According to Nicolaas the accounting profession in SA was once regarded as the best in the world. That changed as one corporate and public sector scandal after another oozed off the pages of the daily press with dreadful monotony. The profession has lost public trust because it no longer practices professional skepticism. And behind this is the relentless drive to turn what should be a public good into a business. Accounting firms are turning a blind eye to irregularities where they should be pointing a blow torch. Nicolaas has some interesting suggestions on how to turn the profession around.
CIARAN RYAN: I’m talking to Nicolaas van Wyk, the chief executive officer of the South African Institute of Business Accountants, otherwise known as SAIBA. This is the first in a series of podcasts on the theme CFO Talks, where we invite CFOs on to talk about their businesses and their lives. What we hope to achieve here is to tell the human side and the business side of the CFO story, rather than delve into the mechanics of accounts preparation and balance sheet structuring, though this is not a subject that should be ignored either. CFOs tend to operate in the shadow of the chief executive officers, so our job is to draw them out into the sunlight and provide a platform for them to tell their stories. With that introduction let’s welcome Nicolaas van Wyk. Hi, Nicolaas.
NICOLAAS VAN WYK: Hi, Ciaran.
CIARAN RYAN: Nicolaas, you are the originator of CFO Talks, so perhaps you could start off and tell us why you launched this platform and what do you hope to achieve with it?
NICOLAAS VAN WYK: As an organisation we look after the needs of accountants, which includes CFOs, and we found that there’s just not enough networking opportunities for CFOs. There might be a few organisations doing things locally but with our ability to work with international organisations we thought that CFOs should have a global platform to discuss issues affecting them. The world, it seems, is immersed in corruption, it’s difficult economic times, so we felt that the role of CFOs should be more focused, there should be more attention given to them, so that their voice can be heard, as you said, and the important role that they play can be understood. They should not be feeling that they are acting alone. Bringing them together under a brand called CFO Talks provides an opportunity to once a month meet and have networking opportunities, where we organise presenters for them. We started this podcast series now to engage the leading thinkers within this space, so that they can share their experiences. As part of CFO Talks we also launched a designation for CFOs, at the moment globally there isn’t such a designation and we felt that CFO Talks can really connect CFOs globally from Argentina to China, and establish the CFO as a career choice, design an accreditation framework for CFOs and give them opportunity to network.
CIARAN RYAN: All right, so you are the chief executive officer of the South African Institute of Business Accountants, which is a professional body for accountants operating in business. Tell us a little bit about that, how many members do you have and what are the benefits of being a member of SAIBA?
NICOLAAS VAN WYK: The accounting profession in South Africa is quite diverse, there are about ten professional accountancy bodies, SAIBA at the moment is the third largest. We have chapters in South Africa, in Namibia and also expanding to other areas of Africa quite aggressively. SAIBA caters for the needs of the aspiring accountant, right through to the CFO. So we designed and set up SAIBA to assist a junior accountant, just starting out, to start his work as a debtors clerk, creditors clerk in a corporate and then we assist and help them develop into financial managers, if that’s the route they choose, and from financial manager we assist them to become CFOs. We do this via our designations, so we’ve got a designation for each stage of your career, as you progress and develop and also a large part of our business is looking after accountants in practice. So this is typically the accounting officer for a CC or the person providing review engagement services or business advisory services for small businesses.
CIARAN RYAN: I think we should just explain for people who don’t know what a CC is, that’s a close corporation, right?
NICOLAAS VAN WYK: Yes, so we’re speaking with an international audience, the smaller companies would be a close corporation, otherwise known as Pty limited, and because reporting is so complex they need a person like an accountant to assist them. But we would like to think of accountants more as business advisors, there’s lots of technology taking over the role of accounting, reporting. So we’ve set up our designations and we’ve set up our development structures to assist the accountant to be a business accountant. We believe the accountant plays a crucial role in helping business people understand their businesses, understand the figures but also assisting with operationalising and strategising the business. SAIBA’s unique offering.
CIARAN RYAN: Give us a bit of your background in business, how did you come to this path of running a professional body for accountants?
NICOLAAS VAN WYK: It’s not something that you select to do just when you leave school. I started my career as a trainee accountant, finished my three years and didn’t really know in what direction I wanted to go. I enjoyed working as a trainee accountant, you do learn a lot about businesses because of all the clients that you assist with registrations and keeping their books, assisting with audits and preparing financial statements, you get a good feeling. After that I started a small practice called VW Consulting and tried my hand at teaching, so I was a teacher for a while, for about two or three years.
