Regulate auditors, but also directors, urges SNG Grant Thornton’s Victor Sekese
Accountability needs to encompass all role players – not just auditors, says SNG Grant Thornton CEO.
This Future of Audit Series interview is proudly brought to you by ACCA.
Technology is transforming the audit profession, and while everyone in the value chain will need to confront accelerated digitisation, it’s also important to focus on broadening the accountability frameworks within which organisations operate. This is something that Victor Sekese, CEO of SNG Grant Thornton, is passionate about. In fact, he’s recently completed his master’s dissertation on audit regulation.
One of the recommendations it contains is to widen the net of accountability beyond audit firms. Victor points out that management should be the first line of defence against accounting scandals and that mechanisms like the JSE's amended listing requirements and the internal controls responsibility statements now required from CEOs and CFOs are steps in the right direction. Beyond this, he believes the level of accountability needs to be raised at the level of the board of directors.
“Currently, you know, there are no prescribed requirements that you need to meet, to be a board member,” he says. “My submission was that we need to start putting minimum requirements in place from a regulatory point of view for someone to be considered to be a board member. I'm arguing that you should need to be a member of a professional industry body, for example, the Institute of Directors, which is a body that is dedicated to directors, looking after the needs of directors, and capacitating directors to be able to meet their duties.”
Victor believes that these minimum requirements should apply to all public companies and that organisations like the Institute of Directors would then need to be given the requisite regulatory powers to effectively govern their members. He cites SAICA as an example of a professional body that has the necessary disciplinary powers to take action against errant members. Its ethical code and requirements for continual professional development should be something that can be transposed to a body like the Institute of Directors to help ensure the people leading listed entities are held accountable.
“Currently, that part of the financial reporting ecosystem is a little bit weak,” he says. “What we need is to professionalise all stakeholders in the ecosystem. This is not insurance that things will not go wrong, but it is a way to minimise the risk of things going wrong. Auditors are not working in isolation. We need to look at everybody involved, which is what King IV was intended to achieve through the concept of combined assurance.”
Opening the audit market to smaller players
While Victor notes IRBA has always been clear that the primary objective of mandatory audit firm rotation is to improve auditor independence and thereby audit quality, a secondary objective was to open up the market, particularly to non-Big-Four firms.
As many companies have already begun to implement the policy, Victor says that it’s becoming clear that many will rotate firms within the Big Four, but that there is at least an opportunity for second-tier firms to engage with potential clients.
“Previously, that door was closed because they’d say, ‘No, we have our auditors. They’ve been doing our audits for the last eight years and we're not going to change that.’ You could talk about the weather or rugby or cricket or anything else, but you couldn't talk about changing auditors. Now, what mandatory audit firm rotation has done is opened up an opportunity to talk about the possibility of new auditors. Yes, we're not always appointed, but at least we have a conversation and means we're able to put ourselves out there and people know our capabilities, and hopefully we are able to work with the client in some other way.”
Victor says that technology development is one potential avenue that may level the playing field. “I think the biggest obstacle large clients see in choosing a second-tier firm is that there's still an issue of capacity. They say, ‘Look, we’re a large company: we need hundreds of people to be able to make the audit work.”
But, as technology automates many of the previously tedious manual audit processes, smaller firms will be under less pressure to supply hundreds of “warm bodies” on an assignment.
Victor also thinks there are lessons South Africa can take from its auditing history and from what other regions, notably the UK, are doing. “In the UK, are really shaking things up by that saying that the market is not self-correcting and it’s not going to develop another firm to the size of the Big Four, so they are going to force this onto the market. They are coming up with rules to say, that clients must appoint a non-Big-Four firm to work with a Big Four firm and that over time, this firm must be given opportunity to grow.”
This type of joint audit is something that used to happen in South Africa, particularly in the public sector, and Victor believes it’s set to return. “To manage that systemic risk, regulators are saying we need to grow the number of players. And South Africa is watching closely what other global regulators are doing.”
The audit ecosystem is likely to experience immense disruption
Victor says that technology has become a driving force in culture and one day soon, blockchain will be as embedded in our lives as email currently is. In the days of the telegram and then the fax, it was not something we imagined would be possible, and we’re likely to find technologies like AI becoming the norm as quickly as email did in everyday business.
As technology evolves, so too will the audit product, but Victor says this is out of a need to meet changing user demands. “Already, the audit product we offer is outdated because it’s not meeting the expectations of people that use it,” he says.
“It’s a product that only addresses the past. People want to get an idea about what's going to happen in the future. Users don’t want to be stunned about a situation where an organisation goes bust a few months after the audit report has been signed. They’re asking, ‘Couldn’t the auditors anticipate this? What's wrong?’ And it doesn't matter how much we auditors explain to the public and the users of the product to say that that is not what we do, there seem to be different user expectations, a different need. And so, we need to find a way of bridging that expectation gap somehow. Users want some assurance about the sustainability of the organisation that we are auditing. We have to transform ourselves as a profession to come closer to meeting that market demand.”