IRBA Annual Report & high profile investigations of KPMG, Deloitte, Nkonki

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Finance Standing Committee

09 May 2018
Chairperson: Ms T Tobias (ANC)
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Meeting Summary

Annual Reports 2016/17

The Independent Regulatory Board for Auditors CEO highlighted that IRBA was globally respected and viewed as a leader in audit reform. IRBA was a founding member of IFIAR (International Forum of Independent Regulators) and its CEO was on the IFIAR Board and chaired the board audit committee.

IRBA’s strategic functions are the setting of standards, preparing auditors (education and training) and the monitoring, maintaining and enforcing of audit standards. IRBA had received a clean audit for the 8th consecutive year and is audited by the Office of the Auditor General. About a third of IRBA’s income was funded by government and the rest from audit companies. Its expenses in 2017 were about R103m most of which was for human resources costs. There was a deficit of R5.4m which was funded from reserves.

The discussion and queries from members focused on IRBA, if it had enough capacity to conduct its work and how compliance and business ethics were investigated. IRBA CEO advised that it did not have enough resources - only five investigators for the 150 open cases on its books. National Treasury would be approached for additional funding.

The IRBA Board Chairperson said that he was extremely dismayed and disappointed by the recent events in the audit profession as the result of the actions of a few rogue accountants. He said that there was substantial work to be done to restore confidence in the industry.

The CEO briefed the Committee on the status of four high profile cases:
• Deloitte and Africa Bank investigation: Deloitte had been issued with a charge sheet and that hearings were held on 19, 23, 26-28 March. Deloitte pleaded not guilty and the hearing had been postponed to 3 September 2018.
• KPMG and SARS / Linkway Trading: The investigation was initially stalled due to the difficulty of obtaining information from the auditors, but the information had since been received and the process was now back on track. Hearings are set for 2-7 July 2018.
• Deloitte and Steinhoff: The investigation was on track and it would be the biggest investigation that IRBA would perform due to the nature and extent of the issues. IRBA was currently awaiting the financial statements.
• Nkonki and KPMG/VBS: It was regrettable that “one errant auditor” had caused the demise of an entire organisation and had tarnished the image of transformation. IRBA had issued investigation letters to the auditor and individuals concerned.

A key concern raised by Members was how IRBA distinguished and managed the process between individuals who transgressed the regulations versus companies where the organisational culture was such that it allowed audit irregularities.
 
IRBA had proposed changes to the Auditing Profession Act to improve the effectiveness and efficiency of IRBA. The amendments would be fast-tracked during 2018 and included the following:
• Strengthening of sanctions for transgressions (fines)
• Power to subpoena - currently it was difficult to get people to attend hearings
• Strengthening the disciplinary process - the current process was very cumbersome.
• New provision to allow IRBA to focus on high profile cases that were in the public interest.

 

Meeting report

The Acting Chairperson, Ms Thandi Tobias, advised that the Committee Chairperson was out of the country and that she was standing in for him during this period.

IRBA Annual Report
IRBA was represented by its CEO, Mr Bernard Agulhas and the Board Chairperson, Mr Abel Dlamini. Mr Dlamini advised that Mr Agulhas would provide the bulk of the IRBA briefing to the Committee, but that he would provide comment on the recent events that were being investigated by IRBA.

Mr Bernard Agulhas, IRBA CEO, provided an overview of the IRBA in the global context, its strategic direction, the 2017 Annual Report highlights as well as the status of its current investigations into various companies.

Mr Agulhas said that the IRBA was globally respected and viewed as a leader in audit reform, consistent with international best practice. He mentioned a number of important aspects that enhanced Such Africa’s stature in the international arena. These included that it was a founding member of IFIAR (International Forum of Independent Regulators). There are 52 IFIAR member countries and SA is one of only four African members, the others being Botswana, Egypt and Mauritius. IRBA also served in key roles on the international accounting standards boards for education, ethics and standards.

IRBA’s strategic functions are the setting of standards, preparing auditors (education and training) and the monitoring, maintaining and enforcing of audit standards. Its strategy was based on four key pillars:
• to be a comprehensive regulator - currently only auditors regulated but there were plans to also regulate accountants
• independence of auditors - to safeguard independence was crucial. Audits were mandatory and audit firms had to be rotated.
• transformation - given the country’s history and the legacy of apartheid, a key mandate was to investigate lack of transformation and ensure this was fast tracked in companies.
• to provide leadership in Africa - working to duplicate SA’s model in the rest of Africa.

Key achievements of 2017 were highlighted. These included:
- It was mandatory that companies rotate their auditors every 10 years
- IRBA CEO was appointed to the Board of IFIAR and chaired the Audit Committee.
- IRBA has had a clean audit report for the 8th consecutive year.
- IRBA had been approved as an equivalent authority under the European Union and by the Federal Audit  Oversight Authority (Switzerland), as well recognition by auditing bodies in the USA.
- The inclusion of key audit matters (KAM) were now prescribed as additional requirements over and above the usual audit information and would strengthen the audit process.

