16 Aug 2023
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The Auditing Profession in South Africa and Its Impact on the Social Compact Introduction To be covered:
First and foremost, let’s explore the social compact, what it means, and how the auditing profession acts as an enabler of the social compact. John Rawls in his A Theory of Justice, as far back as 1971, best defines the social compact, often referred to as the “social contract”, as a fundamental concept that captures the unwritten agreement between individuals and the institutions governing them within a society. Rawls states that the social compact encapsulates the mutual expectations, rights, and responsibilities that both individuals and institutions hold towards each other, forming the basis for social harmony, collaboration, and the overall functioning of the community. Various political and social thinkers continue to explore the social compact, and its relevance is discussed in contemporary debates surrounding governance, citizenship, and societal cohesion. For me, the social compact loosely refers to a shared understanding of what members of society believe they owe each other. But this is not entitlement; it is something deeper, more shared, and rooted in compassion. Role of auditing in upholding the social compact External auditing plays a crucial role in maintaining transparency, accountability, and trust within the social compact. By assessing the accuracy and reliability of financial information, external auditing has far-reaching effects on the social compact, influencing both individual and institutional behaviour. In simple terms, one could say that auditors are enablers of the social compact. One of the primary impacts of auditing on the social compact is the promotion of transparency. External auditors provide an independent and objective assessment of an organisation’s financial statements, ensuring that the information presented accurately reflects the financial health of the entity. Transparency is important for investors, stakeholders, and the public to make informed decisions based on reliable information. Accountability is another key aspect of the social compact, significantly influenced by external auditing. Auditors hold organisations accountable for their financial practices by identifying any irregularities or discrepancies. Trust between individuals, institutions, and society at large is deeply interconnected with the impact of external auditing. Trust is the bedrock of any functioning society, and external auditing helps maintain and enhance this trust. Auditing acts as a deterrent against non-compliance, as organisations are aware that deviations from established rules could result in financial penalties and reputational damage. The social compact can be broken Auditing plays such a major role in the social compact, which sounds noble for the profession, right? Unfortunately, things can and do go wrong very quickly, breaking the social compact. Have you ever been the subject of a robbery or theft? Have your family experienced severe poverty or inequality? Poor service delivery? Pollution? Load shedding? The list goes on. How about this example closer to today’s topic: has anyone or a family member lost their job or had their pension savings wiped out because of a corporate failure? African Bank in 2014 wiped out R7-billion in market capitalisation and R4-billion of Public Investment Corporation investments in a single day. As South Africa’s largest corporate collapse, Steinhoff wiped out an estimated R300-billion in value as its shares plummeted on the JSE following the events in December 2017. The Government Employees Pension Fund, Africa’s largest pension fund with more than 1.2 million members and over 450 000 pensioners, lost an estimated R20-billion alone. These are nurses, teachers, police officers, and public servants. With more than 12 000 shops around the world and around 130 000 people working for businesses linked to the Steinhoff group, many jobs were on the line. In South Africa alone there were about 50 000 employees working in Steinhoff-related companies. How does this make you feel? Angry? Resentful? Despondent? The stark reality is that a single event can break the social compact. These corporate failures are sometimes linked to audit failures, where both the appointed stewards of public organisations and their auditors failed in their roles, resulting in billions of losses to the public. It can be said plainly that the social compact is under severe threat, not only here in South Africa but worldwide. These are sad realities of today’s world. Yet in this context, when everyone is suffering, citizens begin to understand the suffering of others in society. This is the moment when we can renew the social compact—first between citizens working together to hold each other accountable, and then to hold authorities accountable. Evolution of modern auditing in South Africa and where we are today Historical development of the auditing profession in the country: To understand the evolution of modern auditing in South Africa, we first need to look at events in the United States in the early 2000s, often seen as the trigger for global audit reform. Prior to 2002 and the twin audit failures of Enron and WorldCom, the auditing profession was largely self-regulated. The U.S. government responded by passing the Sarbanes-Oxley Act of 2002, which established the Public Company Accounting Oversight Board (PCAOB) to regulate the auditing profession. These changes quickly spread globally and contributed to the creation of the International Forum of Independent Audit Regulators (IFIAR). Around the same time, the self-regulated audit profession in South Africa faced similar challenges due to audit quality issues and ethical breaches. Several audit firms were criticised for failing to uncover fraud and mismanagement at companies such as Leisurenet, Saambou, Regal Bank and Fidentia. The South African government subsequently passed the Auditing Profession Act (APA) in 2005, establishing the Independent Regulatory Board for Auditors (IRBA) to regulate the profession. Initiatives to address key problems we face as a profession It is not all doom and gloom though, and we can fix any problem together. There is still a lot that the auditing career offers aspirant accountants and auditors. Rapid technological advancements such as artificial intelligence, advanced data science, and sustainability reporting are making the profession more dynamic and intellectually stimulating. Auditors play a significant role in ensuring reliable financial reporting, which supports investment, economic growth, tax collection, and job creation. Conclusion In conclusion, external auditing plays a multifaceted and impactful role in shaping the dynamics of the social compact. Through transparency, accountability, trust-building, and regulatory compliance, auditing contributes to a stable and functional society where individuals and institutions interact with confidence. There can be no doubt that society needs auditors. All role players must work together to rebuild confidence in the accounting and auditing profession and restore it to its status as a noble and impactful profession. —end— |