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You need to test the separation of audit and advisory functions

The complete separation of audit and advisory services in large audit firms is welcomed as a solution to corporate and state capture scandals that have undermined public confidence in accounting professionals.

This hard line was adopted by KPMG Chairman Wiseman Nukul at a recent courageous conversation webinar hosted by the South African Institute of Chartered Accountants (Saica) and the Wiseman Nukul Trust.

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KPMG was involved in a scandal related to the occupation of the state and Gupta, and Nkuhlu was brought in to restore the company’s reputation.

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He says he was hooked on the opportunity that audit firms became available to them. They were influenced by the needs of clients who wanted to maximize their profits and began to act in the same way. At the heart of it was all self-interest and greed.

Flimsy wall

Nkuhlu believes that the so-called Chinese wall, a virtual wall that needs to act as an information barrier within an organization to prevent the exchange of information that can cause conflicts of interest, is ineffective.

“We need to admit that we have become commercial, driven by maximizing profits, and less guided by our commitment to the public interest.” Therefore, especially within the four major audit firms. Need to be split.

However, audit professionals should not be held responsible for all governance failures in the public and private sectors.

“The experience of large enterprise failures at SA shows that they have many relationships with egoistic and greedy CEOs … Other governance guardians are also responsible and fail. If you do, you need the result. ”

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However, Nkuhlu sticks to the operational separation of audit and advisory services.

Conversations about non-audit-related work between audit clients and partners should be prohibited.

This is to ensure that the auditor’s approval of the financial statements is unaffected by any consideration other than ensuring that it is true and fair.

Auditors need to be suspicious, skeptical, and independent.

Separation

“The isolation hasn’t been tested yet. It needs to be tested. KPMG is ready to test this.”

Nonkululeko Gobodo, CEO of Nkululeko Leadership Consulting and Head of Leadership Consulting, and co-caretaker of the Independent Regulatory Board for Auditors, agrees on the issue of separation.

“I don’t understand that smart people like us may have been struggling to solve problems for a long time,” she says.

“For me, it’s all about self-interest. Now is the time to set aside self-interest, the ego and start working together in the financial reporting value chain to solve this problem.

“We have to regain public trust and the economy is suffering, so we have to commit to that mission.”

read: Bankers, lawyers, liars who made it possible to capture the nation (February 2020)

Red flag

Gobod states that the profession is fragmented and “audit quality is poor” due to fraudulent schemes and accounting errors.

“It’s hard to believe that we can’t see the warning signals and the internal audit function can’t pick up these warning signals. No one can believe it. [in the corporate and state capture scandals] Suspicious or saw something. ”

read: Why didn’t PwC identify the damage in SAA? (July 2020)

She says the profession needs more “knowledgeable” professionals who can warn the audit committee.

However, efforts to thwart fraudulent schemes have created a great deal of complexity in the financial reporting system, which has become “unrealistic.”

“It’s just the investors who are trying to help us find the financial statements meaninglessly. They need other ways to analyze the statements and make sense. [them].. We need to find a way to make it easier. ”

A good place to get started …

Ajen Sita, CEO of EY Africa, says the principle that everyone must agree on, whether it’s a separation of functions or an “interdisciplinary model,” is the greater independence of the audit profession.

“A complete separation of audits and advice in the short term can be very complex, and there are many things that can be done very quickly to achieve that.”

That doesn’t mean it can’t be done, he added.

One of the immediate issues, according to Theter, is to prevent internal audit partners from paying for sales to audit clients.

He says the problem of greed can be fixed. One way is to improve the company’s report on the resilience of the company. It is not enough to state that the company is a going concern. The auditor needs to elaborate on the reason.

“Enforcing such disclosure will give us a much better understanding of what the real business risks are.”

We also need to focus more on long-term value reporting. Compliance is important in SA. It focuses on economic recovery, health, social equality and climate change in the light of other parts of the world, especially the Covid-19 pandemic.

You need to test the separation of audit and advisory functions

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