Is the accounting profession experiencing a crisis of credibility?
By Max Marx
Current events locally and internationally are demanding higher levels of accountability in the accounting and auditing professions. Unethical accounting and auditing practices in South Africa have reverberated globally, with the reputations of large accounting and auditing firms severely damaged by their links to public service corruption and financial misrepresentation by large multinational companies like Steinhoff.
Investors and financial institutions have lost billions of dollars as a result. BusinessBrief takes a look at whether these events has led to a crisis of credibility and confidence in the accounting professions, how the public’s faith in these professions can be restored and whether additional checks and balances need to be put in place to ensure to members of the profession remain above reproach.
We also look at the different accounting functions and how these should be structured in organisations to make them effective in meeting a company’s objectives. Some of the professional and statutory bodies whose work it is to ensure professional standards and ethics in the industry are upheld and maintained are also featured.
SA’s global image as country with impeccable governance credentials in ruins
The questionable business practices by some of South Africa’s top auditing firms and Steinhoff’s misrepresentation of its financials has tainted South Africa’s image as a country with good governance standards.
David Shapiro, Deputy Chairman of Sasfin Securities, says South Africa has always been highly regarded internationally for its good governance practices in the private sector, but what has come to light in the past few months has seriously damaged the country’s reputation in this regard.
“South Africa should not underestimate the impact of truth fudging by the likes of KPMG, Steinhoff and others on South Africa’s standing in the global financial arena. It’s a big issue when you don’t know with whom you’re dealing. This kind of behaviour is something you might expect from a small auditing firm, which doesn’t have the manpower and shouldn’t be doing big audits, but not from the big firms who have been accused.”
He said Sasfin has raised the red flag when it comes to considering investments in several South African companies because of questionable business practices that could have potentially negative consequences. “Questions of who to trust are exacerbated by the level of corruption in South Africa. There has been a long history of poor governance in government, with most government organisations – about 80%, being unable to get a clean audit report, which means they’re not keeping proper books and records and that there are irregularities.”
He adds that unlike auditors and accountants who get to see a company’s books before the results are published, a problem for investment advisors is that they and their investors only get to look at the accounts once they’ve been signed off by auditors and published.
“Audit opinions are there to confirm that an auditor has done enough to verify the reliability of the financials and financial controls a company has in place. We rely on those to trust that what we are reading is a true reflection of the state of affairs in a business. When something goes wrong we must ask questions about the auditors and company directors – those who passed the resolutions, agreed on deals and who are supposed to be the guardians of the company. These days, when we get a published account, we cannot be sure that the financials are genuinely reflected, which is very worrying and destructive to South Africa’s global image as a country with impeccable governance credentials.”
Shapiro suggests investors and investment advisors look further than a company’s published financial statements when making investment decisions, especially in the current environment. “One needs to look at a company’s history, the lifestyle of their top executives and look out for any red flags.”
He adds that government and the private sector need to clean up their act. “The auditing bodies have to take action to make auditors accountable and restore the public’s faith in what they do. There has to be full transparency and disclosure to regain the public’s trust. The companies involved, the auditing profession, the regulator and SAICA (South African Institute of Chartered Accountants) have got to investigate and let the public know what has happened, and what actions are being taken. Those involved have to face the consequences of their actions. It’s only over time that the credibility of the profession will be re-established. We need to get ethics back into the system. Where people see wrongdoing in companies and government, they need to take a stand and report it.”
Lack of credibility exacerbated by KPMG and Steinhoff scandals
Economist Mike Schussler says the lack of credibility that accountants and auditors are experiencing at the moment has worsened as a result of the KPMG and Steinhoff scandals, but that its part of a cycle that all professions go through.
“All professions go through a crisis of confidence now and again. It usually results in laws getting tightened and stricter controls put in place. Then everything is fine for a while until the next crisis occurs.”
He says people in the accounting professions often lose sight of important role ethics plays in their profession, even though maintaining of ethical standards in the accounting and auditing professions is vital to the health of the economy.
“Accountants and auditors are expected to be beyond reproach, so when big firms like KPMG and Steinhoff get involved in questionable practices, it brings the whole profession into disrepute.”
Schussler points out that it’s not just a South African problem. “Look at the Enron/Arthur Andersen scandal. It’s a case of accountants and lawyers getting to close to the firms they’re involved with and as a result overlooking things that should not be overlooked, in fear of jeopardising their work and income.”
He adds that more and more auditors are taking on the additional role of consultant to firms for additional revenue streams but that this creates a conflict of interest with…
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Read this Feature on Accounting Accountability! by Max Marx, as well as a host of other topical management articles written by professionals, consultants and academics in the April/May 2018 edition of BusinessBrief.
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