Corporate SA is bracing itself for a substantial increase in audit fees. The UK's Accountancy Age magazine suggested recently that audit fees could rocket by 50% or "even double" because of insurance premium increases for fear of huge lawsuits in the wake of the Enron scandal.
Professional indemnity insurance is one of an audit firm's large item costs. Traditionally, policy increases have averaged about 10%/year. But Deloitte & Touche CE Vassi Naidoo says his firm's premium for this year rose 163%.
"We need to recover that cost from our clients, so it must find itself in the audit fee," says Naidoo.
Enron and subsequent debacles have undermined the role and value of auditors as a profession, says Naidoo. "But we can't rely on regulation and new laws to restore confidence in the marketplace; we have to do that ourselves."
Even pre-Enron, audit fees in SA were on a rising curve. Investec's audit fee from joint auditors Ernst & Young and KPMG has increased from R11m in 1998 to R22m last year. And "other services" paid by Investec to its auditors also doubled over the period, from R1m to R2m. Old Mutual paid KPMG a R50m audit fee in 2001 (in 1999 it was R30m). Other services supplied by KPMG rose from R19m to R37m for the same period. On a historical note, Old Mutual paid its auditor R67m in 1998 for other services, primarily for work associated with the group's demutualisation and London listing. The audit fee for that year was an additional R31m.
The King 2 report on corporate governance has urged audits of interim results and PricewaterhouseCoopers (PwC) partner Malcolm Dunn says this extra work could add another 30% to the audit bill.
"The fees are always under pressure," says Dunn. "Boards and companies do try to minimise the amount they spend on the audit. I think as a profession we sometimes are not as strong as we might be on saying what fee we will accept.
"Some clients will say to you: Inflation's running at 7% or 8% and that's all you're going to get.' You can't keep professional audit salaries down to that level. Audit fees will be in the upward direction, there's no question about that."
Dunn runs the audit practice at PwC, as well as risk management, forensics and transaction services. He's been with the firm for 36 years and sat on the King 2 commission.
He applauds the additional responsibilities that King 2 has placed on audit committees. "They will have to really think about their responsibilities more than they have in the past," he says.
"Other services" work done by auditing firms includes consulting, tax work and the internal audit.
King 2 is happy that internal audits can still be carried out by the external auditor, but urges audit committees to scrutinise the non-audit work done and be satisfied there is no impairment of the independence of the audit function.
Auditing is a competitive field and the marketplace expects audit fees to go down all the time, says Ernst & Young CE Philip Hourquebie. Despite the FM's finding that audit fees appear to be rising steadily, Hourquebie says "there needs to be a reversal of this trend where audit fees have been pushed down over the past few years".
Hourquebie says there should be clarity on what the objectives of an audit are. "People say: Why can't you pick up these frauds that go on in business? We want more than what we get from an audit; we want you to blow the whistle when you see things going wrong - and we want you to blow it early .'
"But that's not the function of an auditor," he says. "An auditor's job is not to find fraud; it's to express an opinion over the financial statements: that they are a true and fair reflection of the affairs of the business.
"If we can assist in identifying major fraud, it's going to mean doing a different kind of work - and more work. So the question is not: will fees go up by 30%, 40% or 50%, but what might drive fees up?"
One thing that's certain to, says Hourquebie, is government's plan to legislate for a rotation of auditors.
The thinking is that auditors have an unhealthily cosy relationship with management, so they should be rotated. "But why shouldn't the next auditors have a cosy relationship?" asks Hourquebie.
"Rotation is going to raise the cost, the hidden cost of having to train new auditors."
Enron, warns Hourquebie, could happen in SA. "These events are driven by greed; people wanting more faster, chasing the quick buck. I would suggest that the moral fabric in SA is worse than in America."
Yes, audit fees will go up, agrees KPMG CE Tom Grieve. He says the quantum is still decided by management when it should be the responsibility of the audit committee. "I had breakfast with a number of captains of industry and said: If I attend another audit committee meeting and the committee chairman defers to management on the audit fee, I'm going to weep .' "
Enron, Merck and Xerox, among others, seem to have created a crisis of confidence in auditors outside the US. "Well, maybe," accepts Grieve, "but when our colleagues in Europe talk to their clients and when we do the same here, we don't see this state of panic and no confidence in financial results and auditors. Frankly, I think it's partly you guys that are to blame - the press.
"In reality, Merck and Xerox are nonsense. Enron clearly is a real thing, but with Enron the journalists, many of them with particular axes to grind, made this leap in logic that because Andersen got paid a lot of money for consulting fees they did a bad audit.
"Suddenly we all become terrible people with no integrity, who connive with our clients to falsify their reports."
In a note to the Reserve Bank, KPMG raised its concerns about the Bank and government's proposed rotation legislation. The firm audits half of SA's banks - including Standard, Nedbank and Absa - and, as Grieve says, "Of the 10 banks that have failed in this country in the past 12 years, we did not do a single one of them [the audits].
"This latest draft banking bill insists on mandatory rotation. We, the firm with the best record, the best experience, will have to stand down and resign in 2007 as auditors of 27 banks. None of these 27 banks has ever failed and we will be giving them to firms that have been involved in bank failures.
"This is government's risk-minimisation measure - all it will do is increase the risk."
SA's auditors are jointly regulated by the Public Accountants & Auditors Board (Paab) and the SA Institute of Chartered Accountants (Saica). Now government intends to bring in a new public oversight body to govern the profession.
How do the Big Four see this?
Says KPMG's Grieve: "If it becomes a public oversight body to use some kind of whip in a totally unreasonable manner, clearly that's not going to be helpful. But if it's staffed with people who have some understanding of the capital market system, some understanding of what's needed, then I'm quite comfortable with that."
Ernst & Young's Hourquebie says: "We need a regulatory framework within which we can operate, that provides some clarity around what can and can't be done. Being meddled and interfered with all the time wouldn't achieve anything. There does need to be a level of policing, so if someone has a complaint against a member of the profession, there's a body you can go to where your complaint will be investigated independently and objectively. Paab's enabling legislation was written in 1951; the board needs to be reshaped to do the job that needs to be done today. If new regulation involves the stakeholders, then I'm happy with it."
PwC's Dunn says: " We certainly need to restore confidence in the accounting profession, to return it to the stature that it deserves. I don't think we're talking about government running the profession; I think it's a closer association, but leaving the profession to run itself. As a firm, I think we would support it."
Deloitte & Touche's Naidoo says: "Regulation of the accounting profession is a good thing. We have a public responsibility and we have to be aware of the public interest we have to protect. But we need a regulator that is responsive and gets involved with the issues, as opposed to somebody that's there just to regulate and tell you what a bad boy you are."
