Reevaluating Auditor Responsibilities and Liability in South African Law After Recent Audit Failures in South Africa

Abstract

Financial statement manipulation is the act of adopting innovative accounting techniques to make a company's financial statements reflect its desired performance rather than its actual performance. For the past few years, South Africa has suffered severely from several financial statement fraud by companies. Regardless of the steps taken by the Independent Regulatory Board for Auditors (IRBA) to reduce financial statement manipulation, the practice is still widespread. This act is also colloquially called “cooking the books” and is done to enhance a company’s financial statements to meet certain targets or to influence investors’ expectations. This is caused by a lack of ethics in preparing financial statements, fraudulent behaviour, and conflicts of interest. The fallout from doctored , fraudulent or materially misstated financial statements is substantial, with investors losing billions of rand in the value of their investments and employees losing their jobs. This means that the role of external auditors in auditing annual financial statements is critical, serving as an independent mechanism that provides reasonable assurance that the annual financial statements accurately reflect the company's financial position and business results. If this role is fraudulently or negligently performed, as was the case in a number of case studies in this research, investors and society at large lose the independent arbiter between fraudulent corporate financial reporting and the public. This study focuses on material and fraudulent misstatements in company annual financial statements and the role of external auditors in the production of the same. It starts by looking at the role of directors and internal management in the preparation of annual financial statements. The study then looks at the statutory requirements and duties of external auditors in the auditing of annual financial statements. Thereafter, the study focuses on the liability of auditors for fraudulent annual financial statements to clients and third parties. Comparative analysis with countries such as the UK and Australia is also conducted. In this regard, the study analyses legislation such as the Companies Act 71 of 2008, the Auditing Profession Act 26 of 2005, and other relevant local and foreign legislation, case law, and auditing standards. At the end of the study, conclusions and recommendations on potential improvements to the law on auditor liability in cases of fraud in the auditing of annual financial statements are made.