CIARAN RYAN: Teaching what?
NICOLAAS VAN WYK: Accounting, economics and business economics, I really enjoyed that. Education can transform character if you do it right. Then I realised that there’s a difference between the hands-on accounting, where you work and perform work as an accountant, versus the theory of accounting. I then became a lecturer at Boston City Campus and Varsity College, and then got involved in a professional body, I then acted there as a technical executive there for seven years. The more I engaged with the profession I realised what we are actually doing in accounting is a social science, it’s not mathematics or hard sciences. There’s a lot of judgment when you start preparing financial statements or have to set the rules for financial reporting standards. The same goes for tax, it’s a bunch of people sitting around a room making decisions, which then the rest of the world, through international standards, should follow. That started to interest me and I decided but maybe I needed to be an activist in this area because it’s got such a huge impact, how we set these standards can have a real impact for the small business that has to eventually apply them. Then as I left my initial stint as the technical executive, making submissions to government, trying to influence legislation, trying to make things simpler and easier, I started a small consulting firm, engaged a little bit more with other professional bodies, including the ACCA I was their technical executive for two years in the South African market. I started a seminar business, I suppose again my need to teach came out and I started doing seminars and CPDs for accountants.
CIARAN RYAN: Let’s just explain CPD, continuous professional development, right?
NICOLAAS VAN WYK: Ja that’s the mandatory training that accountants have to do. Most exam or a licensing process. So nobody is excluded and as you get the experience you get rewarded for it. So in short that would be SAIBA.
CIARAN RYAN: You and I have known each other for a few years now and what I like about you is you’re not afraid to speak your mind on the big issues. Recently, for example, you came out in favour of a flat tax to replace this monstrous tax system that we currently have in place. On the face of it the arguments for a flat tax are compelling. We’re spending I believe the figure is R16 billion a year in paying accountants to prepare our tax submissions to the South African Revenue Services. So there’s only one benefit, if we go for a flat tax system that R16 billion could be saved to the economy and better spent elsewhere. What are some of the other benefits of a flat tax?
NICOLAAS VAN WYK: At SAIBA we don’t believe in just regurgitating all of the same solutions to the existing problems. We’ve seen that in South Africa we have to think differently and what does it mean to think differently. For 20 years we’ve had an existing tax system, there are lots of complaints that people have against this and then every so often we try and improve the system. But maybe it’s the tax itself that’s the problem. Based on some research there are a lot of alternative approaches to taxes, one of them is this flat tax and our main concern is that tax is so complex, you criminalise the actions of people just because the law is too complex and that’s not how laws should be implemented. So what we’re saying is there should be a real and honest relook at the tax code and if there’s something that’s more simple, that can save a lot of money in compliance costs, that we can use to reallocate resources and expertise and specialisations because, you must remember, there are thousands of people working to maintain compliance to a tax system. Just imagine if we could redeploy them into areas of economic growth, which a flat tax system would be supportive of. There are a lot of countries in the world that also follow a flat tax system, it’s much easier to understand and one of the biggest benefits is it will avoid people setting up complex tax structures to avoid paying tax. It’s well known nowadays in the international press about these billionaires who make billions but never pay tax. So on the one hand you have people saying no but increase the tax rates for them and on the other hand you have people arguing for a tax revolt. But we support neither of those options. We’re just saying make the tax system more simple, there’s no need to employ complex tax structures and there’s no need for a tax revolt because you know exactly what you are paying. It will improve control and it will improve the relationship between the citizen and government. Flat tax promotes Hong Kong’s economic growth.
CIARAN RYAN: I think there’s quite a lot of international evidence as well where flat tax has actually promoted growth, if you look at Estonia and Latvia, Mauritius, Russia as well has got a flat tax.
NICOLAAS VAN WYK: I think the best example would be Hong Kong, they’ve been running that flat tax system now for many, many years and a lot of researchers say that this flat tax system has been one of the largest contributors to their economic growth. So it’s something that we can seriously consider.
CIARAN RYAN: I think also the benefit of a flat tax is that you don’t have to scheme, you don’t have to employ an accountant to find some devious way to avoid paying tax, you know exactly what you’re going to pay.
