Victor said that executives and directors of organisations also need to be held accountable for audit failures.
Audit firms tend to dominate media headlines following corporate and public interest entity financial failures – but is the net being cast wide enough in terms of accountability? This was the question discussed during a recent CFO Community Conversation, sponsored by Workday.
Following recently completed research for his master’s study on the topic, Victor Sekese, CEO at SNG Grant Thornton, provided comprehensive context to the global and local environment of accountability and the need for all role players in the financial reporting value chain to become more active and accountable
“The world goes through cycles of corporate failures and these are followed by cycles of regulatory reforms. In 2008, for instance there was a wave of corporate failures following the global financial crisis. The EU response was to undertake a significant audit regulatory reform process. This resulted in the introduction of mandatory audit firm rotation. Following various corporate failures, the UK has recently commissioned three separate studies to look into audit regulation,” he explained.
He added, “Locally, the minister of finance last year, during his budget speech, said that he would form a panel to look at audit reforms locally. This has not been followed up but there is a lot taking place in the public discourse on what auditors and other role players should do to prevent further corporate failures from taking place .”
Victor’s study focused on what else could be done in the accountability space, with an overwhelming number of participants indicating that change was needed.
“With corporate failures, the question is always around the auditors. External auditors, in their response, argue that they are the last line of defence. They are not at a company all the time. It is therefore unreasonable to expect auditors to come in and stop these failures. There are other actors in the reporting ecosystem and we then need to look at how to bring them into the same level of accountability,” he explained.
The other players in the accountability value system include management, under the leadership of the CEO and CFO and the chief audit executive – the first and second lines of defence.
Craig Sumption, CFO at Hatch Africa, highlighted that management teams should have to take more responsibility.
“Audit firms have taken an unfair brunt of corporate failures. Regulation won’t make a difference. There is enough in place. There must be a different way and basis for wrong things to be properly addressed and sorted out,” he said.
Corporate reporting ecosystem
Victor’s study has proposed the professionalism of other role players in the corporate reporting ecosystem.
“There is currently no requirement for a director of a listed entity to be a member of the Institute of Directors [IoD].The study recommends professionalisation of other players in the corporate reporting value chain. The directors of listed and other public interest entities should be mandated to be members of IoD. In addition, the IoD should be given the requisite regulatory powers to regulate directors. This would also cover CEOs and CFOs, as they are usually board members.
The role of chief internal auditors (CAE) has traditionally been underestimated. The study proposes that CAEs of listed and public interest entities should be members in good standing of the Institute of Internal Auditors (IIA). The IIA should also be granted regulatory powers to discipline errant CAEs. The professionalisation of directors and CAEs may not stop corporate failures but all actors within the ecosystem will be equally held accountable,” he explained.
Lack of capacity within the current regulatory regime was a factor that stood out in the research, specifically looking at experience, financial and human resources. There was also support from study participants to bring all role players into a single regulatory framework, similar to the UK, and in the process strengthen the regulation.
“What we need to do is look at effectiveness, how to apply what is in place. We need to look into the methods of monitoring. The current methods are reactive and should be more proactive and risk-based. This may help stop corporate failures,” he said.
The study participants also highlighted that mandatory audit rotation will not totally address the concern around independence.
“The reality is that the CEO and CFO play an influential role in the appointment of auditors. Yes, King IV tells us that the audit committee should appoint the auditors, but in practice the voice of the CFO and CEO is generally very loud and dwarfs the voices of the audit committee and its chair. So, auditors are effectively appointed by management.
“Studies show us that shareholders appoint auditors based on recommendations from the board. In reality, during the auditor firm appointment the board recommends one audit firm , and not a list of options to shareholders,” he said.
Defence
Victor further flagged market concentration as a concern in the auditing space particularly as it relates to audit firm rotation, increasing the potential for systemic risk.
“Most participants said the audit market dominated by four players is not good. This subjects the market to many economic risks associated with oligopoly structure. The current market structure limits choice and thus participants supported efforts to encourage growth of other non-big four firms to bring more significant players in the market,” he explained.
In the UK, for example, they are considering mandating a joint audit framework for qualified public interest entities – one with a big four firm and another player being a challenger firm.
Locally, the SA Audit Profession Trust Initiative has tabled a similar proposal with the other joint auditor being a black-owned firm. The objective would be to grow other players in the market and simultaneously improve transformation.
