Any of you who know me know how passionate I am about the CA(SA) brand. As far as I’m concerned, it represents the best preparatory business qualification in the world, bar none! It’s stringent qualification requirements coupled with its lateral thinking and analytical training makes it the hardest course to pass other than maybe actuarial science. It certainly has the highest failure rate especially in the final exams.
How low is the percentage of people who start out and qualify without dropping a year or fail the Board exam. In my day it was 2%! I think it has improved, but it is still substantially below other academic courses!
Hence I have been sickened by the recent news headlines trashing our profession and its brand.
It seems that audit practices that were once regarded as the pillars of professional conduct and ethical behaviour are now being dragged through the media, shown up to be dishonest, complicit and greedy.
What in blue-blazers is going on?
In my view this has brewing for a some time now. It has been like a disaster waiting to happen!
Why so?
Here are some thoughts on this matter:
- Audit fees have been under tremendous pressure:
The audit process has always been a grudge purchase. It’s essential for a company to present a clean audit report in order to satisfy shareholders that the directors have behaved themselves. An objective review of the financial results within a level of materiality, is an acceptable outcome if it claims that the financial results fairly present the year under review. Has not a level of expectation crept into the Board that a clean audit report is a given? That being the case, the audit adds little or no value. With the outrageous fees that audit firms charged, this cost has been questioned and squeezed.
- Termination of lucrative consultancy work:
The harsher requirements around independence has closed off the lucrative consulting work on tax, corporate finance and the like. Audit firms did not gear themselves up for this change. Some of the firms saw this coming quicker than others but it takes time to build a client base notwithstanding the fact that you have a glowing brand. There are 4 big players and they all present themselves in the same way, and competition is fierce. And then you have the law firms who are taking this lucrative consultancy work away. None of the very big names in tax work are with audit firms anymore. They all work in the legal profession, a profession that has no problem with independence!
- BEE requirements:
The recent emergence of large the 2 large Black practices have understandably sopped up lucrative government work, especially SOE’s. Again this has narrowed the field of play. Although this looks like this might revert back to this stable, in the more recent past this has had a material impact on the profession in terms of lost business.
- Business touting:
In various disguised forms, touting has become the order of the day. Newly appointed partners are pressurised into bringing in new business and consequently there is a fair amount of underground marketing going on. And here emerges some major problems in giving quotes to a new audit client:
- The audit issues that could arise on a new client are extremely difficult to predict. The very act of offering a fixed price infringes on the concept of independence. Short cuts are inevitable especially if you are a needing to justify your contribution to other partners in the firm. Everything is a judgement call and if there’s a money risk on the table one just cannot be independent.
- Being unaware of the existing audit fee creates a need to narrow down the quote just like any other bidding environment. Amongst the Big 4 firms the audit service is a commodity. Price is everything. There are no other benefits – the service is the same whether they are with one or the other.
- The spate of mergers and acquisitions:
The recent past has seen a lot of the bigger-margin audits being gobbled up by listed conglomerates due to the plethora of mergers and takeovers. From auditing professions’ perspective this has created unexpected losses of big-margin clients.
- Regulation and IRBA:
The introduction of the IRBA audit requirements has upped the costs of closing off an audit. These punitive regulations has required more higher level resource spending time on managing audit file completion to ensure that the firm emerge unscathed from an IRBA inspection. This has further eroded audit firm margins.
But here is the biggest one of all and it came to me the other day:
· The CA(SA) brand means a lot of things: sharp, flexible well-rounded, lateral thinker, high earner, value creator. But the one thing that it does not mean is ‘ethical’. If ethics were an important part of the CA brand, no-one would leave CA(SA) off their title. How many CA’s do not have CA(SA) on their LinkedIn profile or their business cards?
CA(SA) does NOT mean ‘ethical’ and in my view this is where it has all gone wrong.
Profit and financial rewards have moved solidly to the front of the queue and, with the CA’s superior genius, the emphasis has been more about showing our genius rather than presenting our ethical conduct. We look to maximum advantage of whatever is available albeit without ‘crossing the line’. And ‘crossing the line’ has been a legal issue not an ethical one. We have the capacity to ‘fit’ any opportunity to within a hairs-breath of non-compliance and it is almost expected of us to present these clever solutions. Accordingly, living in the ‘grey’ space is inevitable, especially when there is lots of money is on the table.
If CA’s were more serious about standing firmly behind professional ethics, the grey areas would narrow and more reliance would be placed on the CA(SA)’s solid stance on the non-negotiability of ethical conduct.
By the way I’m not suggesting that CA’s are unethical. I’m suggesting that the CA(SA) brand has become more about financial genius than about ethical conduct. The boundaries have loosened ethical infringement to legal infringement. In other words the boundaries have become far too loose.
Who have to look to our compliance bodies for guidance and their messages, until recently have been mixed. SAICA has been focusing on the transformation scorecard (fully agree with this!) and IRBA seems to have been harassing the wrong people – they have put their energies into focusing on the smaller players, attacking them on every conceivable infringement notwithstanding that the financial risks to stakeholders are minimal?