NICOLAAS VAN WYK: Ja and that’s the ugly underbelly, I suppose, of a complex tax system, those penalties and interest, I’m not saying that we’re doing it but there’s always a possibility that it can be used as an alternative form of tax. So officially you would say the tax rate is very low in a particular country but then if you look closer at how much additional tax is collected through penalties and interest and those can be issued for small things, not because you didn’t pay your taxes but because you didn’t file your tax return or didn’t update your address, then there’s a penalty being issued. So we’re just saying that’s the wrong remedy for the problem. The system is too complex and that’s why you have to have this overbearing and very high percentage of penalties and interest being charged. So you are kind of forcing people to transgress because of misunderstandings. I don’t think it’s intentional, it’s just the nature of a complex system. So if it’s more simple then everybody will understand and you’ll also understand what you have to pay.
CIARAN RYAN: Didn’t we have a tax commission here that was headed up by Michael Katz and I think Dennis Davis, was he also involved in that, and one of the arguments was bringing people like that onboard is they have a vested interest in the existing tax system and there was no out-of-the-box thinking like what are the alternatives, what are other countries around the world doing and, really, the cost of implementing a simpler tax system and the benefit to the economy.
NICOLAAS VAN WYK: You’re right and also the new technology economy that we have demands that we relook at this tax system. Initially when taxes were introduced as a government policy, the argument for them was because the citizens use up resources they have to pay for the use of the resource, whether it’s the road or other utilities. But in a knowledge economy you and I can think up an idea, we post it on a website and we start generating billions because that’s what happened to Facebook. So what resources were used by that entrepreneur? So there’s no argument that he should pay more because he was thinking about an idea or that he used resources, he prevented somebody else from using a resource, he didn’t steal or take any resources away, it was just a great idea. So a complex tax system doesn’t assist in more of those entrepreneurs coming to the fore and getting these new ideas in play and part of the economy. It’s important that we have entrepreneurs that we have these smart people who come up with innovative ideas and South Africa should attract them, it’s they who create employment and society needs them. So in our view a flat tax system would facilitate that. We need to attract, we need to compete with other countries and so that’s why we promote a flat tax.
CIARAN RYAN: I think in the defense of Michael Katz and Dennis Davis the South African tax commission that they were involved in, I think the brief was to look at ways of improving efficiencies within the existing tax structure. I don’t think they were given the freedom to look broadly at new tax systems.
NICOLAAS VAN WYK: In 1994 it was a difficult time for South Africa, we had an existing system and how do you adjust that going into a new model of running a country. Given the knowledge that they had at that time I’m sure that they did their best but what we have now is not the best solution. CIARAN RYAN: I think we also have the trade unions who are very much vested in a progressive tax system, so they want to see a system which would make the rich pay more and the poor pay less, without really looking at the flat tax system, you can introduce mechanisms there to make it progressive. In other words, you exempt people, let’s say, who are earning less than R75 000 per year.
NICOLAAS VAN WYK: If you have a pendulum or an axis then it’s the starting point that’s important. It’s not let’s adopt a progressive complex system and see if we can make it simple. The starting point should be let’s adopt a simple tax system and where necessary let’s make it complex. In other words, to provide for exemptions for the poor, it can be done within a flat tax system. So it’s the starting point that’s important. The state of SA’s accounting profession.
CIARAN RYAN: Let’s talk about the state of the accounting profession, South Africa used to have a reputation virtually unequalled in the world for accounting excellence. Then we had one scandal after another, where accountants were shown to be enablers of monumental corruption. I’m thinking of the looting that took place at VBS Bank and the creative accounting employed at Steinhoff. What, in your opinion, has allowed the accounting profession to slip so badly in terms of public trust?
NICOLAAS VAN WYK: That question always makes me uncomfortable, some serious introspection is needed. You have to consider all the elements and the factors because why would the profession have stumbled so badly. If you consider all the standards that we adhere to, there’s this international code of conduct that we all subscribe to, it’s very prominently displayed on all our websites. We have all our members doing mandatory ethics courses every year. We have strict disciplinary and investigations procedures, where we take complaints from the public and act against it. So on the face of it you would say but everything is in place. There is strict auditing regulation, it’s becoming stricter now, so what is it that is causing the problem? It can’t be that we haven’t done enough to educate and train and teach what ethical conduct means. We’ve all known what independence means and how to apply it but if you look at the specifics of the cases, let’s say the KPMG and the South African Receiver of Revenue, the way they conducted themselves with the receiver of revenue and also some of the Gupta-related companies, it seems that there was just a lack of concern or sceptical thinking. In all these cases, whether it’s also the Steinhoff case, I doubt whether the auditors properly prepared the knowledge of the business assessment. So to me there’s a lack of understanding of business models first of all, when we look at our clients we’re so eager to finish the work and get paid for it that we don’t fully consider what’s the business model of the client and what’s the risk areas for me as the accountant or the auditor, and being sceptical into investigating those areas. There’s always the issue of who is paying the fee, which the new regulations tried to address through rotation of auditors. In our mind that won’t resolve the problem. I just had a look again at the number of scandals in the profession over the last couple of years and it’s interesting to see, it seems like it’s a ten-year cycle. In the 1990s it was the Masterbond scandal and the damages we were talking about was about R600 million. Then in the 2000s it was the Leisure Net scandal and the damages there was about R1.2 billion.
