IRBA Newsletter Issue 48

Issue 48 | October - December 2019 2 FROM THE CEO’S DESK There is no better antidote to the gloom of an economic crisis laid bare in the medium-term budget speech than the national rugby team carrying the nation’s hopes to a thrilling Rugby World Cup victory. The final showdown in Yokohama between the Springboks and England ended in a dominant 32-12 victory for South Africa, placing the Springboks back at the top as the world’s number one team. But it wasn’t always so. At the end of 2017, Springbok supporters were disillusioned, following long runs of bad performance under coach Allister Coetzee and his predecessor Heyneke Meyer. So, for Rassie Erasmus – the coach tasked with turning around the team’s performance – and for the team to come back from the doldrums to scoop the Webb Ellis Cup was no mean feat. While this triumphant win followed previous successes in 1995 (at home) and 12 years later in France (2007), it had taken another 12 years and was, perhaps, no coincidence. Similarly, as with our rugby team’s cyclical performance, the auditing profession is going through a bad performance patch. Since 2017 the profession has been besieged by high-profile corporate collapses that have implicated auditors, in addition to state capture revelations. The crisis continued through 2018, and this year we saw further share price collapses or corruption allegations at companies such as Tongaat Hulett, EOH, Ayo Technology Solutions and Ascendis Health, among others. While a business failure is not always an audit failure, the situation that many of these beleaguered companies find themselves in could just as easily be linked to a struggling economy; questionable actions by management in preparing the financial statements; weak corporate governance; a lack of independence of audit committees and boards; and/or a lack of diversity of skills and gender in governance structures. The economy, as we heard in Finance Minister Tito Mboweni’s budget speech, is in a more dire condition than we thought. Despite all these other factors, the auditors have remained in the spotlight, as the public continues to question how audit can be relied upon to protect its investments. As the regulator, and with the public interest at heart, we have a responsibility to address all these concerns. We have to do this while making efforts to improve audit quality, enhance standards in relation to areas of weakness and help the profession to respond with changes that will restore confidence in the audit quality and opinions. Equally, we have a broader role to play in assisting audit committees and addressing any corporate governance weaknesses. If we are to play a meaningful role in turning around the economy, we must restore confidence in financial reporting and auditing to ensure that investors can confidently rely on financial statements and make sound investment decisions. Two years into our Restoring Confidence Strategy, we have seen that the World Economic Forum Global Competitiveness Index has recorded slight improvements in perceptions about the strength of auditing and accounting standards and in the area of shareholder governance. Admittedly, it is still early days to count any gains. Sadly, though, we are still a long way off from the top of the rankings, a position we held for seven consecutive years. The IRBA recently met with one of the presidential envoys from the task team that has been given the responsibility to work on bringing investment into South Africa. We used the opportunity to explain the way in which the auditing profession can support this national effort by rebuilding confidence in financial reporting. It is clear that there is a role for auditors and accountants in the economic turnaround, specifically when it comes to driving ethical and accurate financial reporting, and focusing on the public and national interest. The turnaround will also need audit committees and boards to strengthen their independence and commit to holding management accountable. Concerns around the quality of corporate governance, financial reporting and auditing are not just a South African phenomenon; in the United Kingdom there have been a number of reviews of the profession, the audit product and reporting requirements. The result has been the establishment of the Auditing Reporting and Governance Authority, which replaces the Financial Reporting Council. This new structure will regulate all accountants and auditors, as well as those charged with governance. This is not unlike the comprehensive regulation model that the IRBA has researched on behalf of National Treasury. However, it remains to be seen whether our government will see comprehensive regulation as a solution to the current situation. We believe that regulation and oversight of the entire financial reporting chain are critical if we are to root out all corruption and malfeasance. What is also becoming clearer is that the country has a leadership crisis, across all spheres. With so many leadership positions at state-owned entities standing vacant, in addition to the number of disgraced CEOs revealed in recent months, we are seeing a real gap in terms of ethical leaders. For too long now, the tone at the top has been self-serving and self-interested. With insufficient accountability, corruption has continued unabated as there is a sense that perpetrators are not getting punished for their wrongdoings. To turn the country around, we need a new generation of leaders who are committed to ethics, professionalism and public interest. Auditors and accountants have a role to play in turning around the economy, and this entails holding themselves, their clients and employers to the highest standards. The regulator will continue to play its role in strengthening regulation and implementing measures to address the root causes. Despite initial fierce resistance to increased or tighter regulation, we are seeing that there is a general recognition that the profession must change, improve and do more. Therefore, we are starting to see greater collaboration and willingness to work together to return our profession to its number one ranking. To borrow from the Rugby World Cup, “we are #StrongerTogether”.