I wrote about the confusion surrounding "clean audits" in government audits (see here). The public believe accountants and auditors are above reproach. They aren't. Like lawyers and doctors, they too have questionable and unethical practises.
Commentators used the collapse of Steinhoff and its founder and CEO Markus Jooste's disgrace and suicide as a lesson on the dangers of fraud and corruption. He was described as a financial genius who built Steinhoff from nothing but then defrauded investors. He hid the Ponzi scheme - that the enterprise was built on sand - from them and auditors in South Africa and abroad for so long.
But how indeed did he evade scrutiny? Jooste was a chartered accountant and knew the tricks of the trade. He did not personally prepare the accounting records and statements so others, especially senior management and auditors, must have known about irregularities but chose to remain quiet or not probe too deeply.
The auditor's motto is to expect fraud and error. So any half-decent auditor ought to have realised something was wrong. But the world of accounting and auditing is notorious for lapses of memory. This is no different to when various parties declare their shock when ANC government corruption is revealed.
Fraudulent enterprises may not start that way but become so out of greed. The American banking sub-prime scandal that created 2008's financial crash, for example. But like that one, there was a point when those who had the responsibility to monitor the enterprises became aware they were in trouble or heading that way but chose to do nothing. Primarily, these are auditors but investors and regulators too are not blameless.
So in all the thousands of words about Steinhoff and Jooste, there's been nothing about the role of the auditors whose job it was to certify the veracity of the financial statements. After the many well-publicised auditing scandals, one would think that somewhere among the outrage and puzzlement over Jooste's shenanigans the media would ask the million dollar question: what did Steinhoff's auditors and the regulators know and when did they know?
Three months as a trainee accountant at a medium-sized Mowbray firm, I was fired after a client whose audit I'd been working on sued the firm for violating audit independence and client confidentiality. The firm's partners had taken sides in a dispute between the client's director/owner and investors by leaking details to the investors because they hoped to benefit from it.
They alleged the reason for my dismissal was poor quality of work but it was no worse than other trainees; I was in training after all. The reality, though, which I only later understood, was they were afraid the client would call me to testify in court.
I won a six month settlement at the CCMA. The staff partner, a nice bloke otherwise, offered no defense; he even offered me a good reference! I was glad to be gone, though, because the environment had been toxic including sexual harassment, a nepotistically appointed trainee who openly sold booze in the office (the partners bought from him too) and feuding partners. The one time I came close to hitting anyone was when this lazy, spoiled, entitled kid ordered me about.
The firm violated professional ethics and ought to have been sanctioned, but SAICA, the chartered accounting member body, did nothing when I informed them.
In other jobs I saw how accountants facilitated clients' questionable bookkeeping and normalised fictional transactions or created balances from nothing to explain the existence or movement of money. It's always about the money.
At a small firm I worked on the audit of a BEE financial services company (it's CEO had connections with the ANC). They'd moved to us from a Big Four auditing firm, presumably to save money on fees.
An irritant was their two accountants', both mid to late-twenties who had not yet completed their degrees, insistence on the report form of the annual financial statements - the look of it as a document. Their pressure bordered on interfering with an audit, which is reportable. They did not explicitly say why they wanted it that way, but it was to make the company's balance sheet appear better than it was to the regulator and possible investors.
Part of the records reviewed during an audit is the general ledger which is the basis for an audit - all transactions are recorded in there. The client had only given us a print copy of the year being audited along with other records. Among them I noticed sloppy bookkeeping - the CEO's and sole director's (along with his wife) personal expenses mixed with company's.
It's essential for an incoming auditor examine the closing balances of the prior year to check if they match the opening balances of the current year, without which he cannot verify the closing balances of the current year.
We requested the general ledger from the client who referred us to the previous auditor, one of the Big Four (referred hereon as B&F) as they'd prepared the financial statements. I immediately noticed every prior sub-ledger closing balances were journaled to zero and new balances journaled in on the last day of the financial year.
A journal is a non-transactional entry into the ledger. Its purpose is to correct errors and record non-book entries. But journals can be abused to create fictional entries. The journal record is also examined during an audit.
The entire ledger's closing balances, and therefore annual financial statements on which it was based, for the previous year were fake. Therefore, the current year's financial statements were compromised. If there was no reasonable explanation, we - any auditor, in fact - had no choice but decline to give an opinion, known as a disclaimer, the worst of audit opinions because it meant nothing about the financial statements were credible.
This was serious for BEE especially as it was trying to make a name for itself in the financial services sector - savings and investment - which is highly regulated and has a high barrier to entry.
I phoned the B&F accountant who'd been responsible for the previous year's financial statements and asked her about the ledger balances. Instead of answering she said "Do you know who we are?", as if I dare question a big four firm. She terminated the call. My impression was they and their former client had something to hide.
We could not complete the audit. The client's CEO pestered us for the audited financial statements and complained to the auditing regulator. He threatened to sue for nonperformance. The regulator dismissed the complaint saying we were justified to audit opening balances.
With things at a stalemate, I wrote a report to the CEO and explained what had happened, quoting auditing standards. A couple of days later his call was transferred to me. He was polite and asked for an clarification. He was a lawyer by training and did not understand accounting - he'd left that to his accountants and B&F's auditors.
A day or two later the more pleasant of BEE's accountants came in and withdrew our services as auditors. He apologised for B&F's "mess up". We charged the full fee quoted because the trouble had caused a lot of work.
Large accounting firms are implicated in numerous scandals around the world. But they're not the exception, smaller firms do it too. Auditors are there to safeguard the interests of investors, creditors and employees. It's likely Steinhof's auditors in South Africa and abroad failed to apply due diligence and/or looked the other way. This does not absolve Markus Jooste and Steinhoff's directors, though. Why the auditors have been ignored during the media coverage debacle likely reflects ignorance about their role and purpose.
A last word. Regulators and prosecutors in Germany acted against Steinhof there and fined Jooste before SA's authorities did despite both being domiciled in SA. South Africa has the dubious distinction of being lax against malfeasance.
Auditors are not the impartial assessors they and the public make them out to be so Steinhof will not be the last financial scandal.
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