AUDITOR SET UP FOR FAILURE
Thursday, October 17, 2019
Director: Standards
Independent Regulatory Board for Auditors
Building 2, Greenstone Hill Office Park,
Emerald Boulevard,
Modderfontein
‘
Email: ivanker@irba.co.za
Dear Imran
Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005
Thank you for your “open door” policy that you are always amenable to entertain my views. I read all material issued by the IRBA extremely thoroughly and carefully. This is just in my nature. It is very rare that I come across the need to formally communicate a tricky issue that I have discovered in an IRBA guide. They are always well researched and well written.
On reading the “Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005” [the Guide] I have discovered that certain guidance may present a problem when it has regard vis-à-vis the reportable irregularity reporting process and the auditor’s report.
This problem can be found in para 14.7 of the Guide where a summary is provided as regards: The impact of reportable irregularities on the auditor’s report.
In para 14.7 it is explained that even though the reportable irregularity reporting process is incomplete the auditor must include a “Notification in the auditor’s report (or both a modified opinion and a notification)”.
I am of the opinion that the auditor cannot include any reference to a reportable irregularity in an audit report until the reportable irregularity reporting process is complete and the auditor has sufficient and appropriate evidence of the existence or non-existence of the reportable irregularity.
Despite the necessity to report a reportable irregularity to the IRBA upfront and without delay, the auditor has a further 27 days (after reporting to management) to confirm that the reportable irregularity, exists and is no longer continuing, the reportable irregularity exists and is still continuing, or the reportable irregularity never existed in the first place. This evidence is finalized only once the second letter to the IRBA has been sent confirming the existence or non-existence of the reportable irregularity. The impact of including any reference to a reportable irregularity that does not exist can have serious financial and criminal ramifications for the auditor. The auditor is under immense pressure from regulators, the press and the public in the normal course of business and the IRBA is now setting the auditor up for more trouble by making them include in an audit report [however unlikely] a reportable irregularity that may not exist.
This inclusion of a reportable irregularity in an audit report prior to the completion the reportable irregularity reporting process is in conflict with section 45 (5) of the Auditing Profession Act 26 of 2005 which states: “a registered auditor may carry out such investigations as the registered auditor may consider necessary”. This is why the auditor has a further 27 days to confirm the existence or non-existence of a reportable irregularity. It is also ensuring that the auditor has sufficient time to investigate the potential reportable irregularity. The scope for an auditor to discuss a potential reportable irregularity with the client prior to reporting is almost non-existent that is why the auditor has 27 days where the auditor can discuss the potential reportable irregularity.
I am in agreement with the Guides reference to section 44 of the Auditing Profession Act 26 of 2005, however the principle of the “notification” when the reportable irregularity reporting process is incomplete does not fall within the scope of section 44 of the Auditing Profession Act 26 of 2005. Section 44 of the Auditing Profession Act 26 of 2005 reads as follows: The registered auditor may not, without such qualifications as may be appropriate in the circumstances, express an opinion to the effect that any financial statement or any supplementary information attached thereto which relates to the entity.
The IRBA’s “notification” probably has regard to the words “any supplementary information” when it adjusts section 44 of the Auditing Profession Act 26 of 2005 to read as follows (see section 14.1 of the Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005). The word “notification” is not mentioned in section 44 (2) of the Auditing Profession Act 26 of 2005. This adjustment may be misinterpreted by an auditor especially if they have not read the actual section 44 of the Auditing Profession Act 26 of 2005.
The IRBA must take note that section 44 of the Auditing Profession Act 26 of 2005 is entitled “Duties in relation to audit”. Section 44 (3) (a) of the Auditing Profession Act 26 of 2005 states that an audit must carried out in compliance with auditing pronouncements relating to the conduct of the audit. This obviously includes International Standards on Auditing (ISAs). ISA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing para 3 states: The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. How can this be if the audit report contains reference however made to a reportable irregularity that may never have existed? It defeats the entire purpose of the reason for an audit. The public will comment as usual that the auditors never do their job properly.
ISA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing para 5states: As the basis for the auditor’s opinion, ISAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. The fact that the audit report contains reference to a non-existent reportable irregularity [however worded] means that there is a material misstatement. As always the liability of the auditor is considered in hindsight and when after the signing of the audit report the reportable irregularity is found not to exist claims will be made that the auditor has made either a fraudulent or a negligent misstatement.