CIARAN RYAN: Double.
NICOLAAS VAN WYK: It was double that. Then in the 2010s we suddenly had this government contracts tender frauds, which started to be in the tens of billions. Then of late we had the Steinhoff collapse and that’s hundreds of billions. So it seems like it’s systemic, it’s really regular, it occurs every ten years and then we are surprised each time that happens. So there was a research paper, which I found, it was done my Professors Gluck and de Jager and they did it – when was it – in the late 1990s, where they made a recommendation and I think they have been proven correct in that if the auditing profession are such an important element of running a solid economy, and if they have to act in the public interest maybe we should regard them as public goods, which means they shouldn’t get their fee from the private sector, their clients, they should be paid by government. So what they suggested back then was a fund to be created and funded by a special levy on companies that need audits and this fund would then appoint an auditor for your company and that’s the only way that you will get an objective view from an auditor on the company because the temptation was always just too big. If your audit fee is running into millions are you really going to report that client? Now, the standard says that you must and you should but we’re all humans and we forget that. Again, speaking a little bit philosophical but I found this well-known research by a guy called Stanley Milgram in the ‘60s, he wanted to know why people did bad things and then blame it on “I was just acting under instruction”.
CIARAN RYAN: Like Hitler’s Nazis.
NICOLAAS VAN WYK: He was exactly studying that, what were the reasons why this happened and he found that when humans perceive that they have to act obediently towards an authority figure then they do bad things. It happens. So it means then that we can’t blame auditors, we’re creating this environment for them to make the mistakes of not acting independently. So we must go to the root cause of the problem and remove the obedience, the master-slave relationship. It means that the auditors shouldn’t be appointed by the company itself, they should be appointed separately and independently and then they will give the right conclusion on what’s needed. I fear that there is now lots of talk about the big four that should be broken up but that’s also just not enough, it doesn’t go far enough.
CIARAN RYAN: Should they be broken up? ‘We’re not really acting in the public interest’
NICOLAAS VAN WYK: Well, as a measure in the right direction, the answer is yes. There is monopolistic tendencies like in any other business sector within the accounting profession, even amongst the professional bodies you find this. What irks me is that in our profession we talk about acting in the public interest but we’re acting like businesses. So we’re not really acting in the public interest because if we were we would split the auditing from consulting work, we won’t be arguing or debating about it, we’ll just do it because that’s the right thing to do.
CIARAN RYAN: Right, so the auditor today is basically a public servant, is he not, because he is required to be a spy for the South African Revenue Services and for other regulatory bodies and that’s written into the law, what law is it written into…?
NICOLAAS VAN WYK: We have the Tax Administration Act, which obligates the accountant to do some reporting to SARS if he finds something untoward. We have the Companies Act that requires reportable irregularities to be submitted to CIPC.
CIARAN RYAN: CIPC is?
NICOLAAS VAN WYK: Companies and Intellectual Property Commission, the registrar of companies. We also have the Auditing Act itself, mandating auditors need to report irregularities.
CIARAN RYAN: To whom do they report?
NICOLAAS VAN WYK: To the regulator themselves, who would then collate all of these reports to the Financial Intelligence Centre. So, again, the idea is good, we want to prevent money laundering, so we need to do reports. The issue of reporting your clients to authorities, it’s not a strange thing for professionals to do that. Attorneys I suppose would be under the same obligation in terms of the Financial Intelligence Centre. The only difference is we don’t have legal privilege within our profession. So if you compare us to attorneys, they’ve got client-attorney privilege, which is a good thing because it enables them to assist the client in launching a defense but without acting illegally. So from SAIBA’s side we would want the same thing for accountants. If you look at the accounting profession, at the moment we only have strict regulation on auditing, we have a number of professional bodies unregulated and we’ve been asking and National Treasury has been looking into this and setting up a regulatory model for accountants, which I think would be a step in the right direction. We need uniform standards, we need uniform education requirements because at the moment it’s very competitive between the professional bodies and it also makes it difficult for government to engage with the professional bodies. For example, in the Schools Act schools are required to obtain an examiner’s report from a professional person on the operational and financial stability of the school and that must then be submitted to the Department of Education. But there are different interpretations, so now who does the department ask for assistance? There’s no single body representing all accountants that can guide them and so you have a very fragmented approach. This is the same when we speak about cooperatives or when we speak about the companies themselves and the close corporations, and a host of other regulation requires a reporting function but there’s no uniform entity that determines what exactly that means.
