Against the backdrop of the ongoing scrutiny the auditing and accountancy professions are under, SAICA hosted an online discussion about auditors and the public interest, ethics and professional integrity in October 2020. The panel and participants focused on how the future of the profession is linked to the need for it to reinforce the commitment to serve the public interest, as well as to reinforce its leading role in ensuring the stability of the entire corporate reporting ecosystem. This is a summary of that online discussion.
The image of professional accountancy
In 2016, the image of South Africa’s professional accountancy industry – and the country’s formal financial markets – was one of strong auditing and reporting standards, having celebrated its seventh year at the top of the World Economic Forum’s Global Competitiveness rankings. The crack in its image since 2017 has meant that a closer look was needed at the underlying assumptions. The drop in the country’s standing to number 49 was due to a range of factors, some of them highlighted in an October 2017 article in the Financial Mail written by Ann Crotty. A look at the survey method behind the rankings showed that the number of opinions sought from South African business leaders for the 2017 listing had significantly increased over the prior year by 286%. This more representative view indicated that political instability, crime and corruption had been the main factors in the reframing of the story about South Africa’s ‘global competitiveness’.
An ecosystem perspective
It is against this backdrop that the managing partner for responsible business and public policy at Deloitte South Africa, Bongisipho Nyembe, shared in his opening remarks the view that Professor Colin Mayer (Oxford’s Saïd Business School) vocalised at the 2020 World Economic Forum, namely that the purpose of business is to provide solutions in a profitable manner. It presents an alternative to the influential statement by economist Milton Friedman that ‘there is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’.
Noting that his role at Deloitte is a new approach that seeks to ensure that the firm is focused on ‘making an impact that matters’, Nyembe said that this involves engagement with a broad range of stakeholders – legislators, regulators, policymakers – in what might have been termed a ‘value-chain in prior contexts but is now viewed as an ecosystem’. Pointing to the recent private and public sector scandals in which auditors were identified as alleged role players, Nyembe stated that failures in governance indicate that the current challenge lies in figuring out how the ecosystem could work together effectively to put the public interest at the centre of its operations.
Freeman Nomvalo, SAICA’s CEO, echoes this outlook: ‘There is no one single “accountability button” we can push to banish fraud, incompetence and corruption. If there were, word would have got out by now. There is a whole ecosystem that has to work. But who are these guardians of governance? Of course it includes at the macro-level citizens scrutinising how taxes are spent and how the private sector creates value. But let us break this down into fixable components. Day in and day out, it is the top management and periodically the board of organisations that must set the example for their organisation of the professional and ethical standards required. More to the point, it is they who must in the first instance monitor and hold their employees and suppliers to account. Ethical business and government cannot be imposed after the fact by an external auditor – though unethical practice can be exposed. The board, audit committees and management must, every day, be the guardians of governance.’
Rebuilding confidence in the financial reporting process
The chair of the South African Auditing Profession Trust Initiative (SAAPTI), Dion Shango, noted that away from the firm level, while there had been an erosion of public trust in the accountancy profession, professional accountants emerged from a society in which there has been a ‘gradual slide’ in everyday life, morality and ethics. Shango’s perspective was informed by the many identities he manages. As an industry-wide stakeholder initiative, SAAPTI (founded in June 2018) has a mandate to ensure that the profession can support the financial markets by rebuilding confidence in the value it adds to the financial reporting process. From his other identities as a member of society, as a parent and organisational leader, Shango noted that the overall society must take responsibility to ensure that ethics are instilled at a basic education level. For the profession, this means ensuring that potential professional accountants are more aware of, and drawn to, its public interest imperative than its potential financial rewards.
A short journey into the history of the profession, particularly the portion between 2016 and 2018, indicates that the profession can only expect more regulation, not less, but that a balance needs to be struck between an effective working relationship with the regulator and maintaining its independence.
The role of the regulator received the audience’s attention, as an audience member posed the question whether earlier interventions – as far back as 2010 – might have resulted in better outcomes for the profession. In sketching the context in which the Independent Regulatory Board for Auditors (IRBA) operates, Shango indicated that the local regulator is not as well-resourced as others around the world. This sometimes impacts negatively on the speed and effectiveness with which the regulator can act in response to violations or incidents of non-compliance with professional standards.
