In its 2018 Public Inspections Report, the South African Independent Regulatory Board for Auditors (IRBA) revealed a decline in unsatisfactory findings at firm and engagement level over the prior period.
Inspections are performed in three-year inspection cycles and the year under review represents the third and last year of the Sixth Inspections Cycle. The Sixth Inspections Cycle on a three-year analysis was characterised by recurring quality deficiency themes.
IRBA’s CEO Bernard Agulhas said: “During the year there was a decline in negative inspection results when compared to the prior two years, with 36% of the 11 inspected firms and 46% of the 188 inspected audit files receiving unsatisfactory outcomes.
“However, taken in an overall three-year analysis, of the 54 firm-wide quality control inspections reported on between 2016 and 2018, 50% (27) were unsatisfactory, 43% (23) were satisfactory, and 7% (4) were referred for investigation. These results are worrying as they are indicative of systemic quality control deficiencies at some firms.”
Of the 188 audits reported on in the year under review, 54% were satisfactory, whilst 32% received an unsatisfactory outcome and 14% were referred for investigation to the IRBA’s investigations department.
The report stated that the decreased number of audit file inspections reported during the period is mainly a result of the of the IRBA’s focus on audits with higher public interest exposure, and these demand more in-depth inspections that take longer to perform.
The high proportion of audits referred to the Investigations Department remains a cause for concerns as these are based on fundamental deficiencies.
Following a cause for concern issued by the Inspections Committee to the IRBA board, number of ‘board steps’ have been introduced.
- The director inspectors meeting with the local network firm CEOs or equivalent, in order to discuss the IRBA’s concerns and to seek a proactive response that will should then be addressed to the IRBA CEO and director inspections;
- The director inspections will meet and inform the local network firm board (chairman), in order to discuss the IRBA’s concerns and to seek a proactive response that will should then be addressed to the IRBA CEO and director inspections;
- The director inspections will inform the leadership of the global network firm of the IRBA’s concerns and seek a proactive response that should be addressed to the IRBA CEO and director inspections;
- A proactive review of the firms’ respective root cause analyses and action plans will be conducted as soon as possible (Remedial Action Process);
- Depending on the outcomes of the above steps, a full-scope firm-wide inspection will be scheduled sooner rather than later; and
- A summary of the inspections cycle results (the Sixth Inspections Cycle in this case) will be included in the annual public inspections report.
Agulhas concluded: “While the IRBA calls on all stakeholders to play their role in improving the integrity of financial reporting and audit quality, it has responded by increasing its focus on firm leadership and related issues such as tone at the top, culture of quality, ethics, firm governance and management.
“In our view, leadership plays a crucial role in addressing deficiencies and is ultimately responsible for driving audit quality improvement and remediation of deficiencies within the firm.”
By Mishelle Thurai