CIARAN RYAN: Right and there does seem to be a little bit of a bias built into all of these acts, which would favour the chartered accountant. Now, if we cut to chase here, the chartered accountants are implicated in all of these scandals that we have just mentioned here. We talked about Masterbond and Leisure Net and Steinhoff and VBS Bank, let’s talk about that for a minute, is there a bias towards the South Africa Institute of Chartered Accountants in the legislative approach? You talked about the schools, they are required to have a reporting function, is it designed so that the chartered accountants benefit from all of these legislative requirements?
NICOLAAS VAN WYK: If you consider the financial statements of SAICA, their annual reports, you’ll see that their revenue is in the hundreds of millions. Now, that dwarfs the second-largest body, it’s not even a tenth of what they report in their revenue. So SAICA is a very dominant player and, hence, also why it’s their members who are in the news of late, committing these transgressions. So in response it’s then obvious, if you have a player in the field that has monopolistic elements, then why would their members need to feel threatened by competition and, to my mind, that is what is causing the lacklustre approach by chartered accountants and auditors when they perform reporting functions. There’s really no competition. How bad can it be if you implement auditor rotation because in a number of years, let’s say 12 years, you’ll get the client back because there are only four firms to which that client will rotate to. The same goes with consulting work, government pays more than R1 billion a year to consultants, which the largest portion goes to the largest…
CIARAN RYAN: I think the figure is way more than that, I think there was a report brought out by the Auditor General saying that in one year nearly a third of departmental budgets were going on consultants.
NICOLAAS VAN WYK: Ja, so is there competition amongst those consultants and is there really an intention to fix the problem or is the intention just to get the funding and get the fees paid and not really improving anything.
CIARAN RYAN: I think the inquiry we had into the South African Revenue Services showed how desperately poorly this money was spent. Gartner was given a R200 million contract there and Gartner itself said virtually nothing that they had recommended was implemented. Deloitte and MG Rover.
NICOLAAS VAN WYK: We saw the same thing with Deloitte in the UK, there’s that interesting case that was investigated a few years ago by their Financial Reporting Council, their regulator, where Deloitte acted both as the auditor for the client, I think it was MG Rover when they went bankrupt. So they were both the auditor and got appointed as the liquidator for Rover, so they were clearly benefitting themselves. Some of the Deloitte directors even bought some of the assets, as liquidator, they bought them for a few hundred pounds and then sold them on for millions. Their defense was but when we act as consultants we are not bound by the code of ethics that applies to us when we act as auditors. That’s just incredulous, is that the word.
CIARAN RYAN: It’s jaw-dropping, isn’t it.
NICOLAAS VAN WYK: Ja because they used the name Deloitte to get the work and then they’re selective on which code of ethics they apply. So they act as the auditors, they act as the consultants and they act as the liquidators, and then all three parties benefitted from the demise. MG Rover got a lot of taxpayer money to try and save them, so a lot of that money was then flowing through to the consulting arm. When they [Deloitte] were asked why did you act like shrewd business people when it comes to the liquidation and the consulting, they responded by saying that public interest doesn’t apply to us in that space.
CIARAN RYAN: If you remember the Enron scandal, we’re going back 20 years, Arthur Andersen, at that time it was the big five, now we’re talking about the big four, but Arthur Andersen was one of the big auditor firms at the time and it disappeared as a result of that. The big discussion at that time was the splitting of consulting from audit. Now, I don’t think the accounting profession took that at all seriously, consulting is still very much part of their business model and it is a business model. So they have this very entrenched relationship with a client on the audit side but then say, hang on, we’ve got these guys here and they are experts in technology or business reorganisation or one of these buzzwords that they use to sell consulting services. So they bring these guys in as an additional revenue source. There’s clearly going to be conflict that arises when you have that kind of relationship.
