The accounting profession in East Africa and globally is facing a credibility crisis.

Recently, South Africa’s Tiger Brands accused managers of its Kenya subsidiary Haco Industries of manipulating profits by Ksh879 million ($9 million) in order to earn fatter bonuses. Haco denied the allegations.

The chairman of Stanbic Bank Uganda, Japheth Katto, spoke to The EastAfrican on corporate governance in the region, and why the reputation of auditors and accountants suffers when things go wrong.

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What is the role of an auditor? Does it include unearthing financial impropriety and scandals?

An auditor is expected to give assurance to investors on the state of the financial affairs of a company, based on the financial statements and other information presented to the auditors by management.

The auditor is supposed to carry out the work in accordance with the International Standards on Auditing (ISA) prescribed by the International Auditing and Assurance Standards Board. These standards cover both audit and non-audit assurance engagements.

The auditor is expected to exercise professional scepticism like ask probing questions, not to take all information and explanations provided by management at face value. This inquiry and probing may result in the auditor “smelling a rat.” The auditor will report this to management or to the Audit Committee.

But, because the auditor depends on information provided by management, the primary responsibility for unearthing impropriety or scandal rests with management and the Board. The auditor only comes in once a year.

Professional accountants are governed by ethical standards proclaimed by the International Ethics Standards Board for Accountants (IESBA) which have been adopted by all the institutes in East Africa. One of the projects that IESBA is undertaking is how to handle situations in which the auditor discovers or suspects criminal activities. The project aims at finding a balance between client confidentiality and public interest.

Recently, auditors have been accused of colluding with management to commit financial impropriety. Is this criticism fair?

Ethical standards required of accountants in general and auditors in particular are independence and ethical and professional conduct. Collusion with management to commit an impropriety or mislead investors/creditors is a serious matter that can lead to legal action and being struck off the register of auditors.

We saw this in the Enron case with the firm Arthur Andersen. [In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm’s handling of the auditing of Enron, an energy corporation based in Texas which had filed for bankruptcy in 2001 and later failed.]

Are accountants falling short of investors’ expectations?

Investors need to be educated on the role of an external auditor and, equally important, the role of management and the Board in the company’s affairs.

There may be cases where the auditor has not done what is expected of him or her, and so the investors/shareholders are entitled to take appropriate action.

In the majority of cases, auditors fulfill the role expected of them but like in every profession there could be bad apples that spoil the name of the profession. It is important that regulators monitor the performance of the auditors through regular inspection and enforcement.

What measures are there in East Africa to uphold the highest standards for accountants and auditors?

Regulators have adopted the International Financial Reporting Standards (IFRS) and ISA, as well as international ethics and international education standards prescribed by the respective independent standard setting boards under the auspices of the International Federation of Accountants (IFAC).

Some countries are also in the process of adopting International Public Sector Accounting Standards. The issue is whether the accountancy bodies a have the resources and expertise to ensure that the standards are being implemented.

If an audit report says that IFRS and ISAs have been applied, the regulators of the profession and financial markets need to satisfy themselves that these have been correctly applied.

Is there is a case for government regulation for auditors?

The global trend is towards government regulation. Mahathir Mohamad, the former Prime Minister of Malaysia, suggested, during the World Congress of Accountants in Malaysia in 2000, that government auditors should audit all companies to ensure independence. He found the concept of a company paying an auditor to do an independent audit and give an independent opinion difficult to comprehend.

The EAC governments should explore the possibility of having a separate body to regulate accountants and auditors. My understanding is that Kenya is considering this model, and at one time Tanzania was looking at the same.

What international best practice for regulating accountants and auditors can we learn from?

I suggest that we look at countries like the UK, South Africa and Malaysia where the accountancy profession is well developed.

In your experience at the FSA, what best practice for corporate governance can East African regulators draw from advanced economies?

There have been many corporate governance scandals in the West and as such it may not the best place to learn from. But we have also had our own scandals in the region, and in Asia. However, countries in the EU and the US have some good corporate governance practices that we can learn from.

The UK has a regime that combines statutory and voluntary compliance. Here in Uganda, we have seen a big improvement in corporate governance in the banking sector, mainly because the requirements were incorporated into the law and there is strict enforcement.

The new Companies Act in Uganda has a corporate governance code that contains requirements including integrated reporting. The challenge will be the enforcement of those provisions against public companies, and whether private companies will comply voluntarily.

In addition, East African capital markets regulators have developed corporate governance regulations for market players and for listed companies, which will be issued in the form of directives.

How best can regulators educate the investing public on the role of the auditor?

The Capital Markets Authority of Uganda has devoted human and financial resources to public/investor education. Other regulators in the region have done the same. The regulatory regime in Uganda, and in the rest of East Africa requires auditor reports on the financial statements, as well as an independent accountants report.

The accountants report is prepared by an audit firm that is different from the one that audited the accounts in the prospectus. It covers all the years of the audited accounts, and usually the reporting accountant makes adjustments to the audited accounts for the prospectus.

We educated the public on the importance and purpose of each of the reports, which was to give assurance to potential investors on the financial statements.

When I was at CMA Uganda, we entered into MoUs with the Association of Chartered Certified Accountants (ACCA) and the Institute of Certified Public Accountants of Uganda to, among other things, enhance public awareness. The MoU with ACCA included the training of financial journalists.

What is the difference between an internal auditor, external auditor and forensic auditor?

Internal auditors are usually employees of the company with a high degree of independence. They are primarily concerned with ensuring that the internal controls are in place and are effective. The internal auditor reports to the audit committee of the Board.

The external auditor is a firm engaged to audit the statements and express an opinion as to whether or not they present a true and fair view of the financial position of the company. The person will assess the work done by internal audit.

Forensic audit is specialised audit or investigation. The auditor is engaged to investigate an alleged impropriety or suspected crime, and produce a report. The skill sets required are different and so is the methodology and objective.