Young CAs – Should the accountancy profession embrace Comprehensive Regulation?

Imagine a crew about to make a blockbuster movie. Who’d be in the team? There would be people of different skills such as main actors, supporting cast, the producer, the director, cameramen, costume designers, special effects specialists, personal assistants, screenwriters etc. Why am I talking about the making of movies? Because it made me think about the concept of Comprehensive Regulation (CR) for the accountancy profession. Why? More on that later.

In the April – June 2019 Independent Regulatory Board for Auditors (IRBA) Newsletter, former CEO Bernard Agulhas said: “The Steinhoff case is a prime example for supporting the need for the Comprehensive Regulation of the financial reporting ecosystem.” I believe that this was a significant statement.

Then, in December 2019, Sir Donald Brydon released an independent review report into the United Kingdom audit profession. His opening statements were: “Audit is not broken but has lost its way and all the actors in the audit process bear some measure of responsibility.” Another significant statement!

Therefore, in this article I will discuss; (1) Why were these statements significant? (2)  What mindset I urge the profession to adopt when looking at the CR principle; (3) Why we should consider embracing CR and (4) Why should young Chartered Accountants (CA) be actively involved in the debate about CR to chart a better future for the profession they will inherit?

“The Steinhoff case is a prime example for supporting the need for the Comprehensive Regulation of the financial reporting ecosystem.”

Why these statements were significant

In May 2018, I wrote an article for the JSE magazine entitled ‘Equitable Dealings.’ There I argued that, our regulations and corporate governance codes would’ve been effective only if we’d paid more attention to corporate cultures. This would’ve prevented the published accounting scandals. I concluded: “We don’t need more regulation. We need to create corporate environments that reward good ethical behaviour. Ethical Culture is vital to effective corporate governance.” (I will write a separate article, further explaining this principle). The aforementioned statements therefore -especially the IRBA statement- were fascinating to me because I already had strong views about additional regulation. I felt that we didn’t need it.

However, despite my strong viewpoints, I am constantly a learning creature. I was curious to learn about differing views in the profession regarding CR. But to do so I needed to adopt an open mindset, one that wouldn’t cloud me to new ideas.

The mind-set I am urging the profession to adopt when looking at CR

As I journeyed throughout my career, I made this important observation; whenever I want to learn, develop and grow as a leader, it’s vital to separate people from their ideas and concepts. This is especially true if I already have a bias.

This principle is greatly emphasised by Lisa Nichols – CEO, Bestselling author and Motivational Speaker.  Nichols, who was a struggling single mom on public assistance, turned her fortunes around and became a millionaire entrepreneur. She said one of the key things she did to turn her fortunes around was to wake up each morning and say, “I have nothing to hide, I have nothing to protect, I have nothing to prove and I have nothing to defend.” She says doing this, helped her to focus her efforts on creating because her energy was not consumed by hiding, protecting, proving and defending.

As a profession, we now find ourselves at a crossroads and we need to be in creation mode, perhaps a re-creation. Therefore, when reading this article and debating among yourselves, I urge you to apply the principles I have stated above. Please separate the concept of CR from the person or organisation that proposed it. And please separate the idea or concept from me, the writer of this article. Also, let’s try and avoid the temptation to expend our energy pointing fingers at each other. This will lead to hiding, protecting, proving and defending. Let’s focus on the content, not the source.

With this in mind, I was fortunate that on the day I saw the IRBA statement, I had a scheduled meeting with a Senior Partner at the firm I worked for. I say ‘fortunate’ because in my many discussions with him over the years, he has been able to separate ideas or concepts from the source. He made the case for the concept of CR by using a simple, but brilliant illustration. It is the one mentioned at the outset of this article.

The case for CR

Imagine that as a profession we are trying to produce our own blockbuster movie. First, we might need a title. I turned to Google to research the possible titles for our movie. The internet is an interesting place. Two suggestions, out of many, stood out; The Accountant or EBITDA (Earnings before I Trick the Dumb Auditor). Yes, that’s how interesting we’ve become. So, once we’ve chosen a title, we’ll then have the ecosystem mentioned in the opening paragraph such as main actors, producer, director cameramen etc.

