Asking accountants to discuss business morality is akin to Casanova running a class in monogamy." With this biting comment, the London Financial Times summed up the current public mood about the accounting and auditing profession in the post-Enron era.
Though their reaction has not been as hysterical as some in the US, local investors have raised serious questions about the standards and ethics of the SA auditing profession after recent corporate failures.
The demise of LeisureNet, Regal, Saambou, Macmed and others made the past year "arguably the most traumatic in the history of our profession", says SA Institute of Chartered Accountants (Saica) executive president Ignatius Sehoole.
Writing in Saica's 2002 annual report, Sehoole adds: "The failure of several of the world's corporations and the attendant alleged complicity of members of the profession cast a slur that will take some time to dissipate."
Regulators, both overseas and in SA, have been quick to act and this has been welcomed by the profession. "The crisis has signalled the death knell of self-regulation," concedes Sehoole, calling on investors, corporations, accountants and government to co-operate "in establishing auditing and ethical standards which will restore confidence and trust".
It is not all "mea culpa", though. Industry executives feel that some of the reaction has been overdone. "Clearly the public has lost some of [its] trust in the profession, which manifests itself in an expectation gap . . . There is a misunderstanding of what auditors should do," says Deloitte & Touche CE Vassi Naidoo.
"The recent corporate failures have been largely blamed on the auditors. This is wrong - we also need to look at the role that corporate executives and regulators play in the profession," says Naidoo. He adds, almost as an aside: "The profession is still in good shape and we do very good audits."
Despite its reluctance to shoulder all the blame, the profession worldwide has been working closely with governments to restore its integrity.
The UK has created a new auditing practices board; similarly, the US has set up an accountancy oversight board and enacted the Sarbanes-Oxley Act, which seeks to limit conflicts of interest among directors and their auditors.
In SA, finance minister Trevor Manuel established a panel last year to review and strengthen the long-awaited Accountancy Profession Bill, which was put on ice in 2001. Manuel promised drastic action, but then allayed industry fears by appointing accounting professionals to the panel. It is headed by former accounting professor Len Konar, who says nothing has been decided yet in the panel's meetings.
Most industry sources now believe that in regulating the industry Manuel will avoid extensive reliance on legislation, but go all out to strengthen corporate governance principles.
The accounting industry is already governed by a range of laws and institutions, though many are antiquated.
The profession also tends to follow the principles in the King 2 report on corporate governance. This guides the behaviour of directors and encourages the independence of auditors.
Furthermore the SA profession has long contemplated and instituted reforms and, well before it became the norm, separated auditing and nonauditing services for corporate clients. This has now become the standard and three of the top four global firms - PricewaterhouseCoopers (PwC), Ernst & Young and KPMG - last year formally hived off their consulting businesses. The exception is Deloittes, but Naidoo says its divisions are strictly separated.
A third point Manuel is likely to take into account when reviewing the panel's findings is that he already has statutory functions in place to regulate the professions - it is just that, until recently, government has made little use of them.
The Companies Act has not been significantly revised since 1973 and the standing advisory committee on company law has not functioned effectively for some time. "A revised company law is crucial in putting effective governance in place," says Sehoole. The department of trade & industry has indicated that it is reviewing the act, a process that could take two to three years.
Similarly, government has not actively participated in the statutory Public Accountants' & Auditors' Board (PAAB), leaving it to be controlled by the profession itself. The PAAB is effective in monitoring and censuring public accountants registered with it, but it lacks input and representation from government and other stakeholders.
"The challenge," says Sehoole, "is to draft legislation that can, through the creation of an informed and reliable regulatory body, embrace the ideals of respected auditing standards without restricting auditors' professional acumen."
The regulatory body should consist of "a balanced number of auditors, investors and regulators" with "public interest standards monitored by a nonauditor consultative council", he adds.
A significantly enhanced Companies Act and a replacement for the PAAB "with bigger and broader clout", says Naidoo, are likely to be two of the key recommendations of the review panel - and expect them to be supported by Manuel when he gets the findings in July.
There also appears to be broad agreement on some of the other important issues in front of the panel:
- Most auditors agree there should be criminal punishment for both directors and accountants who knowingly break the law. The Sarbanes-Oxley Act in the US imposes financial penalties and prison terms "for auditors that knowingly fail to properly report on the financial health of an entity".
It's not known yet whether the SA panel will go as far as the US in making both the CEO and chief financial officer liable and punishable if they wrongly certify the accuracy of company accounts.
- There is also broad agreement on the issue of auditor independence in that fees paid to auditors should not be compromised by other income from the company. Furthermore the audit partner should not have any "affiliate" links to the company.
- In setting up the framework for the panel, Manuel asked for a review of accounting standards and disclosure rules. This was achieved to a large extent two years ago when the SA profession completed a six-year plan to harmonise its rules with international financial reporting standards. Though there are likely to be some recommendations from the panel on issues such as the definition of headline earnings and valuing intangible assets, the standards are, on the whole, adhered to.
The most controversial issue facing the panel is Manuel's call for the compulsory rotation of audit firms at corporate clients to guarantee auditor independence.
Industry leaders have come out against the idea , but have suggested that partners within a firm swap once every five to seven years. Konar has pointed out that the international trend has been towards partner, not firm, rotation.
PwC senior partner Malcolm Ward says regulators in the UK, Germany and the US have shied away from auditor rotation. "It has been our policy for years to change partners on an audit every three to five years, which allows for cumulative knowledge of an organisation to be constantly built up and maintained." Audit rotation would also "result in significant cost increases and possible risk to the auditing profession and clients", Ward says.
Most industry executives believe government will relent on auditor rotation, provided the overall policy proposals strengthen the regulation of the industry and restore confidence.