NICOLAAS VAN WYK: The response by the regulators was to introduce limitation on the services to say no but it can’t be the same partner doing both the audit and the consulting, and then later it became no it can’t be the same firm that does the auditing and the consulting. But the problem remains, as we see through all these scandals. The only solution, the permanent solution would be to remove audit altogether and make it a public good, have them appointed by government through a special levy on companies and then you’ll get your audit report that is required.
CIARAN RYAN: I think one of the comments you made to me a little while back was how the consulting firms operate and I get the point that if you’re an auditor you can’t also be a consultant but it’s not strictly speaking true that that’s how it operates in practice because what happens is the one company, let’s say Deloitte goes in there and they start a consulting practice but they never quite finish and then the next firm, it might be KPMG or it might be Ernst & Young, they then take over and continue that consulting engagement. So this door never really closes, they are opening the door for each other, in other words.
NICOLAAS VAN WYK: Ja, you’ll have an audit client they have to pass on due to rotation to the next big four but then you get the consulting work again. So on aggregate nothing has really changed. Your income is now just spread over a number of years but eventually you’re going to get the same. Steinhoff – accounting mistakes or fraud?
CIARAN RYAN: Let’s go back to Steinhoff, it’s a South African and overseas listed company in the retail space, recently involved in a terribly financially-damaging scandal relating to accounting, accounting mistakes or fraud or whatever, I don’t think we’ve quite got to the bottom of it yet. I noticed in an article in www.accountingweekly.com some time ago you came out in favour of the chief executive of Steinhoff, Markus Jooste, maybe not in favour completely but you argued that he hadn’t done half the things that he was being accused of, can you explain why you said that?
NICOLAAS VAN WYK: The intention wasn’t to come out in favour of the person because what happened at Steinhoff is truly ridiculous. Besides all the damage that they caused on employees and their investors, and the country’s reputation, but the fact is I haven’t seen and nobody has reported it yet, it may come out later, what the accounting fraud was. If you listen to his testimony he said that there was this attorney firm or legal company that looked into the allegations of accounting fraud and they didn’t find any.
CIARAN RYAN: That was the German firm.
NICOLAAS VAN WYK: That was the legal German firm that reviewed for two years.
CIARAN RYAN: And they couldn’t find any evidence of fraud.
NICOLAAS VAN WYK: They couldn’t find anything fraudulently. Then in his [Markus Jooste] testimony he continued by saying that they made bad business judgments, they went into the US and they shouldn’t have, they partnered with a company in Germany, which they shouldn’t have, and that put a strain on their business model, which I think is the main reason for the collapse. It was bad business decisions, which is a different argument on how that happened, given the fact that they had a board, there were some other senior executives making decisions with him. So if you make a bad call, if you applied your mind, can you be held accountable or liable because that’s what a business person is supposed to do. If he acted over-aggressively or overconfidently, then that’s something else again. But was there really accounting fraud, I suppose we’ll only know when the PwC report comes out but there’s also a question of how come Deloitte didn’t pick up these things much earlier because Deloitte was the auditor for Steinhoff for many, many years. Then a consulting firm in the Caribbean reads newspapers and does an analysis of Steinhoff and discovers these mistakes by themselves, without auditing the entity. So how is that possible? I don’t think enough attention has been given on Deloitte’s role in this collapse.
CIARAN RYAN: I think one of the things that came out was that they were syphoning off their liabilities into a third party entity, a separate and legal entity.
NICOLAAS VAN WYK: Ja but that could be a case of fraud.
CIARAN RYAN: Is that a fraud?
NICOLAAS VAN WYK: It depends on how it was structured, how it was set up and whether it was disclosed in the financial statements. Ja but if he committed a fraud…ja, so I suppose the argument can become a little bit semantic if we say is it an accounting scandal where he purposefully misstated numbers or figures or was it just committing fraud in which case obviously you will be condemned. But we’ll have to wait for that report.
CIARAN RYAN: You’ve probably been watching what’s been going on at the Zondo Commission of Inquiry into state capture and the testimony of Angelo Agrizzi in the last couple of weeks, he’s made some pretty shocking charges against his former company, Bosasa, and how it bribed all and sundry to win contracts to supply facilities management services at the prisons in South Africa. How should accountants prevent this type of thing from happening?
NICOLAAS VAN WYK: It’s like the previous example I gave about Stanley Milgram’s research, if you act in a capacity that you want to be obedient, you see that what you are doing is wrong but somebody gave you instructions to do it and your excuse will be “he told me to”. What accountants are supposed to do is be much more sceptical but if you look at our training model – and that’s another reason why we started CFO Talks and we started the designation – there’s so much focus on accounting as a subject, technical knowledge. Accountants when they leave university have very little knowledge, if any, of psychology, motivation…
CIARAN RYAN: Human behaviour.