I have to tell this story about a client of mine who was a partner in one of the non-Big 4 practices:
His audit client used an off-site accounting services company to prepare their financial statements. The accounting services was owned by the senior partners of the audit practice.
My client was a junior partner and, because the accounting services company was physically completely separated from the firm, the issue of independence was not even considered. This ‘forbidden relationship’ was not even flagged as a problem by the firms risk compliance partner!
When IRBA conducted an audit review, they discovered this ‘breach’ and slapped a R150,000 fine on my client in his personal capacity (normal practice as the audit firm is a conglomeration of individuals in partnership).
In the end, I am pleased to report, my client took a stronger stand and refused to carry this issue alone. Eventually the firm backed down, gave him the appropriate legal support and IRBA also backed down.
But, a lot of time and energy was wasted on the wrong person and on a seemingly minor infringement whilst, it is now become glaringly apparent, the bigger firms were non-compliant on major issues!
Getting back to the topic.
The result of all the points raised above, a lot of short-cuts have developed over time. The willingness to compromise ethics and bend to clients’ demands has been the casualty thereof, largely to retain business.
And, now we sit here with audit failures of immense proportions.
What has emerged through trial-by-media that the profession has not only breached its code of conduct, but has collaborated with thugs and thieves, and has been naively lulled into complacency and manipulated by unsavoury characters with strong personalities. In short, it has failed, on an unprecedented level, to behave in a manner commensurate to a profession that was considered the best in the world! And lately, with Nkonki’s recent collapse, we have been shown to have been complicit in fraudulent activities.
Is that who we have become?
It certainly being portrayed that way!
The thing is that, as mentioned above, there have been many more factors that have driven this so-called unethical behaviour. It is my view that, in this state of financial vulnerability, professional ethics have been compromised.
But it does not explain why an army of CA’s remained unquestionably willing to follow their leader at Steinhoff (who himself was considered a brilliant CA)!
So, what is the solution?
The answer remains in the domain of professional ethical conduct!
The “Nuclear” letter that SAICA recently sent out for all its members to sign, is a good starting point.
Do each one of us need to do a post-mortem on ourselves and question our own stance on the matter? How deep would this need to go? Might it include paying outstanding traffic fines or settling our E-Toll bills. Or might it even require admitting to undisclosed foreign assets, owning up to fabricated travel claims and other false allegations that we have made in order show our clients how clever we are?
Maybe.
And here is the acid test: Are you willing to own up?
I don’t know about you but I have been sickened by the recent news headlines trashing our profession.
Audit Practices that were once regarded as the pillars of professional conduct and ethical behaviour are now being dragged through the media, shown up to be dishonest, complicit and greedy.
What in blue-blazers is going on?
In my view this has brewing for a some time now. It has been like a disaster waiting to happen!
Why so?
Here are my thoughts on this matter:
- The audit process has always been a grudge purchase. It’s essential for a company to present a clean audit report in order to satisfy shareholders that the directors have behaved themselves. An objective review of the financial results within a level of materiality, is an acceptable outcome if it claims that the financial results fairly present the year under review. Has not a level of expectation crept into the Board that a clean audit report is a given? That being the case, the audit adds little or no value. With the outrageous fees that audit firms charged, this cost has been questioned and squeezed.
- Termination of lucrative consultancy work: The ridiculous requirements around independence has closed off the lucrative consulting work on tax, corporate finance and the like. Audit firms did not gear themselves up for this change. Some of the firms saw this coming quicker than others but it takes time to build a client base notwithstanding the fact that you have a glowing brand. There are 4 big players and they all present themselves in the same way, and competition is fierce. And then you have the law firms who are taking this lucrative consultancy work away. None of the very big names in tax work for audit firms anymore. They all work in the legal profession, a profession that has no problem with independence!The ridiculous requirements around independence which prevented firms from obtaining the lucrative consulting work on tax, corporate finance and the like. Audit firms did not gear themselves up for this change. Some of the firms saw this coming quicker than others but it takes time to build a client base notwithstanding the fact that you have a glowing brand. There are 4 big players and they all present themselves in the same way, and competition is fierce.
- BEE requirements: The recent emergence of large the 2 large Black practices have understandably sopped up lucrative government work, especially SOE’s. Again this has narrowed the field of play. Although this looks like this might revert back to this stable, in the more recent past this has had a material impact on the profession in terms of lost business.
- Business touting: In various disguised forms, has become the order of the day. Newly appointed partners are pressurised into bringing in new business so there is a fair amount of underground marketing going on. And here emerges another major problem. Giving quotes to a new audit client is not so easy for two reasons: (1)The audit issues that could arise on a new client are extremely difficult to predict. The very act of offering a fixed price infringes on the concept of independence. Short cuts are inevitable especially if you are a needing to justify your contribution to other partners in the firm. Everything is a judgement call and if there’s a money risk on the table one just cannot be independent. (2) Being unaware of the existing audit fee creates a need to narrow down the quote just like any other bidding environment. Amongst the Big 4 firms the audit service is a commodity. Price is everything. There are no other benefits – the service is the same whether they are with one or the other.
