Reportable irregularities and audit quality: Insights from South Africa

Highlights

•	The research provides one of the first interpretive accounts of auditing in an African setting.

•	The association between audit quality and a duty to report irregularities to an independent regulatory body is explored.

•	The reporting duty contributes to the perceived auditor independence.

•	It also emphasises the importance of engagement leader participation and sound consultation and review policies.

•	Issuing more than a generic audit report can add significantly to the perceived value of the assurance function.

Abstract

In the aftermath of numerous corporate scandals and, more recently, the global financial crisis, the issue of audit quality is particularly relevant. Increasingly, numerous jurisdictions are relying on more exogenous forms of control over the audit profession in the interest of improving the quality of audit engagements and the reliability of audit reports. The purpose of this research is to examine the case for a form of mandatory whistle-blowing by South African auditors. Using an interpretive approach, this paper explores the association between a complementary reporting duty and notions of audit quality, recommending that a requirement for auditors to bring certain transgressions to the attention of an appropriate regulator can be a consideration for policy makers. At the same time, the research adds to the existing corporate governance literature by providing one of the first interpretive accounts of audit quality and reporting in a non Anglo-Saxon setting.

Keywords:

• Audit quality
• Audit reports
• External audit
• ISQC 1
• Reportable irregularities
• South Africa
• Whistle-blowing

Acknowledgements

This paper is based on the author's doctoral thesis under supervision by Professor Jill Solomon and has been edited by Mrs. Lelys Maddock.

Special thanks must go to the participants of the British Accounting and Finance Association, Brighton (2012), the British Accounting and Finance Association, Newcastle (2013), the International Corporate Governance Conference, Johannesburg (2012) and the Africa Leads Conference, Stellenbosch (2012) for their comments on earlier versions of this paper. Thanks must also go to Lelys Maddock for her invaluable editorial services.

Notes

1 Non-standard abbreviations include: Auditing Profession Act No. 26 of 2005 (APA); Independent Regulatory Board for Auditors (IRBA); International Auditing and Assurance Standards Board (IAASB); International Federation of Accountants (IFAC); International Standards on Auditing (ISA); material irregularities (MI's); Public Accountants’ and Auditors’ Act No. 80 of 1951 (PAAA); Public Accountants’ and Auditors’ Board (PAAB); reportable irregularities (RI's); and South African Institute of Chartered Accountants (SAICA).

2 This paper uses the terms ‘section 45 of the APA’ and ‘RI provisions’ interchangeably.

3 The APA uses the term ‘management board’ which would include the board of directors or other body or individual(s) responsible for the management of the business of an entity (IRBA, 2006; s1 of the APA). This paper uses ‘management’ and ‘management board’ interchangeably.

4 Section 45 of the APA does not require the auditor to detect fraud. Although fraud would be an example of an RI, the auditor is simply required to report the fraud to the regulator if, during the course of carrying out audit procedures in terms of ISA, it happens to be detected (IRBA, 2006). As such, a discussion on whether or not section 45 of the APA forms part of the classic audit expectation gap is deferred for future research.

5 Experts are drawn equally from each ‘category’. Practicing auditors came from both large and smaller practices, although the quality-size distinction (DeAngelo, 1981a; Francis, 2004) is not specifically dealt with.

6 For this reason, the correspondence analysis is especially useful as it results in an easy-to-understand diagram that can be analysed during interviews. A questionnaire, coupled with more sophisticated statistical manipulation, would have been problematic for most experts to deal with, given that none is a statistician.