ISA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements states as follows: Non-compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements [para 2]. The inclusion of a non-existent reportable irregularity in an audit report may trigger investigations by regulatory authorities as there is no outlet for the company or the auditor to inform the public that the reportable irregularity is non-existent. The only way is to withdraw the financial statements and the auditor amend the audit report. Based on personal experience it is not something that any auditor should have to do; if the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations, the auditor shall obtain: An understanding of the nature of the act and the circumstances in which it has occurred and further information to evaluate the possible effect on the financial statements [para 18]. How could any auditor defend these requirements when it turns out that they included a reference [however made] to a non-existent reportable irregularity? The IRBA itself would be concerned that such an event has taken place and would probably institute disciplinary procedures despite the obligation to include such a reference was made in the guide.
ISA 250 - Audit Evidence states: the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions [para 4]. It is self-evident that if audit refers to a non-existent reportable irregularity in an audit report [which is the only way an auditor communicates to the public], the auditor has failed in this duty.
There are numerous other references in the ISAs and the Rules of Professional Conduct that suggest the auditor has failed in his or her mandate to the public by including a non-existent reportable irregularity, no matter how unlikely to happen.
5
Section 52 (3) [Reportable irregularities and false statements in connection with audits] of the Auditing Profession Act 26 of 2005 states that: A person convicted of an offence in a court of law under this section is liable to a fine or to imprisonment for a term not exceeding 10 years or to both fine and such imprisonment. This [however unlikely], can affect the auditor specifically when it pertains to making reference to a non-existent reportable irregularity in an audit report.
Section 218 (2) of the Companies Act 71 of 2008 states: Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention. If any person especially the client or a third party suffers loss financial or otherwise (such as client reputation) as a result of a reference to a non-existent reportable irregularity in an audit report, the auditor may very well find themselves in trouble despite what has been stated in the Guide.
Compliance with an IRBA guide is not a defense civilly or criminally to accusations of unprofessional conduct. The IRBA would be the first regulator to investigate an auditor if they included a reference to a non-existent reportable irregularity in an audit report.
The problem is that’s what auditors are currently doing as a result of the guidance given to them by the IRBA. The IRBA is incorrect in its guidance even if it results in one auditor out 4 000 being put out of business.
I recommend that the auditor only include a reference to an existing reportable irregularity or a reportable irregularity that existed but is no longer continuing in an audit report and the only way that can happen is for the auditor not to make reference to a reportable irregularity in an audit report in any manner until the reportable irregularity reporting process has been completed.
Yours Sincerely
Steven Firer
Director: Standards
Independent Regulatory Board for Auditors
Building 2, Greenstone Hill Office Park,
Emerald Boulevard,
Modderfontein
‘
Email: ivanker@irba.co.za
Dear Imran
Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005
Thank you for your “open door” policy that you are always amenable to entertain my views. I read all material issued by the IRBA extremely thoroughly and carefully. This is just in my nature. It is very rare that I come across the need to formally communicate a tricky issue that I have discovered in an IRBA guide. They are always well researched and well written.
On reading the “Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005” [the Guide] I have discovered that certain guidance may present a problem when it has regard vis-à-vis the reportable irregularity reporting process and the auditor’s report.
This problem can be found in para 14.7 of the Guide where a summary is provided as regards: The impact of reportable irregularities on the auditor’s report.
In para 14.7 it is explained that even though the reportable irregularity reporting process is incomplete the auditor must include a “Notification in the auditor’s report (or both a modified opinion and a notification)”.
I am of the opinion that the auditor cannot include any reference to a reportable irregularity in an audit report until the reportable irregularity reporting process is complete and the auditor has sufficient and appropriate evidence of the existence or non-existence of the reportable irregularity.
Despite the necessity to report a reportable irregularity to the IRBA upfront and without delay, the auditor has a further 27 days (after reporting to management) to confirm that the reportable irregularity, exists and is no longer continuing, the reportable irregularity exists and is still continuing, or the reportable irregularity never existed in the first place. This evidence is finalized only once the second letter to the IRBA has been sent confirming the existence or non-existence of the reportable irregularity. The impact of including any reference to a reportable irregularity that does not exist can have serious financial and criminal ramifications for the auditor. The auditor is under immense pressure from regulators, the press and the public in the normal course of business and the IRBA is now setting the auditor up for more trouble by making them include in an audit report [however unlikely] a reportable irregularity that may not exist.
This inclusion of a reportable irregularity in an audit report prior to the completion the reportable irregularity reporting process is in conflict with section 45 (5) of the Auditing Profession Act 26 of 2005 which states: “a registered auditor may carry out such investigations as the registered auditor may consider necessary”. This is why the auditor has a further 27 days to confirm the existence or non-existence of a reportable irregularity. It is also ensuring that the auditor has sufficient time to investigate the potential reportable irregularity. The scope for an auditor to discuss a potential reportable irregularity with the client prior to reporting is almost non-existent that is why the auditor has 27 days where the auditor can discuss the potential reportable irregularity.
