SAA, PwC – and Irba: A case of regulatory capture?

In South Africa nothing exemplifies the arcane and sheltered world of auditing and all its attendant woes quite as much as the consent order system that underpins the Independent Regulatory Board for Auditors (Irba) disciplinary system.

The near-pointlessness of this system is demonstrated by the board’s quarterly newsletter, which provides a brief description of matters investigated and finalised by consent orders.

The latest Irba newsletter provides a brief description of each of the 44 matters that were finalised by consent order during the three months to end-March.

Each of these descriptions is written as though Irba is trying to protect the individuals and audit firms investigated while at the same time being able to claim it is doing its regulatory job.

In the vast majority of cases Irba does not reveal names of the individual auditors involved or the audit firms.

Mockery

This makes a mockery of a requirement to hold individuals and firms to account and reeks of regulatory capture, or of a regulator without the resources to do a proper job.

In 41 of the 44 cases finalised in the three months to end March there is not one name mentioned. The note on Matter 13 is typical: “The respondent failed to appropriately evaluate whether the financial statements had been prepared in accordance with the applicable financial reporting framework.”

Nowhere is the name of the respondent revealed, or the audit firm for whom they worked or the client company whose financial statements had not been appropriately evaluated.

When Moneyweb asked Irba why it refused to disclose details, acting CEO Imre Nagy said: “The outcome of an investigation and sanctions, including terms of publication of a ruling, are determined by the Disciplinary Advisory Committee [of Irba] where a matter is settled by a consent order.”

As it happens in three of the 44 matters – Matter 6, Matter 7 and Matter 16 – the names of the auditors are revealed but Irba coyly refrains from mentioning the audit firm or the client company.

In Matter 6, Pule Joseph Mothibe was the auditor and in Matter 7 Thuto Margret Masasa was the auditor. (In Matter 16 – unrelated – Brian John Botes is identified as the respondent.)

Failures

The charges facing the auditors in Matter 6 and Matter 7 were identical. In both cases they “failed to disclose material non-compliance with legislation and internal control deficiencies in the 2014, 2015 and 2016 audit reports” of the entities, writes Irba. The auditors also “failed to obtain sufficient appropriate audit evidence relating to these years on irregular expenditure and fruitless and wasteful expenditure”.

The list of failures in both matters is long. Each auditor was fined R800 000.

Were it not for the fact that the complainant in both matters was Simon Mantell, the public would have no idea that PwC and Nkonki were the two audit firms involved and that SAA was the “entity”.

Cracker tender

The matter dates back to 2014 when SAA’s in-flight catering business told Mantell that his company, Mantelli’s, had won a contract to supply crackers on SAA flights.

A few months later Mantell was told there had been some miscommunication and the contract should never have gone out to tender. The cracker contract was to remain with Anglovaal Industries.

Mantell was not persuaded.

He set off on a years’ long odyssey that provided an insight into the procurement corruption that has helped to bring SAA to its knees.

As Mantell describes it, SAA was dogged by a systemic level of corruption enabled by the prolonged “failings” of auditors who were being paid hefty fees.

Mantell, who is an accountant by training, was not only appalled by the corruption and the implicit involvement of so-called pillars of business but was determined the public should know what was going on.

Open cards

He made it clear from the beginning of his journey that he would not be playing by the rules of silence so beloved by the audit profession.

As a result the public was able to get a glimpse of what regulation of the audit industry looks like. Depressingly ineffectual, it seems.

For three years Mantell had to prod and poke at Irba to ensure that it pursued his complaint. Along the way PwC fought back and tried to discourage Irba by charging that Mantell was abusing Irba’s complaint process. (A year ago, following a separate but related investigation, PwC was slapped with a R200 000 fine, a quarter of which was suspended.)

In response to Irba’s latest order PwC told Moneyweb it is disappointed that the audits it performed with joint auditor Nkonki did not meet the high standards it sets itself.

Ethics

However, it added that: “The Irba’s investigation did not identify a breach of ethical standards in the failure to refer to the identified areas of non-compliance in the audit reports” – and concluded that PwC holds its partners to a high standard and is committed to improving quality and holding those responsible accountable.

It appears that because Irba’s consent agreement made no statement on the ethics of the situation, PwC feels it was able to claim all was well on that front.

How is that possible? Surely consistent failure to do a job for which you are extremely well remunerated has ethical implications?

According to a report on the matter released by Open Secrets in 2020, SAA’s previous auditors Deloitte had already noted “control deficiencies” in SAA’s procurement and contract management in 2011. In the following year, after the appointment of PwC and Nkonki “no such concerns” were noted. Indeed, the auditors had no concerns at all.

However in 2017 when the Auditor-General’s office took over the audit function, it identified eight major misstatements not picked up by PwC and Nkonki between 2012 and 2016.

Read: Why did PwC not identify corruption at SAA? (Jul 20, 2020)

PwC is part of a powerful global firm – one of the so-called Big Four – so it’s difficult not to suspect it had some appreciation of the poor quality of work it was doing. Either that or it is inept.

Mantell tells Moneyweb that in the three years that were the subject of the Irba investigation (2014, 2015 and 2016) PwC received R60 million in audit fees from SAA.

He contends that an ethical company would return those fees, plus interest, on the grounds that it did not do the work for which it was paid.

As Finance Minister Tito Mboweni contemplates ways to beef up Irba’s regulatory muscle he should consider ensuring that it has the resources necessary to take on the powerful audit firms that are able to devote enormous funds to pushing back against any attempt at enforcing regulation.

To its considerable credit Irba, under former CEO Bernard Aghulas, did succeed in disrupting the previously extremely cosy relationship that existed between audit firms and their regulator.

But the current investigative and disciplinary process needs to be completely overhauled or, for sure, the role of external auditors will continue its slide into disreputable insignificance.

Justice must not only be done, it must be seen to be done.