Bending the Rules

Auditors often find themselves in a delicate situation where an audit client wants a certain outcome, while the rules do not allow it. The correct treatment is usually not popular, and auditors then often try to find a way around it, on the instruction of their client. When confronted with such situations, auditors should ask themselves whether they can still comfortably say that they are acting in the public interest, or whether their objectivity may be called into question in the circumstances. There is a fine line between right and wrong, and this is dangerous ground to tread.

Compiling financial statements for audit clients

One such request is for the auditor to also compile the financial statements. Section 90(2) of the Companies Act prohibits the auditor and the audit firm from compiling the financial statements for a statutory audit client.

Only voluntary audit clients may be assisted by the audit firm in this regard, but the financial statements must be signed off by someone who is not an audit team member, and the firm must not assume a management responsibility when preparing the financial statements (IRBA Code, para R601.5 to 601.5 A4).

The IRBA Code further prohibits the audit firm or network firm from compiling the financial statements for an audit client that is a public interest entity (IRBA Code, para R601.6).

The audit client may need to consider compiling the financial statements internally instead, or recruiting another party to compile the financial statements on their behalf.

Non-consolidation of financial statements

Another situation encountered is where audit clients don’t consolidate, while consolidated financial statements are required.

If consolidated financial statements are not prepared when required, many elements in the financial statements are materially affected. This departure from the requirements of the financial reporting framework is, therefore, considered to be pervasive.

Such a pervasive effect on the financial statements leads to an adverse audit opinion on the financial statements. SAAPS 3 specifically includes illustrative report number 19 to address this situation.

Other examples

More examples include:

Reportable irregularity requirements. For example, they need to be reported immediately upon suspecting a possible irregularity.
International Standards on Auditing (ISAs), with due regard to the requirements of the International Standards on Quality Management, as well as the relevant ethical requirements. For example, engagement partners’ involvement in the audits are not as required.
Compliance with the Companies Act and Auditing Profession Act, including:
- Directors’ remuneration disclosure in groups of companies
- Solvency and liquidity requirements
- Insolvency requirements and reckless trading.

The aim of an audit is not to issue an unqualified audit opinion, but to issue the correct audit opinion, regardless of the client’s wishes, or the consequences it may have for the entity. Audit clients need to be educated on the purpose of the audit and the responsibilities of the auditor, and the different opinions

Important considerations

Should an auditor, audit firm or network firm fall foul of these requirements, the audit regulator and other regulatory bodies will seek disciplinary measures against the auditor and the audit client to address the non-compliance.

Depending on the level of non-compliance or improper conduct, this may lead to fines, temporary suspension, or even revoking the registration status of the auditor.

Ultimately, it brings discredit to the profession because the auditor was biased and did not act in the public interest.

In summary

Auditors and audit firms must carefully consider client requests, in the context of the relevant requirements and potential consequences of non-adherence. The auditor must always be seen as independent and not biased towards the client’s point of view. When in doubt, err to the side of caution and consult, if necessary, to come to the correct conclusion. LEAF can assist with steering you in the right direction.

References

Companies Act, 2008 (Act 71 of 2008)
IRBA Code of Professional Conduct for Registered Auditors
South African Auditing Practice Statement (SAAPS) 3, Illustrative reports
Auditing Profession Act, 2005 (Act 26 of 2005).

How LEAF can assist

LEAF can assist firms with a full-spectrum service, producing manuals and risk registers, in line with firm circumstances and risks; continuous administration and monitoring of quality management systems; monitoring of audit engagement quality; thorough file reviews and EQR reviews; providing practical advice; reviewing methodology design; designing audit working paper templates; and providing staff training on the relevant requirements and procedures. Necessary safeguards are being applied to ensure the objectivity of our partners in each team.