How to restore trust in the audit profession?

Professor Wiseman Nkuhlu recently delivered the keynote address at the centenary celebrations of the Faculty of Economic and Management Sciences at the University of Pretoria (UP). This was followed by a panel discussion during which some interesting points were raised.

Nkuhlu is Chancellor of the University of Pretoria, chair of the board of KPMG in South Africa, and a member of the Advisory board of the South African Institute of Chartered Accountants (Saica). He was the first black chartered accountant in South Africa, and over the next 40 years achieved many academic accolades and received many awards.

In his book Enabler or Victim? KPMG SA and State Capture (KMM Review Publishing, September 2020) he discusses ethics, transparency, corporate accountability, and the role of chartered accountants in society.

Called on to navigate KPMG through the crisis of being embroiled in state capture in 2018, he had to consider how KPMG could have ignored the information in the market, and find itself in a position that damaged its brand. When KPMG was accused of being complicit in state capture, the first reaction was disbelief. Thereafter, disbelief turned into denialism.

Nkuhlu says KPMG’s reaction took too long; someone should have stood up and said: “Not in the name of KPMG”.

Once appointed at KPMG, he insisted that each auditor’s commitment to integrity be reviewed.

In his book he discusses the desires that define our behaviours; and the desires that drive the behaviours of professional and business leaders. According to Nkuhlu, our egos drive self- interest. However, an understanding of our purpose in society should really drive our behaviours. Behaviours in turn influence decisions.

The profession in a nutshell

In trying to analyse what happened at KPMG, Nkuhlu reflects on the purpose of the audit profession, and that is of checking and verifying the financial statements of a company.

In reforming the audit profession, auditors should introduce risk management, and should not be swayed by commercial success and recognition by clients that they serve.

All professionals and business leaders should interrogate themselves and understand what really drives them, and what drives their conduct.

Nkuhlu is of the firm view that professionals and business leaders must aspire to a greater good.

He suggests that more audit firms should be developed to take on large complex audits.

Panel discussion

Professor Tawana Kupe, vice-chancellor and principal of UP, led the very interesting panel discussion that followed. The panel included Nkuhlu; senior counsel and former supreme court judge Professor Mervyn King (aka Mr Corporate Governance SA); and Professor Karin Barac, deputy dean of research and postgraduate studies in the faculty of economic and management sciences at UP.

Barac sees the ideas put forward in Nkuhlu’s book as, collectively, being an enabler or motivator to restore the respect in the profession. She spoke of the competing logic in the audit profession, commercialism versus professionalism. She also spoke of the complexity of business, and the need for greater scepticism to be displayed by accountant and auditors.

Due to the complexity, auditors often have to rely on experts, and these experts are in the consulting divisions of the audit practice.

Barac said universities teach in silos. Accounting and auditing students don’t understand much about business. It is important that students develop critical thinking skills and judgement.

Educators have a responsibility to deliver auditors with technical skills, and who will act in the public interest.

King, who along with Linda de Beer, is co-author of The Auditor: Quo Vadis (Routledge, June 2018), said that if one of the Big Four auditing firms (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) had to collapse, it would be disastrous for the audit profession.

King raised the very important point that smaller firms don’t have the capital to obtain artificial intelligence. Auditing a large bank requires artificial intelligence.

King is also of the view that audit rotation would put strain on the profession.

He further referred to the liability risk; the Big Four are exposed to hundreds of millions, and take out limited liability insurance. Hence, when a listed company goes under, audit firms are seen to have deep pockets. Auditors are often sued even where they have no culpability. He noted that bankruptcies are caused by many different events.

King mentioned an interesting anomaly: that when a director makes a bad business judgement, they are protected if they can demonstrate that it was a rational decision and there was no conflict of interest.

An auditor does not have this safe haven, and always has the Sword of Damocles hanging over their head. King said there should be an “auditor judgement rule”.

King emphasised that the auditor does not draw up the financial statements; the directors do. The auditor’s job is to ascertain that the financial statements are a fair reflection of the company, and are in accordance with International Financial Reporting Standards.

King said it is not possible to legislate an ethical state of mind.

An auditor should reflect on how they are adding value to society. King also said that companies should have intergenerational diversity. He said those who belong to Generation Z are different; they want value to be added to society. Companies must develop a global sustainability standard, he said.

Nkuhlu said the crux is to understand the desires that drive behaviour. If behaviour is driven by self-interest, and if this becomes a dominant driver of behaviour, the planet will end up crashing.