For the auditing profession, both domestically and internationally, the past year has been one of exceptional change and challenge.
Some of the challenges are specific to the local environment. Like many sectors of commerce and industry, the profession is having to address the demands for transformation in the new society.
It is also under the pressures of a skills shortage, rising costs of resources - both human and technological - and a continuing diminution in the number of companies listed on the local equity market.
More controversial issues overlay these, challenging the role and efficacy of the auditing profession and threatening to erode the confidence both of the public and of corporate clients in the profession.
Corporate failures are as old as capitalism. But in recent years there has been an increasing number of high-profile failures, many of which have been costly for shareholders, clients and other stakeholders in the businesses concerned.
And, increasingly, the stakeholders and government have queried the role of the auditors in these events.
The argument is not that the auditors caused the businesses to fail. A question that does often get asked, however, is whether the auditors might not have been expected to do more to ensure that outsiders had a clearer understanding of the risks. Put differently, in many cases external auditors have approved financial accounts that concealed rather more than they revealed.
The debate has been heightened, yet also distorted, by the events surrounding the collapse of Enron in the US last year. One reason that investors failed to understand either the business or the risks involved in this company was that it had extensive exposure to off-balance sheet debt through special-purpose vehicles or SPVs.
When the collapse came last November, analysts, regulatory authorities and politicians in the US were quick to ask why the company's auditor, Andersen, had allowed Enron to produce accounts so palpably lacking in transparency - even misleading.
The answer could be found partly in the philosophy and approach of the accounting profession and the regulatory authorities in the US.
In an article in the Financial Times, Robert Bruce, former editor of Accounting Age, says: "UK accountants have developed a system of financial reporting rules that rely on principles. In the US, accountants were fixers rather than initiators. A huge system of rules was what they required and this had predictably dire results."
Bruce quotes an old Andersen hand in London, who notes: "An Andersen accountant will say, Yes, you can do that. It says so on page 370.' The work is done by rote in America and by judgment in the UK. People have failed to understand that."
In fact, the debate over Enron's implosion, and on whether Andersen should be found culpable, evolved into something else. It turned into an Andersen scandal when it was discovered that the firm had systematically shredded potentially sensitive documents relating to Enron. That triggered a new investigation which quickly moved some distance from the broader issue of financial accounting and corporate transparency.
Much of this could be dismissed as having little bearing on the SA auditing environment. As SA Institute of Chartered Accountants (Saica) executive president Ignatius Sehoole notes, from a technical standpoint, SA follows the philosophy applied in the UK, where principles take precedence over rules. "In the US, the standards are a lot more prescriptive than they are here," he says.
Moreover, the document shredding and related allegations levelled against Andersen in the US could hardly be taken as a reflection of the entire profession, internationally or in SA.
Except that the local accounting profession has had its own problems. Here, too, there has been a succession of corporate collapses in recent years. Companies such as Regal Private Bank and LeisureNet are among the more familiar of these in the past year. Each time, similar questions have been asked, about the value and transparency of the failed companies' published financial accounts.
The roles of auditors have been questioned and criticised in some high-profile investigations and official reports, too.
When the Nel Commission of Inquiry into the affairs of the Masterbond group and investor protection in SA produced its 916-page final report last year, it devoted an extensive chapter to what it called "The auditor and the expectation gap".
There have, of course, been claims elsewhere in the world that public confidence in the auditing profession has diminished - though practitioners contest this view. KPMG senior partner Tom Grieve says: "The so-called lack of confidence in public financial statements is just not borne out by what corporate leaders are saying."
Grieve cites the results of a KPMG survey, conducted earlier this year by YouGov Opinion Research. It polled the opinions of some of the UK's leading CEs and chairmen. When asked about their organisations' audited accounts, 96% said investor trust and confidence was either "very high" or "high". And 85% of business leaders thought that professional service firms handled conflicts of interests well.
Nonetheless, one conclusion the Nel Commission drew is that many of the problems it cited, including inadequate disclosure of information on which users could make informed choices, or "dishonest or inefficient auditors", could be eradicated by the appointment of auditors for and by each significant stakeholder group. It also took the view that, if the various stakeholders were empowered by the right to appoint their auditors, and could take appropriate class actions, much corporate fraud could be prevented or limited.
