Question

“There is a need for regulation of our accounting profession. We cannot afford a system, like the present one, that facilitates failure rather than success. Accounting firms have public responsibilities. We have had too many financial and accounting failures…. While there are many facets of our system that need repair, the potential loss of confidence in our accounting firms and the audit process is a burden our capital markets cannot and should not bear”
(Harvey Pitt, President of the US SEC).
In the wake of Enron Collapse
A) While the statement above was made in the context of the US, it is equally true for many other countries, including South Africa.

QUESTION:

i) Discuss and explain in detail recent or current accounting failures that have occurred in the private sector in South Africa?

The answer should be related to a South African private sector, Steinhoff Sagga for example

Answer 1

For this answer we will take a look at recent or current accounting failures that have occured in the private sector in India since a country has not been specified.

Last year in mid 2019, one of India's leading private software company (anonymous to protect identities) had been shocked by a big jolt from within the company. A whistle blower had made out scandalous allegations against the company's top management and had written to the company's Chairman and its Board of Directors alleging several and serious accounting malpractices, acts of ommission and commission, and basically alleging that a lot of 'cooking the (accounting) books' was happening in the company to show much better performance at the behest of the top most management thereby pointing an accusatory finger at the company's CEO (Chief Executive Officer). The Chairman of the Board was at first seen to be downplaying the complaint from the whistle blower and denied it and defended the top managment led by the company's CEO. The CEO also denied it outright and referring to it as scandalous, wild and baseless. The CFO (Chief Financial Officer) too denied it and said he did not receive any such instructions from the CEO to manipulate the company accounts neither was he involved or a party to any such conspiracies and the accounting books were in order and verified by the company's auditors.

This whistle blower complaint letter was also leaked to the media and the media had a field day blowing this out of proportion and raising aspersions on the company's management and the performance results of the company, this company's shares also took a beating at the stock markets falling due to suspicions and doubts cast over its reported performance to its shareholders.

Acceding to media pressure and being nudged by the Union Ministry for Corporate Affairs of the Government of India to investigate into the matter, its U.S. based corporate clients and shareholders, the Chairman finally acceded to appoint the company's contracted auditors to conduct internal investigation and submit its investigation report to the Chairman. As expected after the investigation was concluded, the company's auditor, which is a highly reputed multi-national audit company denied any wrongdoing by the company and gave a clean chit to the company's top management thereby stating in their report that the whistle blower complaint was baseless and erroneous.

In the interim, U.S.'s S.E.C. (Securities and Exchange Commission) decided to also take cognizance of the whistle blower complaint and investigate into the matter since this premier Indian software company which is listed on the stock exchange in India had contracts with a few U.S. based companies/partners which are also listed in the U.S.

While the company auditors gave a clean chit to the company and the Chairman and the Board of Directors were very quick in accepting their investigation report without batting an eyelid and giving a clean chit to its top management and closing the matter, several questions were left unanswered leaving a lot to be expected including some serious ones like why was it an internal investigation and not an external investigation in the first place to focus on transparency or at least create the perception of transparency, then why were the same auditors who audited the same books previously appointed as the investigation officers/team and why would the results of the investigation be fair, transparent and genuine when the same company who had earlier audited and approved the Indian software company's accounting books subsequently in the investigation admit serious lapses in their previous audit and throw dirt on themselves and tarnish their own reputation and credibility as international auditors, and so on.

Of late, in India owing to several corporate bank scams in the private sector and willful defaulters by company founders and promoters on bank loans, lots of suspicions are being raised on the credibility of both company auditors in their role to allow trumping up of company performances to impress shareholders, lenders/banks, and foreign investors/business clients. Also the role of credit rating agencies has come under fire in the recent past who show good track records of a company and/or its promoters/founders and create the perception of good borrowers based on several crucial factors including these audit reports thereby allowing these companies or its promoters to avail more bank loans/credit running into millions without the actual repayment of the pending ones with outstanding interest.

Thus, it may be concluded that in the absence of transparency and a lack of interest to pursue and arrive at the facts of any malpractices or lapses in accounting create the perception of wrongdoing and corruption even if there was none in reality thereby lending credence to the serious allegations of accounting failures.