New Maximum Fines

The IRBA and National Treasury recently instituted new maximum fines for auditors. These fines don’t apply to specific situations, nor to certain types of firms or clients.

In an attempt to determine the reasons for the maximum fines, and the effect they will have, considered with other measures taken by the IRBA and the National Treasury, one can safely assume that IRBA had the following train of thought, as their actions have not proven otherwise to date.

  1. The IRBA is limited by previous maximum fines to disciplining auditors appropriately and will use the maximum amount of fines and charges legislated.
  2. The IRBA does not represent the profession and is purely a regulator.
  3. The IRBA is not allowed to assist practitioners.
  4. Should actions of the IRBA be questioned by the court, their view can be reinforced by a change in legislation.
  5. Members are not taking the fines seriously enough to change their behaviour to comply with auditing standards.
  6. Members are incapable of acting ethically. Their behaviour has to be legislated or set out in standards.
  7. Auditors are the main cause of company failures and the subsequent loss by investors.
  8. The code and the standards are the sum total of the necessary procedures for auditors to issue an appropriate audit opinion, and to act ethically.
  9. If an audit procedure is not documented, it has not been performed.
  10. Contravention of auditing standards implies acting to the detriment of the profession.
  11. Contravention of auditing standards implies inadequate management of audit quality and, therefore, contravention of ISQM.
  12. Contravention of auditing standards supports the legitimacy of a complaint and disciplinary action, even if the contravention bears no relation to the complaint, nor affects the stakeholders.
  13. Auditors earn premium profits from audits, compared to other avenues of accounting, and can, therefore, afford premium costs of audit quality and fines.
  14. The audit file is the complete record of all actions and communications on an audit.
  15. Auditors in small firms have access to large audits, should they so wish.
  16. Materiality, applied to determine misconduct, is not what would affect the users of the financial statements, as the definition states, but the amount determined by the auditor.
  17. Standards are applicable to all audits and audit firms in the same measure and are not scalable.
  18. The only mandate of the IRBA is the public interest, regardless of whether the interest of audit firms and auditors may also be in the public interest.

Now I list these assumptions, not because I necessarily believe they are blatantly unreasonable, since the audit regulator can assume what it likes, in order to enforce standards and legislation. I list these, as they all fly against the beliefs of the average auditor, who is just satisfied with the following:

  • Being proud of their profession
  • Being seen in the public eye as a reputable professional
  • Being recognised for the specialised education and experience gained
  • Servicing their clients appropriately, within the risks and scale of their clients, and the users of their financial statements
  • Being regulated by their peers, who have an interest in their wellbeing.

It’s not difficult to see that the beliefs of the auditors and the IRBA are very far apart. Consequently, one would be reasonable to question:

  1. Why do you need a 50% pass mark in the final exams, but a 100% pass mark, if inspected immediately afterwards?
  2. Why do auditors pay a membership fee? What are they members of?
  3. Why is the gatekeeper of the profession, with its education requirements and ADP programme, also regulating it afterwards?
  4. Why are senior positions at the regulator not filled from inside, by personnel experienced in auditor contact and inspection, but rather from outside, by auditors with limited practice experience?
  5. Why aren’t reasonable principles of investigation and disciplinary action applied, as opposed to large fines with the threat of untenable legal costs for the defence?
  6. Why does the IRBA issue guidance to practitioners if they are not allowed to assist them?

These are some of the questions being asked by the members of the profession. I am sure that the IRBA will have an answer for each one of them. They are points to ponder and paint the background when trying to decide whether the profession has a future, if fines are instituted which can destroy an audit firm in one investigation.

We can argue all we want about the role of the IRBA and the beliefs of the auditors, and debate who is correct, but, if the audit profession, of which the direction is enforced by the IRBA, takes the wrong turn, I do not believe there will be an opportunity to turn back and correct the error. The new maximum fines may be such an error.

The profession is struggling with members leaving the profession, and with recruiting new members to become RAs.

Should the IRBA not accept some accountability for the failures experienced in the audit profession?

If the quality management principles are so important to an audit firm, should these principles not be applied by all stakeholders of the profession, i.e. the regulator, decision-makers of legislation and institutes?

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