Audit profession post-Zondo: ‘We’re watchdogs, not bloodhounds’

The murder of Gauteng Department of Health senior official Babita Deokaran on 21 August 2021 outside her house in Johannesburg, after she uncovered more than R100 million in dodgy payments to Tembisa Hospital, was perhaps the most flagrant attack on a whistleblower in recent years, but it was not the only one.

In 2018, the late Auditor-General Kimi Makwetu pulled his audit team out of Emfuleni Municipality, south of Johannesburg, when one of the auditors was shot while sleeping in a guesthouse in Vanderbijlpark.

The 32-year-old staffer had been investigating accounting irregularities in the municipality.

As Moneyweb reported, Mercy Phetla, chief financial officer and acting municipal manager at Mamusa Local Municipality in North West province, received death threats after she uncovered corruption and irregular payments within weeks of taking up her position in April 2021.

Speaking at the Leaderex Convention at the Sandton Convention Centre this week, national head of audit at the Auditor-General of SA (AGSA) Bongi Ngoma explained the difficulties in attracting top accounting talent to the public sector.

“We have to deal with issues such as the complexity of the work and the safety of our staff,” she said. “We’ve had to put in mechanisms to deal with threats and intimidation, and implement extraction tactics for threatened staff.”

Among the most dangerous provinces for a public auditor are KwaZulu-Natal and the Free State.

The idea of having extraction teams to remove auditors from the path of danger is inconceivable to accountants of a previous age. Yet here we are.

There are also reports of auditors having to be escorted by security or police on more dangerous assignments. Whoever said accounting was a dull profession?

Mechanisms also have to be put in place to protect audit trainees facing coercion from colleagues to flout standards of accounting ethics, added Ngoma.

“Training in ethics does not translate into safety,” said Freeman Nomvalo, CEO of the SA Institute of Chartered Accountants (Saica). “If we expect change to happen in SA, we can’t expect those in authority to drive that change.

“Integrity demands that we [as auditors] disassociate ourselves from misinformation. There’s not many examples of that in practice.”

State capture was facilitated by people inside public organisations, added former AG Terence Nombembe. “Related parties [were] an issue. This is how state capture succeeded. Do we have sufficient instruments to pick this up?”

There is an expectation about what auditors are required to accomplish. “Auditors are watchdogs, not bloodhounds. The market is looking for something else,” said Nomvalo.

More bite

The enhanced Public Audit Act introduced the concept of material irregularity in financial audits conducted by AGSA, with the power to force accounting officers to recover the loss or prevent it from happening in future, under penalty of being issued personally with a certificate of debt.

Under the Audit Profession Amendment Act, auditors have search and seizure powers when undertaking an investigation.

These laws are a nod to the enhanced role that auditors are expected to perform.

Their fees may be paid by the client, but auditors act in the public interest (giving rise to arguments that clients should not be allowed to select their own auditors, but should leave this to an independent body).

The Zondo Report into state capture made several recommendations to avert any further instances of state capture, among them beefing up the AGSA so that it can audit all state-owned enterprises (SOEs), including the secretive intelligence agencies.

Where this is not possible, private firms should be appointed to conduct audits, provided they can demonstrate that they have the required skills and understanding of public accountability.

The various volumes of the Zondo Report are riven with instances of auditors bingeing on the public purse, in dereliction of their role as public watchdogs.

Investigative and advocacy group Open Secrets detailed the malfeasance of the accounting profession in its report The Enablers, who were ably abetted by lawyers, bankers and private sector operators.

Zondo drives home the point that it was both private and public sector enablers who delivered SA’s plumpest treasures into the hands of crooks.

The South African Revenue Service (Sars) would not have been rendered a hollow husk had it not been for Bain & Company, found by Zondo to have colluded with former president Jacob Zuma and ex-Sars chief Tom Moyane in the capture of the tax agency.

Bain was recently slapped with a three-year ban from doing government work in the UK over its role in state capture in SA. The firm admitted to making mistakes, but denied “wilfully or knowingly” supporting state capture at Sars or anywhere else.

Profile of shame

It is disconcerting that so many accountants were key actors in state corruption. Zondo listed them.

The AG found that South African Airways (SAA) failed to accurately value assets or correctly record irregular or wasteful expenditure.

All this happened under the tenure of former SAA chair Dudu Myeni, with interim CFO Phumeza Nhantsi failing to raise any suspicions over a corrupt aircraft refinancing deal being awarded to a relatively unknown company called BNP.

Another chartered accountant, Yakhe Kwinana, served on the SAA board for several years as head of audit and risk.

Zondo found she had no clue about being a CA and, together with Myeni, hounded out subordinates who protested their unlawful conduct.

This was the leadership imposed on SA’s national flag carrier.

Zondo recommended that Kwinana be investigated by Saica as to whether she had “the requisite knowledge and appreciation of her obligations as a chartered accountant” and whether she should be allowed to continue practising in the profession.

Zondo criticised for targeting the profession

Former professor of auditing at Wits University, Steven Firer, writing in Financial Mail, criticised Zondo’s targeting of the audit profession.

“The Zondo commission appears to have proceeded on the assumption that an auditor is the guarantor of the accuracy of a company’s financial statements. Hence, any failure in the accounts of Eskom, Transnet or the Passenger Rail Agency of SA — whether through fraud or connivance — must lie with them.

“But Zondo failed to acknowledge how critical the process in which an auditor exercises judgment really is.

“And the commission just as profoundly failed to recognise that it is a company’s management – not the auditors – which is responsible for the accuracy of financial statements,” said Firer.

Auditors have never been expected to uncover every instance of fraud or management’s failure to pay what is owed, he added.

The issue of ‘materiality’ repeatedly surfaces as a feature of accounting judgment. Should auditors focus on a missing amount of R5 000, or should they focus on the bigger amounts?

In turn, Zondo’s critic is criticised

In response to Firer, biscuit entrepreneur Simon Mantell points out that SOEs are governed by the International Standards on Auditing (ISA) and statutes such as the Public Finance Management Act (PFMA).

“They must also be considered against the many years of clean audit opinions given to SOEs when corruption, tender fraud and procurement malfeasance were actually so rife and so material that they could only have been missed by the incompetent, the blinkered or the dishonest,” wrote Mantell.

It was left to investigative journalists and others, to the shame of the audit profession, to expose the state capture story.

“Conscientious audits would have resulted in audit opinions that were, at best, materially qualified, or, at worst, adverse,” writes Mantell.

“These would have made it impossible for lenders, under their own governance requirements, to supply credit lines to SOEs, and the state-capture game would have been over a long time ago.”