Mapping the future of audit

Can the audit profession restore trust? Will new technologies like blockchain cannibalise jobs in the profession? Should the audit product evolve to include sustainability reporting? These are some of the questions Tamara Oberholster asked a range of audit experts.

In the wake of several high-profile corporate failures over the past years, from Carillion in the UK to Wirecard in Germany and Steinhoff in South Africa, there’s been a renewed focus on financial reporting systems with calls for audit reform globally. There have been several developments on this front, including The Auditing Profession Amendment Act (APA), which was signed into law by President Cyril Ramaphosa on 23 April 2021 and gazetted on 26 April 2021. In the UK, the report by Sir Donald Brydon CBE, titled ‘The quality and effectiveness of audit: independent review’, lays out various recommendations for reform, which may have application outside of the UK, in countries including South Africa.

Ethics and trust

Professor Wiseman Nkuhlu, chairman of the board at KPMG South Africa, says his primary concern when it comes to the future of audit is to restore trust in the profession. “There needs to be a restoring of pride in the social purpose of audit,” he says. “For us to continue doing the great things that we've done as human beings, we have to work through organisations, collaborating together. And that requires trust. Auditors play an important role in enhancing trust of an organisation. We must just get that back in terms of restoring the pride in the audit profession. And auditing firms should take voluntary responsibility for restoring that trust.” Prof Wiseman believes that instilling an understanding of business’s role in society needs to happen not only within industry, but in education too. He says that over the past few decades, business qualifications have become very focused and narrow, shaped predominantly around teaching techniques for extracting value and maximising shareholder profits. “There is very little about the social sciences or people in the courses,” he says. “We need to find a way of bringing those into the BCom and MBA courses. Just teaching ethics on their own without linking it to the need for why you’d want people to be ethical (for the sake of sustainability) doesn’t work. It's when you care about the fears and concerns of others, that you can sustain whatever you do in the longer term. We must not teach ethics for the sake of ethics, but because ethics are about the greater good.”

“Directors should have an obligation to report on what actions they've taken to ensure that there is no fraud in the company.”

Digitisation and technology

“The word that springs to mind when I think of the future of audit is ‘digital’,” says Vodacom SA FD Sitho Mdlalose. “The future of audit for me is really about the future of business in general, and that’s digital.” Like all areas of business, audit will need to keep pace with rapid digitalisation. With technologies like blockchain and automation on the rise, Sitho highlights the need to establish audit teams that are both tasked with creating value through insights and that can “think digital”. Shamit Govind, partner at KPMG South Africa and head of the firm’s Emerging Tech Unit, believes that the future of audit will centre around reinvention and disruption, but that it’s important for governance to keep pace. “Creating a new tech is not actually that hard, but embracing the governance within which it has to operate within the organisation is important,” he says. “To ensure that the culture and the governance are set up such that the technology can actually fit in and be used from a mainstream perspective and provide a return on investment – that’s critical.”

Addressing the expectation gap and evolving the audit product

The future of audit should be linked to the fundamental purpose of financial reporting, says Imre Nagy, the acting CEO of the Independent Regulatory Board for Auditors (IRBA). “The purpose of an audit is to gain confidence in financial statements and reports by investors,” he says. But while the purpose remains the same, Imre says the audit product needs to evolve. It needs to develop alongside business as the world changes, and remain fit for purpose. Imre says that this evolution also needs to address the expectation gap. Referencing a report published by the Association of Chartered Certified Accountants (ACCA), Closing the expectation gap in audit, he details three types of gaps. “The ‘knowledge gap’ is the difference between what the public thinks auditors do and what auditors actually do; the ‘performance gap’ is the difference between what auditors do and what they’re supposed to do; and the ‘evolution gap’ is the gap between what auditors are supposed to do and what the public wants them to do,” he says. Ajen Sita, CEO of EY Africa, says the audit product needs to evolve to address two key areas it hasn’t previously. “The first is the expectation gap around fraud. We are seeing poor economic conditions around the world and with the resulting pressure, there is a rise in corporate fraud. Auditors need to play an expanded role in identifying and reporting on this fraud.” He also believes that the focus on long-term value reporting and on climate and sustainability will become critical. “One of the many lessons coming out of the last number of years, and the pandemic in particular, is that we've got to pay more attention to the environment, whether it comes to energy security, food security or just the wellbeing of the population as a whole,” he says. “Companies will only attract capital if they are progressive in their environmental response – and will have to report to stakeholders about what they're doing. Naturally, there will be an expectation that auditors will provide assurance around those sustainability and climate reports.” l

“The future of audit for me is really about the future of business in general, and that’s digital.”

Ian Putter

Mokgadi Malematsa

Donald Brydon

Imre Nagy

What about fraud?

It’s important to focus on broadening the accountability frameworks within which organisations operate. This is something that Victor Sekese, CEO of SNG Grant Thornton, is passionate about. In fact, he’s recently completed his master’s dissertation on audit regulation. One of his recommendations is to widen the net of accountability beyond audit firms. Victor points out that management should be the first line of defence against accounting scandals and that mechanisms like the JSE's amended listing requirements and the internal controls responsibility statements now required from CEOs and CFOs are steps in the right direction. Beyond this, he believes the level of accountability needs to be raised at the level of the board of directors. Sir Donald agrees. “Fraud starts with the directors. My recommendation was that the directors should have an obligation to report on what actions they've taken to ensure, as far as they can, that there is no fraud in the company. And then the auditors will have an obligation to use all reasonable endeavours to satisfy themselves that the steps taken by the directors were appropriate, and appropriately reported upon, and then add to that information around what steps they've taken to satisfy themselves that there is no fraud in the company.”

“Auditors play an important role in enhancing trust of an organisation.”

Ajen Sita

Prof Wiseman Nkuhlu

Victor Sekese

Sitho Mdlalose

Making more room at the table

Small and Medium Practices (SMPs) face numerous barriers to growth in the audit space and if the industry is to encourage diversity and inclusion, reduce the monopoly of the Big Four firms and maximise employment opportunities, steps need to be taken to overcome these barriers.

Mokgadi Malematsa, director at PSTM, a black woman led and owned assurance, tax and advisory firm, says that the Auditor-General has been instrumental in creating a platform for smaller auditing firms to raise these sorts of issues, and offering funding programmes, as well as projects targeting specifically at small firms. “That’s been very helpful in ensuring that the firm is sustainable long enough to start to gain that brand recognition you need to begin to open doors,” she says. Without this type of support, most startups in the audit sector don’t last longer than two or three years.

Mokgadi also underscores the value of partnerships. Building relationships with bigger firms is a win-win approach. It creates opportunities on the projects front – for example, where a joint audit is required – but also in terms of training and development. “In the past, we’ve partnered with a bigger firm to help train some of our staff. The capital outlay for them is the same, whether they’re training five or 10 people,” she says.

This means the smaller firm is able to access training for employees, and the larger firm is able to boost its training and development numbers, which assists in meeting targets. Taking this a step further, Mokgadi says, small firms could second trainees to bigger firms to help expand their experience, and to provide project-specific support to larger firms.