I am in agreement with the Guides reference to section 44 of the Auditing Profession Act 26 of 2005, however the principle of the “notification” when the reportable irregularity reporting process is incomplete does not fall within the scope of section 44 of the Auditing Profession Act 26 of 2005. Section 44 of the Auditing Profession Act 26 of 2005 reads as follows: The registered auditor may not, without such qualifications as may be appropriate in the circumstances, express an opinion to the effect that any financial statement or any supplementary information attached thereto which relates to the entity.
The IRBA’s “notification” probably has regard to the words “any supplementary information” when it adjusts section 44 of the Auditing Profession Act 26 of 2005 to read as follows (see section 14.1 of the Revised Guide for Registered Auditors: Reportable Irregularities in terms of the Auditing Profession Act 26 of 2005). The word “notification” is not mentioned in section 44 (2) of the Auditing Profession Act 26 of 2005. This adjustment may be misinterpreted by an auditor especially if they have not read the actual section 44 of the Auditing Profession Act 26 of 2005.
The IRBA must take note that section 44 of the Auditing Profession Act 26 of 2005 is entitled “Duties in relation to audit”. Section 44 (3) (a) of the Auditing Profession Act 26 of 2005 states that an audit must carried out in compliance with auditing pronouncements relating to the conduct of the audit. This obviously includes International Standards on Auditing (ISAs). ISA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing para 3 states: The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. How can this be if the audit report contains reference however made to a reportable irregularity that may never have existed? It defeats the entire purpose of the reason for an audit. The public will comment as usual that the auditors never do their job properly.
ISA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing para 5states: As the basis for the auditor’s opinion, ISAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. The fact that the audit report contains reference to a non-existent reportable irregularity [however worded] means that there is a material misstatement. As always the liability of the auditor is considered in hindsight and when after the signing of the audit report the reportable irregularity is found not to exist claims will be made that the auditor has made either a fraudulent or a negligent misstatement.
ISA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements states as follows: Non-compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements [para 2]. The inclusion of a non-existent reportable irregularity in an audit report may trigger investigations by regulatory authorities as there is no outlet for the company or the auditor to inform the public that the reportable irregularity is non-existent. The only way is to withdraw the financial statements and the auditor amend the audit report. Based on personal experience it is not something that any auditor should have to do; if the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations, the auditor shall obtain: An understanding of the nature of the act and the circumstances in which it has occurred and further information to evaluate the possible effect on the financial statements [para 18]. How could any auditor defend these requirements when it turns out that they included a reference [however made] to a non-existent reportable irregularity? The IRBA itself would be concerned that such an event has taken place and would probably institute disciplinary procedures despite the obligation to include such a reference was made in the guide.
ISA 250 - Audit Evidence states: the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions [para 4]. It is self-evident that if audit refers to a non-existent reportable irregularity in an audit report [which is the only way an auditor communicates to the public], the auditor has failed in this duty.
There are numerous other references in the ISAs and the Rules of Professional Conduct that suggest the auditor has failed in his or her mandate to the public by including a non-existent reportable irregularity, no matter how unlikely to happen.
5
Section 52 (3) [Reportable irregularities and false statements in connection with audits] of the Auditing Profession Act 26 of 2005 states that: A person convicted of an offence in a court of law under this section is liable to a fine or to imprisonment for a term not exceeding 10 years or to both fine and such imprisonment. This [however unlikely], can affect the auditor specifically when it pertains to making reference to a non-existent reportable irregularity in an audit report.
Section 218 (2) of the Companies Act 71 of 2008 states: Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention. If any person especially the client or a third party suffers loss financial or otherwise (such as client reputation) as a result of a reference to a non-existent reportable irregularity in an audit report, the auditor may very well find themselves in trouble despite what has been stated in the Guide.
Compliance with an IRBA guide is not a defense civilly or criminally to accusations of unprofessional conduct. The IRBA would be the first regulator to investigate an auditor if they included a reference to a non-existent reportable irregularity in an audit report.
The problem is that’s what auditors are currently doing as a result of the guidance given to them by the IRBA. The IRBA is incorrect in its guidance even if it results in one auditor out 4 000 being put out of business.
I recommend that the auditor only include a reference to an existing reportable irregularity or a reportable irregularity that existed but is no longer continuing in an audit report and the only way that can happen is for the auditor not to make reference to a reportable irregularity in an audit report in any manner until the reportable irregularity reporting process has been completed.
Yours Sincerely
Steven Firer
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