Steinhoff, EOH, Tongaat Hulett and Aspen. These organisations have all been accused of financial mismanagement and misstatement of information recently and illustrate how the corporate world has been battling to deliver a ‘clean’ record.
According to Robert Lewenson, head of ESG Engagement at Old Mutual, listed corporates are required to have several checks and balances in place in terms of law and governance best practice.
“This makes it tough to understand exactly how financial mismanagement on such a scale can go undetected for sometimes long periods of time,” he said.
“Mistrust in the external auditing fraternity in South Africa has grown with each new corporate scandal coming to light in the past few years.
“However, auditors insist that they can only work with the financial information provided to them by companies and that uncovering financial mismanagement is not their responsibility. If not the auditors, then whose responsibility is it?”
Three important role players
Lewenson explains that there are three important role players when it comes to assuring the audited financial statements: the audit committee, an internal audit function and the external auditor/s.
“All three of these functions should work together to ensure good governance of audit practices. As soon as there is a weak link in the chain, it invites opportunity for financial mismanagement. As we have seen with the recent examples of Steinhoff and Tongaat, the implications are massive,” he said.
“Looking more closely at the three functions, the audit committee is a sub-committee of the company’s board.
“This committee will elevate their issues or concerns to the board, but their primary task is to guard the auditing practices of the company and finalise a company’s financial statements which the Head of the Audit Committee assuming the responsibility for signing off the financial statements.
“The internal audit function acts as another line of defence and ought to report directly to the audit committee on material internal audit findings. The external auditor then has to take a view on whether the financial information of a specific financial year is correct and unqualified,” Lewenson said.
Tongaat vs Steinhoff
When considering the Tongaat case, Lewenson points out that it appears as if the Tongaat combined audit function did their job properly when it picked up the financial irregularities within the company, but it could take a significant amount of time to determine what (and if) fraudulent activity actually took place, to what extent and for how long.
However, the question remains; did the Tongaat internal audit function and its audit committee do enough when the discrepancies first emerged?
“Steinhoff in comparison, had an audit committee comprising of incredibly seasoned and experienced individuals who maintain that all the fraudulent activity that came to the fore, emerged out of the blue and they knew of nothing,” said Lewenson.
“The implicated transactions orchestrated by Jooste and certain executives went on for almost 10 years.
“Can we assume they managed to hoodwink experienced and well-respected members of the combined audit function throughout that time? Given the calibre of the audit committee members, it is extremely hard to comprehend how this happened.
“It begs the question of whether the board applied their minds appropriately when they saw the financial results, or did they just blindly accept that the information was correct. This highlights the critical role that a board plays in interrogating financial statements and the correct use of the internal audit function.”
He said that both companies had entrenched and long-serving board members and CEOs, which could be viewed as having impacted the independence of the board.
The unfortunate reality is that financial mismanagement has been going on in corporates for years, both locally and globally, said Lewenson.
“In South Africa, we’ve seen a culture of unethical leadership unfold and if that is how certain of the country’s corporate leadership operates, financial mismanagement will definitely find its way into the private sector.
“Greed has become a massive problem in the corporate world. Cunning fraudsters believe that they can continue to get away with this kind of activity, but the tide is turning as we’re increasingly seeing how more companies and individuals are being exposed for poor governance practices and irregular financial activity,” he said.
To support this ongoing fightback against corporate corruption, Lewenson believes that there is an urgent need to protect whistle-blowers within organisations.
“We should be encouraging the establishment of whistleblowing mechanisms and as an organisation, we continue to champion the protection of whistle-blowers in our market,” Lewenson said.