About a third of IRBA’s income was funded by government and the rest from audit companies. Its expenses in 2017 were about R103m most of which was for human resources costs. There was a deficit of R5.4m which was funded from reserves.

IRBA measured its performance against set targets in four areas:
- to develop and maintain auditing and ethical standards
- to provide a framework for the education and training for properly qualified auditors
- to monitor the compliance of registered auditors with professional standards
- to improve the IRBA’S operational efficiency by strengthening its capacity and performance capacities.
All set targets were achieved, except one aspect on compliance monitoring in reviewing the work of registered auditors - where only 80% of the targeted 90% adherence were met. The reason the target was not achieved was due to other developments during the year that constrained the monitoring process. Another negative factor was lack of adequate staff.

Discussion
Ms G Ngwenya (DA) asked how IRBA tracked and ensured that companies complied with the codes and standards and how this impacted on the audit performance.

Mr Lees (DA) was concerned about cost over-runs being funded from reserves. He asked what IRBA would do once its reserve funds were exhausted. He asked who audited IRBA.

Ms N Nkonyeni (ANC) said that although the IRBA felt confident about its respected global status, recent audit related events in the country had tarnished its image and she felt that perhaps its global image was not as good as it claimed.

Mr N Nhleko (ANC) asked how the four pillars in the organisational strategy linked in to its service delivery.

The Acting Chairperson asked if IRBA had enough reserves to effectively conduct its business. She was also concerned about compliance and ethics insofar as companies conducted themselves and asked how these were monitored and investigated. She asked if IRBA had budgeted for the inclusion of the regulation of accountants in its future operations.

Mr Agulhas responded as follows:

 The key outcome of IRBA’s work was to ensure that companies were compliant and ethical. It was very difficult to measure if an organisation was compliant and that IRBA was still in the process of fine-tuning the measurement mechanism.

He agreed that it was not sustainable to fund expenses from reserves. IRBA was in the process of working on a new funding model (as requested by the Board) and once approved, would approach National Treasury to increase its funding.

IRBA did not have enough capacity to conduct its mandate effectively. There were 150 open investigations but that IRBA only had five investigators and no additional funding to increase this - hence the reason for the focus on the high profile cases such as Steinhoff. The lack of capacity was a big concern for IRBA in the current climate of audit investigations.

IRBA was audited by the Auditor General, which was the only South African entity not regulated by IRBA.

He believed IRBA still commanded excellent global respect. A key factor that should strengthen this - was how the country (i.e. IRBA) reacted and dealt with the current spate of problems facing the audit industry. The current problem in SA was a global problem such as what happened to Enron and Arthur Andersen. The country now had an opportunity to show how it managed and addressed these problems. He emphasised that only a small percentage of auditors were bad, a far greater proportion of industry members were fine and above board.

On the link between the four pillars to IRBA strategic objectives - he advised that these were in IRBAs KPIs (key performance indicators) but that the actual performance objectives could only contain legislated items and had to include 80% of issues as mandated by the Board.

There was no budget to include the regulation of accountants as part of IRBA mandate.

Investigation of high profile cases

Mr Abel Dlamini, IRBA Board Chairperson, said that IRBA was extremely dismayed and disappointed by the recent events in the audit profession as the result of the actions of a few rogue accountants. There was substantial work to be done to restore confidence. Some of the key actions taken by IRBA were to ensure compliance and to preserve the professionalism of the audit industry. Other initiatives were to improve risk management strategies and oversight operations. IRBA also wanted to change the public perception that it was a “toothless” body. This could only be done if more resources were made available and Treasury would be approached to address this.

Mr Agulhas outlined the high level process of the auditor investigation process. Normally the process is triggered by receipt of a complaint, this was followed by an investigation, the Investigations Committee would then make a recommendation to the Disciplinary Committee which would make a decision on the recommendation. He said the current system was onerous and had to be fast-tracked so that more cases were resolved more speedily.

He briefed the Committee on the status of four high profile cases:
The CEO briefed the Committee on the status of four high profile cases:
• Deloitte and Africa Bank investigation: Deloitte had been issued with a charge sheet and that hearings were held on 19, 23, 26-28 March. Deloitte pleaded not guilty and the hearing had been postponed to 3 September 2018. A key concern for IRBA is that organisations were using all available options to stall, delay and constrain the quick resolution of the process.
• KPMG and SARS / Linkway Trading: On the investigation related to the SARS rogue unit, it was very difficult to get the information from KPMG. SARS finally provided information and the process was now back on track. The Linkway charge sheet had been sent to the auditor. Hearings are set for 2-7 July 2018. The investigation dealt with KPMG as the auditor and the investigation into KPMG (on its own) would be a separate investigation.
• Deloitte and Steinhoff: The investigation was on track and it would be the biggest investigation that IRBA would perform due to the nature and extent of the issues. Since December 2017 when IRBA opened the case, a lot has happened and the investigation commenced in February 2018. IRBA was currently awaiting the financial statements.
• Nkonki and KPMG/VBS: He emphasised that it was regrettable that “one errant auditor” had caused the demise of an entire organisation and had tarnished the image of transformation. IRBA had issued investigation letters to the auditor and individuals concerned.

