Special Report – Audit Reform: The future of audit in South Africa

It is imperative to recognise that it is not only the auditors who need to take accountability for the financial reporting scandals of late. It also remains the responsibility of management and those charged with governance for not doing more to protect the public interest we serve through our financial reporting roles.

The auditing profession has suffered a significant reputational loss over the past few years and now faces a crisis of trust. Business Day recently illustrated this position, showing where South Africa ranked out of 141 countries, as depicted below:

Year South Africa country ranking
2010 1st
2011 1st
2012 1st
2013 1st
2014 1st
2015 1st
2016 1st
2017 30th
2018 55th
2019 49th

My thoughts on the future of the audit profession place great emphasis on quality, credibility, transparency and independence. Auditors’ responses to the future should include, among others, improved skills in order to respond to the challenges created by heightened expectations of the profession, driving audit efficiencies and quality by exploring new ways of work, being technological savvy in response to technological opportunities and threats and most importantly, maintaining professional independence and professional scepticism.

 

Rebuilding trust by embracing a culture of challenge

An effective ecosystem is fundamental to restoring public trust in auditing and will require action from investors, boards, management, regulators and the markets − including the media and civil society. Above all, it will require action from the audit firms themselves by requiring them to show decisive leadership.

This action starts by embracing a ‘culture of challenge’ within audit firms, a culture that empowers rank-and-file auditors to do their job and execute their responsibilities in the public interest without fear or favour.

While the core work of the audit is backward-looking − requiring verification of past transactions for authenticity − much of it is not. Audit also requires an eye into the future to test the economic soundness of management’s assumptions. This is a question of judgement where well-trained professional and skilled auditors can add great value to markets while simultaneously bringing the foresight required of quality audits.

Doing so requires professional scepticism, a notion predicated on a questioning mindset. It also requires a setting that allows individual audit professionals to exercise a questioning mindset; a setting that necessitates individual auditors to call on clients to prove, validate or justify their judgements about realised and expected performance.

Nurturing such a setting − a ‘culture of challenge’ − is one of the primary responsibilities of audit. It is at the heart of how audit firms add value. An audit firm with a thriving culture of challenge is one that is undistracted by other potentially conflicting economic interests.

 

People

Auditing, done right, is no easy task − indeed, it’s not just one task but a multidisciplinary range of tasks. An auditor must simultaneously understand the strategic essence and direction of a business while also being immersed at its most fundamental levels, and then to be able to formulate an objective position on the way the economic outlook of that business can be communicated. Collectively, this comprises the ‘technical ability to challenge’.’

A workforce with raw intellect, the cold, hard knowledge of professional principles, and the judgement to apply accounting and auditing principles prudently in a given context is a necessary first step to a culture of challenge. Too much challenge from an auditor (just as too little) can be an indication of sub-par technical capability to challenge effectively.

Once the technical ability to challenge has been established, the auditor must feel safe to apply those skills. Here, audit partners and senior managers have a critical role to play.

Managers play an important role because they spend many years understanding businesses, building their technical skills, confidence and soft skills to engage with clients at all levels. Supporting younger, less experienced team members to ‘learn the ropes’ in a responsible and accountable fashion promotes the overall quality of the team − and in turn the quality of the audit.

Partners are the engine and identity of any audit firm − their every action, inaction and words, shapes the culture of those around them.

 

Preventing the next corporate failure and lessons to be learnt

Much has been written about the reasons for corporate failure. In my experience, it’s worth noting that while external forces of change in the nature of an industry clearly play a major role in corporate failure, it’s the interdependencies between these changes, poor strategy, management choices past and present, poor governance and the structures and business models companies have adopted that ultimately determine whether a company has the ability to ride that strategic change or be brought down by it.

A key responsibility is placed on the effectiveness of the audit committee and audit teams to ensure adequate measures are in place to provide the necessary support and assurance on key management decisions so as to steer organisations away from possible failure. In doing so, audit committees and audit teams must ensure the following:

• Agile audit planning taking into account emerging risks and risk trends
• Enhanced audit scoping and re-alignment of audit objectives to the strategic focus of the organisation
• Formal and transparent communication channels between all parties
• A strong and dedicated culture towards organisational co-ordinated assurance
• Adequate investment in technology and tools to ensure effective operational processes, and
• Adequate investment in the right skills and experience, especially at senior levels responsible for key decision-making

Combined assurance and placing accountability on the wider corporate reporting ecosystem

It should be noted that poor corporate reporting or audit failures do not cause corporate failures but often mask the signals that should highlight this risk.

With the risk landscape remaining ever-changing, organisations require as much assurance on risk mitigation as possible, from an array of independent assurance providers. Audit remains a key player in relation to combined assurance and needs to work closely with the organisation to balance the need for assurance, with the risk appetite and tolerance of the organisation. Audit’s primary focus remains on the key financial reporting risks of an organisation with a combined assurance lens, as these risks would need the most investment in terms of focus and mitigation. As a result, a combined assurance approach provides a comprehensive and prioritised means to provide assurance over key risks, without duplication of effort or wastage of resources.

 

Concluding remarks

Auditors play a critical role in our capital markets by ensuring companies appropriately reflect the impact of salient external issues in their financial reporting. Looking ahead, these issues will range from the current pandemic and its economic costs to businesses and business models, through to other issues emerging, such as climate change. The impact of these issues will need to be transparently reflected in audited financial statements − only then can investors meaningfully allocate capital to effect positive change. For audit to remain relevant, audit needs to be agile and adaptive to the risk landscape as well as the ever-changing organisational strategies and the changes in the environment in which it operates. Audit firms need to be reminded that their primary responsibility is to serve the interest of the pubic, that the focus needs to remain on audit quality for audit to regain the once high moral compass the profession enjoyed − a profession I remain proud to be associated with.

I welcome the South African Auditing Profession Trust Initiative (SAAPTI) document and the efforts taken by the profession as a force for change. Whilst I support multi-disciplinary practices, I would recommend an outright ban on consulting services (non-audit-related services) to ‘PIE clients’, thereby sending a strong signal to the market of the profession’s seriousness in dealing with the perception of independence and self-interest. I would encourage the audit firms to establish an independent audit quality board and to come together to support the establishment of an external audit quality centre of excellence. These simple yet profound steps should not await the creation of the ministerial panel to review the auditing profession, because once implemented, they will go a long way in restoring credibility and public trust.

Real change will require all of us in the financial ecosystem to work together. This starts with companies critically assessing how their business models and strategies will be affected, underpinned by robust, high quality audits to check, verify and challenge their assessments − all in the context of a culture of challenge that is embraced by audit firms and companies alike. South Africa Inc deserves better.

AUTHOR | Stanley Subramoney is former Deputy CEO of PwC, serves on boards and audit committees and is chairman of the Audit Committee Forum (ACF), part of the IODSA. He acknowledges inputs, various discussions and contributions from the profession and the ACF that have shaped his views on this paper