Assurance in turmoil: four positive outcomes from the Steinhoff scandal
UCT's Tim London shares what he considers four positive outcomes of the Steinhoff scandal
The Steinhoff scandal is costing jobs and harming people’s investments. It has also put more pressure on an already embattled assurance industry. But there are positive outcomes, says Dr Tim London, a senior lecturer at UCT’s Graduate School of Business.
The recent revelations detailing Steinhoff’s significant governance and financial issues are obviously not news. The scandal is still ongoing, which means we still do not know the full extent of what’s gone wrong, or what all the repercussions will be. What we do know is that the result will likely be the loss of thousands of jobs and millions of dollars, pounds, and rands of people's investments in Steinhoff and its associated companies. For those of us in South Africa, it has also provided a clear case of private corporations doing things that thus far we have largely seen mostly in the country’s state-owned enterprises (for example, the ongoing issues at Eskom, SASSA, PRASA, and others).
The full implications of the Steinhoff scandal have yet to be revealed, with the weeks and months to come likely providing more depressing details. There are, however, a few positive takeaways that we can use going forward, firstly, to minimise the likelihood of these events happening again, and secondly, as a means to lessen the impacts if they do.
What follows are what I deem four positive outcomes of the scandal:
1. The biggest and simplest takeaway from the Steinhoff scandal is that we are catching these organisations when they slip up. Now, obviously we caught this and other scandals only after they had done significant damage, but the fact that they are being reported is a positive sign for accountability systems. While people in powerful positions will always have a leg up in terms of starting these messes, society (both private and public) has never been so well-equipped to ferret these issues out. Between the press, regulators, whistle-blowers, and the incredible access to information that a growing number of the public has via the internet and social media, we have a much more robust system to not only catch bad behaviour in organisations, but catch it earlier than we might have five or ten years ago.
2. A key component of the existing accountability and governance systems, across most countries, has been the major accounting/auditing/consulting firms. Some are bigger than others, but the “Big 4” firms (KPMG, EY, Deloitte, and PwC), along with others, such as McKinsey, BDO or Boston Consulting Group (to name a few) will all have to up their game in terms of holding both their clients and themselves to high standards. The number one thing offered by any firm that offers these types of services, is “assurance”; namely, people both inside and outside the organisation feel confident that they can trust what is happening because it has been signed off by a firm they trust. If that trust factor is diminished due to bad behaviour, even if it is just perception, there becomes little reason to use that firm in the future – there are many firms that offer accounting, auditing and consulting; why would any firm pick one where any reports created invite only eye rolls and smirks?
So, I do think the Steinhoff scandal will be another point of pressure on these firms to increase their attention to sound, ethical practices from top to bottom in their organisations. This will have to be more than lip service, and speak to real improvements in their structures, culture, and the people they hire and promote. While many of these improvements may only be focused on in the short term, they still have the potential to have lasting benefits for the relevant assurance firms going forward, too.
3. Related to the previous point, for other people/companies in the assurance industries, this scandal and others like it that implicates major firms may lead to a democratisation of the field. While the largest firms may have scooped the most work in large because they’re among the largest, hits to their reputation are already leading to clients dropping them as their assurance firms of choice. So, for example, when Sasfin and Hulisani break ties with KPMG, it creates an opportunity for a new firm to take on that business – a firm which might not have been considered previously.
The opening of the playing field to more competitors of different sizes is not only good for developing a more robust industry, it is better for clients too, as it diversifies their providers for different services. This can help avoid some of the overlap/co-mingling issues that can lead to massive failures (for example, the Enron case in relation to Arthur Andersen). As we see some of the largest assurance firms lose clients, hopefully there are plenty of other smaller firms ready to step in to provide high quality services.
4. Finally, I am somewhat hopeful that Steinhoff may be the bogeyman needed to put a face/name to when things go seriously wrong. Saying the name “Enron” in America or the phrase “Barclays LIBOR scandal” in the UK immediately conjures powerful negative images of serious accountability failures in their respective countries. The Steinhoff scandal might now be the case we use in South Africa for discussing failures – and potential failures – in the private sector. Having this type of bogeyman is actually a very useful thing for both providers and clients. Within assurance firms, saying something like “we don’t want to be aiding another Steinhoff” could be an easily stated and understood way to help empower people to speak up earlier in the process, before things go wrong. It could similarly help when pushing back against client requests, as saying “Steinhoff wanted a similar accounting structure” is likely going to be a powerful way of driving home the point that some choices might be dubious.
Obviously, Steinhoff is not the first firm to make choices that lead to disaster, but it is now one of the biggest in South Africa in recent times. I certainly do not want to advocate for bullying the firm, but these types of glaring examples can be used for positive reflection as well. We cannot go back and change what happened, but using the scandal as a warning beacon to others does provide the potential for real improvements in other firms in the future.
To be clear, the repercussions of what is happening with Steinhoff will have profoundly negative impacts around the world. We are seeing connected companies fail, or at least go through major trauma, as well as the loss of livelihoods for related employees and share value for investors. I am hopeful, however, that the changes listed above are positive outcomes from the scandal that may help us minimise such terrible occurrences in the future.