- The spate of mergers and acquisitions: The recent past has seen a lot of the bigger margin audits being gobbled up by listed conglomerates due to the plethora of mergers and takeovers. From auditing professions’ perspective this has created unexpected losses of big-margin clients.
- Regulation and IRBA: The introduction of the IRBA audit requirements has upped the costs of closing off an audit. These punitive regulations has required more higher level resource spending time on managing audit file completion to ensure that the firm emerge unscathed from an IRBA inspection. This has further eroded audit firm margins.
But here is the biggest one of all and it came to me the other day.
The CA(SA) brand means a lot of things: sharp, flexible well-rounded, lateral thinker, high earner, value creator. But the one thing that it does not mean is ‘ethical’. If ethics were an important part of the CA brand, no-one would leave CA(SA) off their title. How many CA’s do not have CA(SA) on their LinkedIn profile or their business cards?
CA(SA) does NOT mean ethical and in my view this is where it has all gone wrong.
Profit and financial rewards have moved solidly to the front of the queue and, with the CA’s superior genius, the emphasis has been more about taking maximum advantage of whatever is available to take without crossing the line. Or to ‘fit’ any opportunity to within a hairs-breath of non-compliance. Living in the ‘grey’ space is inevitable when lots of money is on the table. If CA’s were more serious about standing firmly behind professional ethics, the grey areas would narrow. Consequently, more reliance would be placed on the CA(SA)’s solid stance on the negotiability of ethical conduct. I’m not suggesting that CA’s are unethical. I’m suggesting that the boundaries have been far too loose.
Who can be more to blame than SAICA itself? Where have you ever seen them advertise ethics as a value or promote it to its members?
And IRBA? What have they been doing? It seems they are very focused on the smaller players, attacking them on every conceivable infringement notwithstanding that the financial risks to stakeholders is minimal?
I have to tell this story about a client of mine who was a partner in one of the non-Big 4 practices:
My client’s audit client used an off-site accounting services company to prepare their financial statements. The accounting services was owned by the senior partners of the audit practice. My client was a junior partner and, because the accounting services company was physically completely separated from the firm, the issue of independence was not even considered. This ‘forbidden relationship’ was not even flagged by the firm’s risk partner as being a problem!
When IRBA conducted an audit review, they the discovered this ‘breach’ and slapped a R150,000 fine on my client in his personal capacity! I was horrified to hear that he stood alone in this matter – the firm were quite happy to let him carry the can!
My client was traumatized by this as you can well imagine. And, here is the worst part: without my absolute outrage and concomitant support, he would have been left to carry this scar on his reputation for life. I was disgusted at the firm’s attitude but not surprised as I knew the risk partner and knew he was quite capable of shifting his failure in governance onto my client without a shiver!
In the end, I am pleased to report, my client took a stronger stand and refused to carry this issue alone. The firm backed down gave him the appropriate legal support and IRBA backed down too.
But, a lot of time and energy was wasted on the wrong person and on a seemingly minor infringement whilst, it is now now become glaringly apparent, the bigger firms were non-compliant on major issues!
The result of all of this has been short-cuts, willingness to compromise ethics and bending to clients demands in order to retain business. And, of course, the emergence of audit failures of immense proportions.
The thing is that, not only has there been material breaches of regulation, there seems to be a plethora of accusations against audit partners who are accused of being lulled into unconsciousness by gangster-types who wined and dined them in order to cover up covering up material frauds. In the process, it seems, they have allowed their ethical conduct to be compromised on a unprecedented scale!
And now, with the media stirring the pot, this has become the face of the CA(SA) – a conniving pirate focused only on making money at the expense of poor pension fund beneficiaries?
Is that who we have become?
It certainly being portrayed that way!
The thing is that, as mentioned above, there have been many more factors that have driven this so-called unethical behaviour. Is it that in this state of financial vulnerability, professional ethics have been compromised?
I would think so.
But, it does not explain why an army of CA’s remained unquestionably willing to follow their leader at Steinhoff (who was considered a brilliant CA)!
So, what is the solution?
The answer remains in the domain of professional ethical conduct!
The “Nuclear” letter that SAICA recently sent out for all its members to sign, is a good starting point.
Do each one of us need to do a post-mortem on ourselves and question our own stance on the matter? How deep would this need to go? Might it include paying outstanding traffic fines or settling our E-Toll bills. Or might it even require admitting to undisclosed foreign assets, owning up to fabricated travel claims and other false allegations that we have made in order show our clients how clever we are?
Maybe.
And here is the acid test: Are you up for it?
Clive Kaplan is a top-rated Executive/Leadership/Career Coach.