Auditors Face Extinction

 

ON 18 AUGUST 2006 Ignatius Sehoole then CEO of SAICA said - There could come a point when auditors will walk away from the business because of the growing risk.

 

The risk to registered auditors from enhanced regulatory enforcement and new legislation continues to increase. Enforcement actions are up, and IRBA inspectors are becoming more zealous and more prescriptive about what they expect from auditors. This activity is causing great concern amongst the audit profession in South Africa. These days, audit firms are asking: What are the practical steps the firm can take to demonstrate compliance with such onerous regulatory regimes? Where is the future of regulation headed? How do we do business in this ever changing regulatory environment? Yes auditing is a business with most audit firms having limited access to funds never mind cash to pay these ever increasing legal fees. 

 

Much has been written about the increasing incidence of civil litigation against auditors such as the recent court decision in Axiam v Deliotte the landmark decision by the Supreme Court of Appeal where the auditor maybe guilty of negligence by omission – by failing to disclose that their audit report was wrong. Appeal Court Justice Cloete in disagreeing with such a judgment stated – how can an auditor disclose what an auditor does not know. Professor Loubser of UCT said that as a result auditors faced the specter of indeterminate (unknown) liability. 

 

IRBA enforcement against auditors has arrived in South Africa with a vengeance. I agree it’s the IRBA’s task to protect the public, however even relatively minor violations of auditing standards and/or frivolous complaints by any member of the public may prompt regulatory action by IRBA. In my opinion a “broken windows” approach to enforcement is being applied by IRBA. This is most unfortunate. The profession is losing its ability to attract and retain the best recruits and professionals because of the risk attached to the profession. Since a respected accounting profession is the backbone of any important financial center, if the accounting profession suffers, South Africa’s hard-earned status will suffer.

 

Abusive litigation and regulation poses a grave threat to the vitality and viability of many businesses and professions. In today's litigious environment, no business, no profession, and no individual is going to take actions that would further increase liability exposure. In fact, exactly the opposite is happening. Doctors are leaving high-risk specialties. Fear of abusive litigation is causing emerging businesses to seek private financing rather than entering the capital markets, thus decreasing investment opportunities. Qualified people are declining to serve as outside directors unless they are covered by liability insurance. Is it any surprise, then, that auditors are thinking long and hard about assuming the roles of public watchdog?

 

In addition to the perils of the liability system, the auditing profession must contend with unrealistic expectations regarding the auditor's obligation and ability to minimize risk by preventing business fraud, mismanagement, error and failure. For example, many people believe that auditors are required to search for any type of fraud of any magnitude, be it embezzlement, "cooking the books," using the corporate airplane for personal jaunts, or pilfering petty cash. Auditors are also expected to foresee or prevent business failures by, among other magical acts, predicting sudden changes in the business environment, keeping management from making bad decisions, and assessing the effects of a CEO's unstable mental condition on a company's prospects. These unrealistic expectations anticipate the concept of risk-shifting that is driving the liability system have fed on each other to create an impossible situation in which auditors are seen as absolute guarantors against fraud, failure, and financial ruin. Shareholders and third parties, therefore, feel justified in refusing to recognize that risk is an inherent factor in investment and demanding that the auditor compensate them for losses and un-met expectations even if they were responsible for the losses, even if their expectations were unrealistic, and even if the auditor is not culpable.

 

Some observers have suggested that public expectations are a constantly moving target. Any effort on the profession's part to meet these expectations at a given point in time always seems to generate newer and even more unrealistic expectations. The resulting disappointment produces more criticism of the auditor's performance, more litigation, and more pressure for even further expansion of the auditors' responsibilities. How do we stop this vicious spiral? There are no easy answers. I can only suggest that the process begin with a good faith dialogue between IRBA and the profession that hopefully will lead to cooperative action. The auditing profession can articulate its proposals to meet public expectations within the boundaries of the current financial statement audit and hopefully this will result in a cessation of invasive regulatory practices. 

 

There is "a very real fear" that regulators are forging ahead in an attempt to become market leaders, and were no longer listening to those professionals whose very existence seems to be in doubt. Regulators and enforcement officials continue to develop more powerful enforcement tools.

 

The current situation is not in the best interests of all the parties concerned, and some legislative reform is required to address the glaring inequitable risk/return situation that faces auditors. The concern is expressed that a continuation of the current situation may well lead to the collapse of one of the medium to large firms in South Africa, a fear already expressed in the United Kingdom and the European Union, and experienced in the United States of America