Stiffer fines for auditors ‘will not bring back credibility’

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Industry watchers say it will take more than the recent move by the treasury to impose stiffer fines for egregious misconduct by auditing firms to restore lost trust in the profession.

The audit profession has taken a reputational knock in recent years, amid accounting scandals involving companies such as Steinhoff, Tongaat Hulett and EOH.

 The treasury increased the maximum monetary fines that the Independent Regulatory Board for Auditors (IRBA) can impose on auditors and auditing firms who are charged with improper conduct and either admit guilt or are found guilty following a disciplinary hearing. 

The previous maximum fine was R200 000 but now the board can impose R5 million per charge for an individual auditor and R15 million per charge for an audit firm for an admission of guilt. Should there be a disciplinary hearing and an individual auditor is found guilty the fine is R10 million per charge and R25 million for an audit firm. 

But the increase in fines will not necessarily bring back credibility to the profession because the big firms will always be able to pay the big fines, argued Khaya Sithole, an independent accountant and commentator.

One of the biggest scandals to hit the sector recently was that involving retail group Steinhoff, whose share prices collapsed in December 2017 after the exposure of accounting irregularities. The misrepresentation of Steinhoff’s results vastly inflated the company’s income.

Earlier this year, the Johannesburg Stock Exchange imposed sanctions on Steinhoff’s former chief executive Markus Jooste for breaches committed in the balance sheet scandal, including two fines totalling R15 million. 

Accounting firm Deloitte, Steinhoff’s auditor for years, faced lawsuits from investors who lost money when the retailer’s share price slumped in late 2017.

Executives at sugar refining company Tongaat Hulett were implicated in a multibillion reporting transgression in which accounts were misstated, incorrect profits declared and huge bonuses awarded. Former Tongaat Hulett chief executive Peter Staude and six others backdated sale agreements by the company’s property division to the value of R2.5 billion between March 2015 and September 2018.

By inflating the company’s profits, they scored themselves millions of rand in productivity bonuses based on the fraudulent sales, with Straude alone raking in R94 million by cooking the books, the Mail & Guardian previously reported. 

Audit firm KPMG has also come under fire for its alleged role in the ransacking more than R2 billion from the now-failed VBS Mutual Bank.

Imposing higher fines on the audit entities involved in this type of malfeasance means nothing without quality checks, Sithole said.

“This [increased fines] is probably the third or fourth step towards that journey of restoring credibility of the audit profession,” he said.

“Firms with big resources will always be able to carry that risk because, with higher fines, the cost of delivering the audit will be higher. Smaller firms, without the depth of resources that Deloitte and KPMG have, are the ones that will struggle to retain the type of client portfolio they have.”

Audit quality, Sithole said, is the single most important element of the profession and restoring its credibility hinges on it. 

The 2022 IRBA inspection report notes that “poor audit quality can lead to serious consequences that include loss of employment, decreased investment and reduced economic growth”.

“Last year’s report indicated that about 80% of audit files had an issue of some sort. So, if 80% of the audit has an issue, it means that there is a fundamental problem with the understanding and application of standards, a fundamental problem of audit quality,” Sithole said.

“Some people don’t do documentation properly. Some people don’t do proper calculations or ask the right questions from their clients. This is what improves the audit profession, not an increase in fines.”

An annual report is based on inspections performed by the regulator, including working papers, statements, correspondence, books or other documents in the possession, or under the control, of a registered auditor.

For its part, KPMG had introduced initiatives aimed at ensuring independent governance of the firm and additional lines of quality defence, said Devon Duffield, head of audit for Africa.

Duffield said the audit firm’s biggest concern about the increased fines was whether it would further undermine the attractiveness of the profession.

“Our profession has to continue to attract and retain the brightest minds to fulfil our public interest responsibilities of protecting the capital markets — and we have seen a steady reduction in the number of people choosing to take up this profession at a university level and at a graduate level,” Duffield said.

“To properly inform future audit professionals it is vital that we fully understand how the regulator intends to apply these fines.”

The higher cost of operating in the sector, as a result of the higher penalties, is likely to have a knock-on effect on the cost of effective audits within the country — whether through the increased cost of insurance or the introduction of enhanced standards.

Sithole weighed in: “The new fines increase the risk of doing audit work and I do not think that the risk appetite for this particular type of work is high and, therefore, those people might withdraw from the profession altogether.”

“That’s the dilemma that everybody has to deal with in that there comes a point in time where the number just sounds risky enough for a lot of people to say that somebody else must bear the risk.”