Mr Agulhas stressed that the lack of capacity with only five investigators was hampering the progress of investigations.

Discussion
Mr D Maynier (DA) wanted more detail on the other issues that were discovered during the investigation on KPMG and SARS / Linkway Trading. He asked if the auditors reported any irregularities on developments at Steinhoff and VBS.

Ms Ngwenya asked if there was a possibility that criminal charges could result from IRBA investigations and if there was a link to law enforcement agencies. She asked if anyone one else besides IRBA could pursue investigations on audit irregularities. She asked what the competencies of the Investigation Committee was, and how the appeal process functioned.

Mr Lees asked if SAA was in the “cross hairs” of IRBA. This was especially relevant given the recent comments by the Auditor General on SAA’s previous auditors (PWC).

Mr Maynier felt that the problem with some audit firms (like KPMG) was the systemic and institutional culture that was the root cause of audit problems. He asked what IRBA could do to address this.

Ms T Tobias (ANC) agreed and cited the example of Nkonki where there was a separation of an individual’s action as opposed to systemic conduct within an organisation - was the individual at fault or was it part of the organisational culture. How did IRBA deal with individual versus systemic organisational breaches

Mr Dlamini replied that during investigations, trends and patterns would emerge that clearly indicate a systemic organisational trend that could impact negatively on audit processes. Whilst investigations on individuals breaching regulations showed that rogue individuals were not complying with the normal company rules and regulations, as was the case in VBS and Nkonki.

Mr Agulhas replied that at this stage, IRBA could not divulge the other information gleaned during the KPMG investigation linked to SARS and Linkway Trading, as it could jeopardise its investigation.

On VBS Mutual Bank, he advised that letters were sent by the auditors about irregularities on 18 April 2018 (KPMG) and on 2 November and 19 December 2017 (Deloitte).

Mr Agulhas replied that IRBA investigated auditor conduct not criminal cases. If any proof of criminal activity was discovered such as. money laundering, this would be reported to law enforcement agencies.

He advised that anyone could investigate or open cases against organisations that infringed audit regulations.

The composition of the Disciplinary and Investigations Committees was available on IRBA website and consisted of retired judges and lawyers, CAs, business people, academics and people with ethical backgrounds.

Mr Agulhas replied that the appeal process was set in law. Auditors could appeal to the High Court if there was disagreement with IRBA findings. Appeals were costly and resulted in a delay of the resolution of audit investigations.

He said that IRBA had completed the SAA investigation and that the Investigations Committee would meet soon to make a decision on the matter.

He indicated that systemic organisational culture that impacted negatively on audit outcomes had to be rooted out. He cited the example of KPMG where the current leadership were now working tirelessly to address the systemic problems that existed before. IRBA was engaging with KPMG on this.

Some examples and initiatives underway to address problems identified were:
• strengthening governance by appointing non executives to boards with appropriate power to influence decisions
• making senior partners responsible for risk management
• conducting proper due diligence (forensic and other) before accepting clients for auditing.
• no gift policy
• a second partner review the quality of audits
• more training on ethics with all staff. A key deliverable would be to sense the “tone at the top”, i.e. how does the leadership and senior partners set this tone on ethics - they had to “walk the talk”!

Mr Maynier requested more detail on VBS Mutual Bank and the two conflicted auditors.

The Acting Chairperson said the line of questioning was not appropriate and ruled the matter out of order. She said that if there was time left after the discussion on policy issues, it could be discussed then.

Mr Agulhas continued his comments on initiatives to strengthen auditing companies.

Mr Maynier left the meeting.

Mr Agulhas said that IRBA had proposed some changes to the Auditing Profession Act, No 26 of 2005, aimed and improving the effectiveness and efficiency of IRBA. These included:
• Strengthening of sanctions for transgressions (fines)
• Power to subpoena - currently it was difficult to get people to attend hearings
• Strengthening the disciplinary process - the current process was very cumbersome.
• New provision to allow IRBA to focus on high profile cases that were in the public interest.

Discussion
Mr Nhleko asked if any other options had been considered to address the lack of capacity within IRBA as opposed to requesting increased funding. There were other state institutions that could assist such as the Special Investigating Unit (SIU).

Mr Lees commented that the policy recommendations were important changes and asked if this had been prioritised in any Bills.

Mr Agulhas responded that IRBA had approached other institutions for help such as the Association of Fraud Examiners. They had also engaged other regulatory bodies in the USA, Britain and Canada who advised that they could make people available (probably at no cost) but IRBA would have to pay logistics costs.

He said that Treasury had indicated that funding was available to strengthen the operations of IRBA.

He advised that a draft Bill was in the process of being finalised and would come before the Committee in due course.

The Acting Chairperson confirmed that the new draft Bill was a priority matter for the Committee.

Meeting adjourned
 

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