You will agree that, in a real movie, some of these parties work behind the scenes and their work will not be visible to the movie goers. But other parties like the actors, the special effects specialists, work in the front lines, so to speak, and the quality of their work is visible to the movie goers. I will call this group the “front line workers.” Now, imagine if the movie critics and movie goers focused almost all of the attention and criticism on the movie stars and co-stars, and not focus on the mediocre work of the behind the scenes crew such as writers, producers, directors and cameramen.

What do you think would happen if the movie’s behind scenes crew was mediocre? The production would be mediocre. Is it possible, then, for the lead actor and supporting cast to be brilliant in a mediocre production? I am sure all of us may agree that we would be greatly compromising the outcomes of our movie like, quality, integrity, credibility. Think Halle Berry in Catwoman.

This principle of comprehensive teamwork does not apply only to movie making, it applies to most creative productions such as radio shows, orchestra, and ballet shows etc. It also applies to sports such as Formula 1 (F1) racing. For Lewis Hamilton to win six and possibly seventh championships this year, everything in his car has to be quality. From the design, to the engine, to the correct set-up and the right choice of tyres. The pit crew must be top quality during races. Everyone of those components accounts for their part in the team’s success or failure. But, if you put Hamilton in a badly run team such as the Williams Mercedes that has zero points in 2020, what would be the result? Even the brilliant Hamilton would fail. It’s the same driver with the same talent, but the team is mediocre.

Likewise in our profession, the quality, credibility, integrity of our financial reporting depends on a financial reporting ecosystem. This ecosystem is housed in the combined assurance model (CAM). We can all research what CAM is. When the model is working as intended, it should produce credible financial reporting both internally and externally, and for the governance structures. Just like in our illustration of a movie production, all parties or components of the ecosystem – even those whose work will not be in the spotlight – should be held to the highest level of quality standards. All should account for their contribution in the ecosystem.

What, therefore, are the components of CAM? King IV discusses at least five components; (1) line functions that own and manage risk and opportunity, (2) specialist functions that facilitate and oversee risk and opportunity, (3) internal assurance providers, (4) external assurance providers and, (5) governing body and committees.

Again, remember that all the components in the ecosystem must subscribe to the highest levels of quality and must account for their part in the production. What happens though, when we have what is normally referred to as an accounting or audit failure? The question is asked – where were the external auditors?

As ‘lead actors’ we, the auditors need to take the criticism and some of it is well-deserved. But is this the only question we should be asking? Can an external auditor produce great quality audited results if some or all of the critical components of the production are mediocre? Should other components not take any responsibility or accountability at all? I am sure that most of us would agree that if we don’t expect this approach to work in creative industries and sports, it surely cannot work with financial reporting. People must account for their work!

Young CAs, Comprehensive Regulation and the future

In the past I have argued that the majority of issues behind these accounting or audit failures did not all emanate from the Finance Function. These may not have resulted from prior period errors, changes in estimates or accounting policies. Not from erroneous misapplication of International Financial Reporting Standards (IFRS) or innocent misinterpretation of laws and regulations. The accounting or audit failures could’ve been caused by people, who were higher up within organisations (auditors and client) who failed to make decisions that would lead to sustainable organisations. These failures could’ve been caused by intentionally misapplying the standards, laws, regulations, assumptions and forecasts to achieve pre-determined outcomes to benefit some – but not all – stakeholders, or to conceal the real state of affairs. Some failures were a result of intentional breaches of risk management processes within audit firms and organisations for personal benefit.

Whether we were involved in the orchestration or not, recent events have been devastating to the economy, the auditing profession and to the accountancy profession at large. You, the young people have been impacted the most. Sadly, you can’t turn back the hands of time and live your professional lives backwards. What you can do though, is to be intentional in setting time aside to pay attention to critical developments and to participate in shaping the future of the profession.

I am writing this article to you to try and explain and make a case for the concept of CR. I hope this will encourage you to participate in this critical discussion, which has the potential to re-arrange the waterfront of the profession; a profession that will be handed over to you, for some of you to lead and be the face of.

I urge you, despite your heavy workloads, to read the article and objectively deal with the concept of CR without being influenced by personalities. Gather your own facts, pay attention to critical discussions and participate.

For now though, the question I really want you to answer after reading this article is –  Given what we have seen, from Enron in early 2000s to the financial crisis of 2008, to the recent events impacting the profession; is it still appropriate for external audit to be the only component that is regulated within the CAM? Your answer to that question will shape the future of the profession you will inevitably inherit.