In a chapter on the auditing profession and ethics, the commission recommended that an independent body be created to regulate and oversee accountants.
It noted that the co-ordinating committee of the SA National Accounting Forum had drafted a new Accounting Profession Bill 2001, but no attention seemed to have been paid to the increasing distrust of the auditing profession by the public, the necessity for independent regulation and the developments in jurisdictions such as the US, the UK and Ireland.
"Time has not stood still, but the profession still clings to an outmoded and outdated model of self-regulation, which is perceived by the public, by regulators and even by governments as nothing more than self-interest," the commission said. "This is not acceptable in a profession which has been created for the protection of investors and whose integrity is so vital to the wellbeing of the economy."
Harsh words, and it appears these sentiments found a receptive ear in government. In his Budget speech this year, Finance Minister Trevor Manuel said the draft Accountancy Professions Bill to replace the existing Public Accounting & Auditors Act did not go far enough. As a result, he said, the Finance Department in coming months would engage with all the role-players to ensure the Bill addressed SA's needs.
Saica chairman Colin Beggs, who is also CE of PricewaterhouseCoopers, one of the big four auditing firms in SA, says the profession has been seeking to put in place "building blocks" that should help to address concerns.
The overview board would be one of these. Another - and something Saica has long striven for - would be legal backing for Gaap (generally accepted accounting principles) in SA. This, too, was recommended by the Nel Commission. Sehoole expects parliament will approve the necessary changes to the Companies Act this year. Saica is also involved in an initiative with the JSE Securities Exchange, to help review financial accounts published by listed companies.
Saica technical director Graham Terry says the institute accepts the principle of an oversight body for the accountancy profession, and would like to reach agreement with government on that. What may need further discussion is the practical issues of how the board would be constituted and how it would operate. He adds that while there are international precedents for such bodies in the UK, Ireland and the US, they have also been controversial and their effectiveness has been questioned in some of these countries. In the US, the oversight body has elected to disband.
Leaders in the profession emphasise that any concerns about the role of auditors cannot be seen in isolation from other aspects of corporate governance. These include the need to modernise the legislative and regulatory framework; the Companies Act is widely viewed as outdated.
The second King Report on corporate governance, released in March this year, places the auditors' role in the context of those of other players, including executive and non-executive directors and audit committees.
The debate around the role of auditors has already affected the structure of the profession in the domestic market. Restructuring has occurred in several ways.
First, each of the firms that comprise what is now known as the big four - PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte & Touche - have decided to separate their auditing and consulting activities, to address allegations of conflicts of interest. Such separations are not always clear-cut, though. Some of these activities contain resources that can be closely linked to the auditing function. Terry cites tax advice as an example.
Second, the Andersen collapse has resulted in significant mergers, internationally and in SA, where the local Andersen operation was merged into KPMG. This substantially enlarges KPMG, a firm which had 2 500 people before the deal and gains an additional 550. Grieve describes the two firms as " complementary", and says the merged entity has particular strengths in tax and legal areas.
Third, there have been further deals among SA auditing firms, aimed at enhancing diversity and transformation. Just before its recent Andersen merger, KPMG embarked on a merger with KMMT, a leading black-owned accounting firm.
It is unclear whether there is much room for more such deals. The local auditing industry is already concentrated, with most of the middle-sized firms associated with international players.
What is continuing steadily, though, is the growth in the number of black auditing professionals, and their influence in the industry. Saica figures show that the number of successful black candidates in part one of the qualifying examination this year increased by 21%. The total number of passes was up 9%, at 1 637.
Some of the accounting firms have made high-profile appointments and reshaped their corporate governance structures. Ernst & Young, for example, last year appointed Financial & Fiscal Commission chairman Murphy Morobe as the firm's non-executive chairman. This was part of a broader reshaping and the creation of a new Policy Board. CE Philip Hourquebie said the firm had itself adopted the best practices it recommended to clients.
Moves such as these may not fully deflect the debate that has swirled around the auditing profession. But they do stand as evidence that its leaders are striving to tackle the issues and enhance confidence, both within the profession and among its stake-holders.