAICA. But, much has transpired since and I guess I am at a point where I could express my general observations, taking a broad approach without pointing a finger at any particular individual or organisation.

Let me first say that I had been warning for a while that a tsunami is coming and that the profession will not come out of it unscathed. There were too many worrying signs. I don’t think that we have seen the full extent yet and can safely say that at the IIA SA we are holding our breath and are sitting at the edge of our seat as we are still navigating through unchartered troubled waters.

Getting the market to understand the mandate of the auditing profession
There is still a lack of understanding of the difference between internal audit and external audit. It appears that many erroneously believe that the internal auditors, and the broader auditing profession for that matter, could singlehandedly have stopped the scourge of fraud and corruption that have become more visible in what is now being referred to as state capture as well as the spectacular corporate failures we have seen in recent times.

Unlike external auditors, who are obligated to bring reportable irregularities to IRBA’s attention, which gives them leverage when engaging with management and the oversight bodies, internal audit’s reports stop at the audit committee. It is then up to the Audit Committee to ensure that there is accountability when findings and recommendations are not addressed. However, I am hearing increasing reports from members that internal audit reports with critical findings, that are pointing a finger to the fraud and corruption, disappear into a black hole. 

Lack of application of mind
It seems to me that the number-one issue, besides deliberate fraud and corruption, at the centre of all the evil is the lack of application of mind. To me it appears that the root causes of this lack of application of mind include:

  • Professional laziness
  • Lack of professional scepticism
  • Information overload
  • Auditors too close to auditees
  • Grossly underestimating complexities
  • Lack of competence and/or experience 
  • Glossing over things as quantity trumps over quality in the quest for revenue

While the auditors should take responsibility for their role, including internal auditors who think that in high stakes situations having given the audit committee their report is enough, it is important that we do not lose sight of the other roleplayers responsible for governance.

Did the oversight bodies ask enough of the right questions? For example, where there were multiple companies in the group, should the boards, audit committees and auditors not be asking questions such as:

  • Why is internal audit compartmentalised, i.e. internal audit is decentralised in the group with no strong central oversight. Is the executive deliberately preventing them from seeing the whole picture and connecting all the dots?
  • Who is taking responsibility for ensuring that the auditors talk to each other and that the combined assurance model is not only utilised within companies but also across the group? You have to see all the companies in the group, related party transactions and shareholding to be able to connect dots and see where the wrongdoing is.
  • When funds move across companies that are not necessarily in the same group but have the same major shareholders, do the auditors follow the trail or stop where they believe their scope ends? Sometimes real insight comes from going a little beyond what is within sight.

The boards
Where boards place too much trust in the executive, the likelihood of deep probing questions being asked is diminished. This is aggravated by situations where those who serve on the oversight bodies are themselves either not competent or strong enough to take management on.

Members of oversight bodies, who owe gratitude for their seat to management, are more likely to let their fiduciary duties slip and not hold management accountable. Where oversight bodies are too weak, dominant CEOs are likely not to be held accountable

However, in many of the scandals, there were seasoned directors at the helm. Why is it that not enough alarm bells go off in the minds of boards when management present them with questionable assumptions or where there were potential early indicators of the improper recognition of revenue?

Critical thinking is a diminishing skill
A number of professional bodies are raising the red flag as they are observing worrying trends in the professions over which they preside. The most obvious area is the downward sliding of pass rates in board exams. This points a finger at the education system. 

Our young people are not being prepared well enough at school level, and this cannot be fixed in three or four years at university. Couple this with a lack of appropriate exposure where skill can be built, and we are set to see the skills pool diminishing even further.

Too often I find that organisations are not willing to invest in developing strong internal auditors. They would rather recruit for skill than contribute to the building of skill in the country. Building competence is key if we are going to demand professional due care. The reality is that we are living in a country where our past designed a present in which we have a significant skills shortage.

Much could also be said about those situations where there appears to be deliberate recruitment of people too junior, and out of their depth, into senior internal audit positions, presumably to ensure that internal audit will not have the muscle to challenge management. This is particularly true when the Audit Committee abdicates its responsibility of appointing the CAE. And, where the Audit Committee does appoint the CAE, often they recruit chartered accountants who have no real internal audit experience and no internal audit credentials. This could affect the effectiveness of internal audit.

Ethical courage
In order for us to restore good governance in our organisations, it is imperative that those in leadership positions, as well as those who provide assurance, display ethical courage, even if it means standing alone. Failures are not the result of one single individual’s actions. They happen when good people keep quiet or let their guard down.