The most disturbing business relationship in the world is one where one party compensates another party that is supposed to be loyal to the society at large and uphold certain fiduciary principles. You are paid by one entity but, your allegiance is supposed to be to a larger entity that has not compensated you in cash and/or kind but expects the integrity of your profession to trump selfish business concerns. Auditors get paid by the client but, the investing public is expected to believe the audited financial statements meet certain required and expected standards of honesty and transparency. Reality of events across the world clearly shows that audit firms have pledged their loyalty to the paying client and not the users of the financial statements they audit.
Africa needs better audits by auditors if it its constituent countries’ stock exchanges are ever to become developed markets and if it wants to increase stock market participation rates by its citizenry. Africa is already on the back foot; negative news gets amplified and positive news gets diminished in comparison. The audited financial results of companies need to be as is (allegiance to truth) and not as desired (allegiance to paying client). Africa needs the stock prices of public companies to be driven by substance and not speculation. The audit firms have shown (more so in recent times) that they heed to the needs of their (paying) clients and not the users (non-paying) of the financial statements they provide opinions on.
Recent accounting scandals (non-exhaustive) in Africa that have brought the immediate need for a total overhaul of the audit practices for public interest entities are as follows:
South Africa: African Bank Limited – Deloitte, LeisureNet – Deloitte, Linkway & Gupta Family – KPMG
Nigeria: Cadbury – Deloitte, Dangote Flour – Deloitte, Oceanic Bank – PWC, Stanbic IBTC – KPMG
Kenya: Mumias Sugar – Deloitte, Uchumi Supermarkets – Ernst & Young, Haco Tiger Brands – PWC, Imperial Bank – PKF
Uganda: Crane Bank – KPMG
Ghana: Intercontinental Bank (now Access Bank) - PWC
Audit firms have been given numerous opportunities to rise above monetary inducement and selfish business interests and have failed the investing public. It is time to save the investing public from audit firms through the following:
I. Every country in Africa that has a functioning stock exchange must create an ACT by law that establishes a Public Company Accounting Oversight Board (PCAOB) which will be a private sector, non-profit company. This body will oversee the audit of public companies. The legislature must pass the law and each country’s president must assent to it. A clause will be put in the ACT ensuring that the law establishing the PCAOB cannot be repealed by successor governments, it can only be replaced with a better version after a majority vote in both legislative houses. Given Africa’s history with corrupt leaders and despots, this law must have a protective barrier that ensures there is no way back to the “dishonest and opaque” days of old through the efforts of bad future leaders.
II. Public interest entities (PIE) will no longer be able to choose their auditors. We have seen clearly where the allegiance of audit firms lie. The PCAOB will choose auditors for each PIE and rotate auditors every eight (8) years or less if necessary.
III. PIE will no longer pay their auditors directly or determine remuneration. The PCAOB will determine auditors’ remuneration on a biennial basis and pay the auditors annually post-audit. The fees will be publicly released for each company with an explanation of fee basis. Audit firms will now be engaged by the PCAOB to audit PIE on behalf of the investing public. An escrow account will be set up in which the agreed fee with the PIE will be paid into by the audit firm.
IV. The audit firms will make an annual contribution (as a function of the number of and market capitalization of all PIE as at year-end managed by an audit firm) into the Audit Malpractice Fund set up by PCAOB which will be used to fund the operations of PCAOB.
V. PCAOB must be fully independent of industry regulators in each country and is not accountable to them. The Central Bank cannot prevent the PCAOB from indicting a bank’s auditor, censuring the bank’s board and demanding a restatement of the financial statements for the years where it is determined the audit firm failed in its fiduciary responsibilities to the investing public.
VI. The PCAOB will bar audit firms from auditing in any industry they are found to be deficient in their audit of a PIE for ten (10) years. For example, if PWC Kenya is found wanting in its audit of Safaricom by the PCAOB, PWC Kenya will be barred from auditing telecom companies in Kenya (public or private) for ten years.
VII. Global audit firms (PWC, E&Y, KPMG & Deloitte) will no longer be allowed to be legally distinct from the local firms using their name. If a global audit firm refuses, it must severe all business/partnership ties from the local audit firm and a name change must immediately be effected. Once no longer legally distinct, aggrieved parties are now able to sue the local firm and its headquarters; both are now legally liable. If you are receiving money from use of your name, you should also be legally financially liable when the local audit firm using your brand name is deficient in its audit function.
VIII. Audit firms will be permanently barred from doing board corporate governance and/or industry reviews for PIE. KPMG Nigeria regularly does rankings survey/analysis of the most customer-focused banks in Nigeria. Zenith Bank typically wins and KPMG is the auditor of Zenith Bank. PWC did a Ghana Banking Survey inclusive of banks it audited.
Once freedom is abused repeatedly, freedom must be lost. The audit firms have been operating freely and have run amok in the process. The time has come to rein them in with shackles to protect the financial markets. Governments gave us prisons to protect us from dangerous people. Governments in Africa should give us PCAOBs with the powers I mentioned above to protect us from a network of auditors that have proven to be untrustworthy and unreliable. Their weakness is money; their strength is obscurity and statutory protection.