NICOLAAS VAN WYK: …or human behaviour. They won’t be able to spot a psychopath, even if they were standing in front of them. So they have no ability to make this distinction. Technically they are very smart and capable but their human behaviour knowledge is zero. Psychopath CEOs
CIARAN RYAN: I’ve seen this in practice, as a journalist I have worked in newsrooms and I have worked in companies for various periods of time, where you get a very dominant personality, the boss, and he got there because he’s the alpha male he’s just going to get to the top because he can’t envisage a junior role for himself. I’ve seen people being persuaded to do things that in their own nature they would not do because of this kind of dominant personality. This is what goes on in the corporate world, isn’t it?
NICOLAAS VAN WYK: That’s exactly right. Somebody did do some research and then comparing it to the general population the percentage of psychopaths as CEOs is double what you would find in the general population.
CIARAN RYAN: What about politicians [laughing].
NICOLAAS VAN WYK: [Laughing] I suppose these tendencies of you have to influence people as a CEO, you have to make things happen, so some of those elements are serving them well in running these big companies because it’s a tough ask to run a multi-billion dollar company globally and have everybody working in the same direction. But when it now comes to the grey areas of entering into transactions or deciding things that shouldn’t happen, the accountant is not equipped psychologically to defend himself or understand himself and realise what’s happening. He can apply technically the rules but ja, so he’s ill equipped. So what we’ve been doing and working with some universities, relooking at their qualification requirements for accountants. Overseas technical knowledge only comes later, in South Africa we make it part of your undergraduate degree and it’s highly specialised and that’s what you do, you understand IFRS and IFRS for SME, the accounting standards from front to back, every little detail that you can apply but not much else.
CIARAN RYAN: No human skills.
NICOLAAS VAN WYK: No human skills. Also about strategy and business models, only in your first year you do that, so that also falls by the wayside. What we’re doing with CFO Talks is to discuss with CFOs what their real role is, so that we can back-engineer the education criteria to say but if a CFO is required to have an ability to engage with people, to understand human dynamics, maybe that should be part of their degree, make that part of their study route. When you look at reality, if you are faced with a complex accounting problem that is when you would go and study it and see examples and engage with colleagues. So the technical knowledge, in our estimation, you would need much later in your education path, not so early. What you need is a good understanding of yourself, who am I as a human being, how do I relate to the world, how other human beings may try to manipulate me and how I can respond to that. Then once you’ve got this complete human being, then expose them to accounting and you’ll have a different result. So with our qualification competency framework for CFOs that’s what we’re trying to build into the competency framework, that is what we want them to go and study and learn. So we’re looking for a new type of CFO.
CIARAN RYAN: We just spoke to Pieter de Jager, who is the chief financial officer for Tanga Cement in Tanzania and he raised the point, I asked him that very question, how much of your time is spent on preparation of financial statements and numbers, and he said 5%. The rest of the time he’s involved in trying to maintain liquidity for the company, finding the cash the company needs to grow and to pay its bills, and strategy and compliance, those are the kinds of areas he’s focused on.
NICOLAAS VAN WYK: He mentioned working with his board, working with funders and working with his finance team, of which he’s got 20 or 30 people, and motivate all of them to act in a coordinated fashion. That is not a technical skill that is psychological skill that must be developed, which we don’t adequately provide for our future CFOs.
CIARAN RYAN: One of the things that accountants are supposed to be, and you raised this, is sceptical. You’re presented with some figures, what is this transaction here, this looks a little bit odd, it’s flowing from the company bank account into some individual, we don’t know who this is. It’s almost like a journalistic skill that you have to develop, which is don’t believe everything that you’re told, you have to go and dig deeper. Those are the kinds of skills that accountants need to develop, correct?
NICOLAAS VAN WYK: Absolutely. How we systemise that or formalise it is through a set of working papers. So when you engage with a client there are certain steps that you have to follow, you first have to have an initial discussion with them, have a little bit of research into them and their company, understand their environment and build an understanding of the business model that applies to that company, in what industry are they operating in. So that’s the first engagement set of working papers, do I know this client and do I want to work with him and what is he doing. I think that first set of working papers doesn’t happen because we’re pressed for time and have to run budgets we just start with the process part, the actual auditing, and then we don’t really understand the business. So that’s what I think went wrong at Deloitte, with KPMG and with all these scandals that we are facing, we didn’t do our homework, we didn’t spend enough time understanding the business model and then analysing before we look at the business, where might the management be hiding money or where might they maybe want to massage the figures. That has to happen before you engage and I don’t think that happens. Should accountants be reporting to government?
