The IRBA Chairman addresses prioritising strategies that address the broader financial reporting and governance ecosystem.
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The Independent Regulatory Board for Auditors (IRBA) views transformation as relating to broad audit reforms in the interest of audit quality, technology and building trust in the audit product. Its strategy, focused on restoring confidence in the auditing profession, is ongoing to identify key reforms and improvements, says the IRBA’s Chairman, Fulvio Tonelli.
“Given the number of corporate failures and scandals that occurred in South Africa and around the world, confidence in the auditing profession has been waning,” he says. “Questions are asked about whether auditors are doing enough when they audit financial statements, and more particularly, whether the auditor’s report goes far enough to meet the needs of the users. There are also questions about the auditors’ transparency in relation to their independence and objectivity, as well as their conclusions on matters such as fraud and going concern.”
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Fulvio says that the IRBA seeks to understand these questions more thoroughly before embarking on a process to advocate for broader reform to transform the audit profession into one which more closely aligns to the market and user expectations. “Specifically, the IRBA will initiate reforms that positively impact audit quality in South Africa,” he says. “To date, the IRBA has obtained an understanding of the ecosystem of reform, considered different approaches, performed a deep dive into local and international initiatives, and considered the international developments and compared this to the South African ecosystem.”
The restoring confidence initiatives that the IRBA embarked on from 2018 through to 2020 included enhancing firm transparency with the IRBA, the introduction of fit-and-proper criteria for registered auditors (RAs), an improved accreditation and monitoring model to strengthen oversight over professional bodies (currently only SAICA), a new CPD policy to enhance auditor continual professional development, a strengthened Inspections 7th Cycle with greater focus on leadership and ethics, employing more proactive monitoring of audit firms, a process to amend the Auditing Profession Act to enhance investigation and disciplinary processes, the launch of audit quality indicators and transparency reports by audit firms, and a guide to conducting joint audits.
Currently, the IRBA is conducting its first hearing under the new disciplinary rules arising from the Act Amendment. “We expect to see the fruits of the strengthened Act in the months to come,” says Fulvio, adding that the increased sanctions will only be imposed on transgressions committed by auditors after 1 April 2021 (the date of promulgation of the Act Amendment). All transgressions committed prior to 2021 will be sanctioned according to the previous Act provisions.
“Employing a more proactive approach with audit firms on issues of audit quality enables closer monitoring of turnaround plans, and ensures that the IRBA can proactively address audit quality issues, rather than respond after the fact in the event of a failure,” he says. “Audit firms that were previously linked to audit/corporate failures or have an undesirable quality track record have presented robust turnaround strategies and are now significantly more careful regarding their brands.
“What we’re seeing is that acceptance and continuance procedures and the risk assessments related to retaining or taking on new clients have been strengthened at several firms and, where the reputational risk is too great, these audit firms prefer to sever relationships or turn down a client rather than continue or take on audits for clients that pose too high a risk.”
Fulvio explains that the nature of the IRBA’s monitoring is direct; and quarterly feedback to its board, over and above inspections monitoring, has had some encouraging results in terms of increased engagement and dialogue on audit quality and what can be done to promote consistent improvement and quality audits. “Our public inspections report has recorded significant improvement in audit quality at some firms,” he says.
The IRBA is now prioritising projects that address the broader financial reporting and governance ecosystem, the auditing profession as a whole, and internally at the IRBA, with the aim of improving internal processes and platforms to ensure a fit-for-purpose regulator.
“We need to remember that there are several role-players in the financial reporting chain, and each has a unique role and responsibility to contribute to sound financial reporting that can be trusted by users to make appropriate financial decisions,” says Fulvio. “We all need to work together to promote more awareness and an understanding of the responsibilities and ensure that we protect our investing public by holding those who break the rules accountable.”
Considering additional accreditations
“The IRBA is serious about enhancing the pipeline of future auditors through accrediting additional professional bodies and their members in the auditing space,” says Fulvio. “This is progressing well, and a few applications have been received. As external audit is now on the national scarce skills list, it is paramount that the IRBA works with professional accounting oversight bodies to establish more routes to becoming an auditor. All qualifications and routes will be subject to scrutiny for relevance and appropriateness to continue to ensure that the quality of future auditors is secure.”
The IRBA believes that besides enabling multiple routes to become a registered auditor, additional accredited professional bodies will increase regulatory oversight and accountability of practitioners, and consequently strengthen the entire financial reporting system.
ESG, audit quality and positioning the IRBA
“ESG reporting is a current topic of discussion for the financial reporting system and auditors, who are specifically focused on defining what type of assurance of ESG reporting is appropriate,” says Fulvio. “The IRBA management recently updated our board on rapid developments in ESG/sustainability reporting and related assurance, and the IRBA is monitoring and participating in several local and international initiatives.
“The concern around ESG reporting and the assurance of these reports is that currently there is no reporting framework for this. There is also no legal obligation on companies to comply with ESG reporting. Many different types of practitioners are offering ‘assurance-type’ services, without being registered with the IRBA. There are inherent risks to investors in such an unregulated environment.”
The IRBA continues to drive improvements in audit quality. “We’ve released our third Audit Quality Indicators Report, which pursues advancement by placing actionable information in the hands of stakeholders, including those charged with governance,” says Fulvio. “We also issued our 2021 Annual Public Inspections Report earlier this year to assist firms in promptly remedying reported deficiencies and to support audit committees when engaging auditors.”
The IRBA has also embarked on a new marketing strategy to effectively position the audit regulator and its brand in the mind of stakeholders and the public. “While regulators historically were low-key and less visible, we recognise that times have changed,” says Fulvio.
“The IRBA is effective and does a lot of good work, but if the public is not aware of this, then negative perceptions will prevail. Clearly, this has a negative consequential effect on the attractiveness of the profession. We know that we need to make the profession more attractive and ensure that the IRBA is more transparent, regular and consistent in its engagement on various platforms and channels in order to be an engaged, relevant and responsive regulator while not compromising our independence.”