The expectation gap
In the financial reporting ecosystem, the role of organisational leadership requires significant reframing. For those ultimately responsible for financial statements and the organisational cultures that affect their quality, Stephen Ntsoane, assurance leader at EY South Africa, suggests that a change of perspective is required on the matter of internal controls. By making additional investments to ensure that internal systems do the work of preventing, detecting and correcting errors and fraud, organisations could minimise or avoid the impact that fraud has on employees, lenders and investors. ‘Narrowing the gap’ would ultimately require seeing the additional costs as a public interest investment. From his perspective, Nyembe shared that the cost of not putting controls in place should be high. Noting that the United States has made efforts to hold company executives legally accountable for the way that they execute their duties, he suggested that this is something that South Africa should consider. In this way, the risks and responsibilities for financial reporting and an overall ethical culture could be more appropriately spread.
The need for what SAICA has termed ‘courageous conversations’ with one’s clients is what Coen Stokes, chairman of SAICA’s National Small and Medium Practice Interest Group, suggests as a necessary component of supporting efforts to achieve positive socio-economic outcomes for the country. This, he reminded the audience, is the role of professional accountants who are registered auditors and are held to a higher standard. In describing clients looking for a clean bill of health on ailing financial statements, Stokes detailed a scenario where clients go for ‘second opinions’ from a non-SAICA or IRBA-regulated assurance or accounting service provider. According to Stokes, the gap would be narrowed by educating the market about the distinction between professional designations, which carry varying levels of accountability. Stokes also turned attention to small and medium enterprises by considering that ethical cultures are sustained ‘from the bottom up’ as well as from the cascading effect of ‘the tone at the top’. This meant that smaller audit firms with fewer than 10 partners, not only the big firms, also had a role to play in upholding good ethical values.
The identity of the auditing profession
Wherever chartered accountants (CAs(SA)) find themselves, they should always aim to act in the public interest. ‘Our role is elevated,’ said Victor Sekese, CEO of SNGGT, reminding those familiar with both the SAICA and IRBA codes of professional conduct that the public interest and independence are the ethical values that reside in the heart of the profession’s conceptual identity.
A return to basics is what Sekese prescribes for the ailing profession. Due to the impact of COVID-19, the auditing profession − which already makes significant investments in technology solutions for the performance of its work − has had to adapt to virtual audit conditions as well as the changing business models of clients. This, however, does not change ethical requirements, as Sekese noted that the ethical value of professional scepticism continues to guide auditors who have had to increase the level of internal reviews and oversight over audit work performed in the virtual setting. This extends beyond the teams engaged with particular clients and has resulted in increased audit costs. For Sekese, the possible reduction in profit margins – owing to clients who will not pay for these additional processes – should not be seen as a limitation but a necessary step to ensuring that auditors continue to give life to their identity.
An ecosystem of trust – avoiding a culture of ‘professional suspicion’
Considering the health of the overall ecosystem, stakeholders must play their part to maintain a culture of trust. For Stokes, this means that its various stakeholders can fix their attention to the task of adding value. According to Nyembe, while continuing to remember that other stakeholders base their decision-making on audited information, auditors must reassert their duty ‘to challenge the soundness of the thinking’ behind client-prepared information.
By holding clients accountable for the underlying assumptions of information, the profession may be able to avoid the transition to a culture of ‘professional suspicion’ where the auditor feels the need to investigate everything that the client says. Nyembe elaborated on the term brought to public attention by the Brydon report in the UK on the quality and effectiveness of audit by challenging the auditing profession to look into evolving its tools in response to the increased complexity of the audit environment. This is particularly important for the South African environment, in which he described clients’ attitudes as being one that ‘the auditor needs to fix’. In the end, it is about the identity of the nation – the story we construct about ourselves. It can inform how we behave and how others treat us. It’s about achieving a balance of values.
Nomvalo concludes: ‘The decisions that chartered accountants and auditors take around profitable transactions which cause ethical dilemmas shape the character of the profession. CAs(SA) and registered auditors are expected to lead the way through ethical dilemmas by serving the public interest as their North Star. It is not enough for something to only be profitable and legal; it also has to be the right thing to do. There is only one way to find your ethical North Star and that is through accountability.’
SAICA dedicated the month of October to Ethics to align with Global Ethics Day on 21 October and held a series of webinars addressing different aspects of ethics in the accountancy profession. The webinars can be viewed on SAICA’s Ethics website: https://saicaethics.co.za/book-now/