A focus on fraud and the financial reporting ecosystem

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The South African Institute of Chartered Accountants (SAICA) strongly believes that the profession needs to embrace the concept of joint accountability for the stability and trustworthiness of the finance ecosystem. It is important that the public understands that auditors are not the first line of defence, and multiple lines of defence are required to come before them.

South Africa’s financial reporting ecosystem was previously lauded as one of the best in the world. However, recent developments have called into question the way fraud and corporate failures are handled. Additionally, there has been a growing disconnect between what society thinks the financial reporting ecosystem is about, and what it actually is. 

During an Audit Reform panel discussion hosted by SAICA, various role players in the financial reporting ecosystem came together to discuss their responsibility in the prevention and detection of fraud.

“In conversations of this nature, we need to work out how to develop a more cohesive understanding across society of what is happening in the corporate world, and how to deal with those issues,” said facilitator Khaya Sithole, CA(SA), a graduate of UKZN and Oxford University.

Every stakeholder must take responsibility 

Stephen Ntsoane, CA(SA) and EY Africa Assurance Leader, explains that while everyone looks for the external auditor’s signature on financial reports, there are many people involved in the process. “Over and above this, we need strong corporate governance to make sure there’s an effective monitoring process around the effectiveness of all of the measures put in place,” he says. 

Marco Adaggi, Managing Director of Volkswagen Financial Services, South Africa, agrees. “Each stakeholder in an organisation has to play their part, and through the various structures, you should get to a point where the entire ambit is covered.”

Ntsoane points out that while we strive for an ideal world, auditors are required to express reasonable assurance that financial statements are free from fraud or error, not absolute assurance. “That’s where the expectation gap comes in.”

One way of addressing this issue is to instill a higher level of scepticism into the financial reporting ecosystem, according to Mario Fazekas (Certified Fraud Examiner), owner of AuditLink. Fazekas stresses that there needs to be a balance between trust, neutrality, presumptive doubt and complete doubt, and that close relationships with clients can often skew this balance. Once an auditor has identified risk factors that warrant suspicion, forensic and cyber specialists should be brought into the audit. 

“Individuals who perpetrated the fraud or who did not fulfil their fiduciary duties need to be held accountable,” says Tania Wimberley, Head of Financial Reporting in the Regulation Division of the Johannesburg Stock Exchange (JSE). 

Culture is key

Professor Michael Katz, Chairperson of ENSAfrica, notes that the financial reporting ecosystem needs to look at more than just finance. “The starting point of a modern board is to ensure the selection of top management and to monitor their overall performance, (behaviour and financial performance).” 

When analysing a company holistically, auditors need to look at the ethics and background of the managers and directors; the company’s relationship with other parties; how the organisation is doing compared to others in the industry; and its financial results and operating characteristics, explains Fazekas.

Katz doesn’t believe there are defects in the regulatory system; instead, he believes that the auditors’ and directors’ duties are more than adequate. “Culture is key here. When a company’s culture is to do good, you’ll have a reduction in fraud,” he says. 

There needs to be a real possibility that people will be caught and successfully prosecuted, adds Wimberley. “Leaders need to instill a zero tolerance to fraud and the ability to speak up without fear, and this culture needs to extend to everyone a company does business with, including suppliers and clients,” explains Adaggi.

“You can set up whistle-blower systems and promise protection, but a skewed organisational culture will make it difficult for individuals to come forward,” says Wimberley. She adds that while the JSE is the first place people refer to when there is a problem, they do not have the jurisdiction to prosecute people from a fraud perspective, and that society further expects the police and NPA to take action. But equally important are the likes of SAICA, who have also been playing a positive and active role in focusing on ethics and culture. 

Greater transparency and accountability 

For Adaggi, a level of greater reporting, greater transparency and greater accountability by the people signing off reports will restore the public’s confidence. “In order to close the expectation gap, we need clear guidance and regulation on what structures need to be in place at an organisational level,” he says.

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