CIARAN RYAN: Increasingly we’re seeing the role of the accountant and the auditor as the eyes and ears of government, whether that’s a good thing or a bad thing is open to debate but their first duty seems to be now to represent the state. Lawyers certainly don’t have that burden, you’ve already mentioned that client confidentiality. What exactly does it mean for the accounting profession when accountants must squeal on their clients and is this right?
NICOLAAS VAN WYK: The starting point is this concept of public interest, if you look on the global governing body for accounts website, it’s called IFAC, the first thing you’ll see there is that accountants act in the public interest. Then if you look on the professional body’s website you’ll see accountants have to act in the public interest. But I think we never analysed what that means, public interest means you have to act for the benefit of the public, not your client. The problem is your client is paying you and expecting a certain service. So when you engage in an auditing relationship you have to think but what is in the best interest of the public or else you shouldn’t say you’re acting in the best interest of the public. So that is why I think what you are rightly saying is the feeling could be but should accountants and auditors not be reporting more to government. If we say we act in the public interest, especially when it comes to auditing, then maybe that’s the thing that we would need to do. That then proves our earlier argument that auditing should be separated completely from the profession, it should be funded separately through a special levy, where a government agency allocates the auditor to provide the service for you. The point is you can’t have it both ways, either we act in the public interest with everything that we do, whether it’s auditing, accounting or consulting, or we don’t. But we can’t hoodwink the public by saying we act in the public interest, that’s why you need to pay us a fee and give us a monopoly because in essence if there’s a legislation that prescribes the appointment of a professional sector to perform the work like it is with auditing then you have a monopoly and you have to act in line with the responsibility that has been placed on you. You can’t then also run a business.
CIARAN RYAN: Ja, so there’s a clear conflict and it’s all got to do with the funding model of the audit profession, they’re being paid by the client but they’re expected to spy for the state, in crude terms.
NICOLAAS VAN WYK: In crude terms that’s the case, plus we don’t have the benefit of legal privilege like attorneys have, so we are kind of forced to squeal on the client.
CIARAN RYAN: Ja and you know how snitches get treated in prison [laughing].
NICOLAAS VAN WYK: [Laughing] Exactly.
CIARAN RYAN: What about the search and seizure powers that the Independent Regulatory Board for Auditors now seems to have been given by Parliament. I don’t think IRBA actually asked for these powers but it seems that they’ve been given them all in the name of cleaning up the profession, is it a good or a bad thing?
NICOLAAS VAN WYK: I saw that their response was that they didn’t ask for it. Why they responded in that manner is quite revealing because do they see themselves as a regulator. Remember how they started as a sister organisation of SAICA, so SAICA and the regulator was one entity and they governed the profession and the regulation. Then with the Masterbond scandal the then Minister of Finance, Trevor Manual, said no, the profession should be split and then he reestablished the auditor regulator to be an independent regulator. Now, if you are a regulator then it’s normal to have search and seizure powers. SARS, the revenue services, has search and seizure powers in terms of the Tax Administration Act. The FSB has search and seizure powers.
CIARAN RYAN: The Financial Services Board, now they call it the Financial Conduct Authority, FCA.
NICOLAAS VAN WYK: So they have search and seizure powers, so it is normal for a regulator to have these powers. The reaction of the stakeholders in the profession and the regulator itself is revealing to the fact that they don’t see themselves as independent from the profession, when, in fact, they are and should be. I think it’s the last vestiges of the SAICA, IRBA relationship that’s causing consternation about search and seizure powers. They should have it. If you can imagine how long it took for Parliament and our own investigators to get access to Steinhoff, it took months and months and months, when everybody saw the scandal happen but nobody did anything. If it happened within the financial planning space, the regulator in that area would have been much faster, they’ve got many more powers to take control over an entity and appoint a replacement and a curator to run that entity. So in these cases you have to act fast because the money can flow anywhere and all the evidence can be removed, you can’t play around with it, it has to happen. But the reaction from the auditing sector proves that they don’t think IRBA should be separate, they still want to control it in some form or another.
CIARAN RYAN: Okay, Nicolaas, we are going to end off there. That was Nicolaas van Wyk, chief executive officer of the South African Institute of Business Accountants.