CEO Message: The Silence of the Auditors

Prof Janek Ratnatunga,
CEO, ICMA Australia

In my last CEO message, I provided recent examples of iconic companies running amok and paying scant attention to ethics and values but being rewarded with higher share values. There was Volkswagen ignoring the toxic pollution caused by their diesel engines, HSBC involved in money laundering for Mexican drug cartels, Facebook breaking all privacy legislation, and almost all the Australian banks involved in large-scale corrupt practices.

Businesses behaving badly

Since writing that message, in Australia there appeared to arise what one could only describe as a ‘corporate crime wave’. There was an outbreak of business lawlessness including wage theft, mistreatment of franchisees, abuse of workers on temporary visas, and much more1.

Mr. Rod Sims, the chairman of the Australian Competition and Consumer Commission, in his 2018 Giblin Lecture on Friday July 13, gave us an extraordinary list of the commission’s enforcement activity for the month of April alone this year.

Ford was ordered to pay $10 million in penalties after admitting to unconscionable conduct when dealing with complaints about PowerShift transmission cars. Some customers were informed that shuddering was the result of their driving style despite Ford knowing the problems with these cars.

Telstra was ordered to pay penalties of $10 million in relation to its third-party billing service known as ‘premium direct billing’ under which it exposed thousands of its own mobile phone customers to unauthorised charges.

Thermomix paid penalties of more than $4.5 million for making false or misleading representations to certain customers through its silence about a known safety issue affecting one of its products.

Flight Centre was ordered to pay $12.5 million in penalties for attempting to induce three international airlines to enter into price-fixing agreements.

K-Line, a Japanese shipping company, pleaded guilty to criminal cartel conduct concerning the international shipping of cars, trucks and buses to Australia.

Woolworths had proceedings instituted against it alleging that the environmental representations made about some of its Homebrand picnic products were false, misleading and deceptive.

Mr. Sims went on to say that earlier this year, the Federal Court found that food manufacturer Heinz had made misleading claims that its Little Kids Shredz products were beneficial for young children, when they contained about two-thirds sugar.

Nurofen packaging for four of their pain products claimed that each was specifically formulated to treat a particular type of pain when, in fact, each product contained the same active ingredient and was no more effective at treating that type of pain than any of the others.

Hotel giant Meriton was caught taking deliberate steps to prevent guests it suspected would give an unfavourable review from receiving TripAdvisor’s ‘review express’ prompt email, such as inserting additional letters into guests’ email addresses. The court found this to be a deliberate strategy by Meriton to minimise the number of negative reviews its guests posted on TripAdvisor.

Optus Internet recently admitted to making misleading representations to about 14,000 customers regarding their transition to the national broadband network (NBN), including stating that their services would be disconnected if they didn’t move to the NBN, when under its contracts it could not force disconnection within the timeframe claimed.

Pental admitted that it made misleading claims about White King ‘flushable’ cleaning wipes, saying they would disintegrate in the sewerage system when flushed, just like toilet paper, when, in fact, our wastewater authorities are encountering enormous problems because the wipes can cause blockages in their systems.

The Silence of the Auditors

Against this backdrop, one needs to question why auditors have remained silent. Most of the above companies and financial institutions received unqualified audit opinions.

Auditors collected large amounts in audit and non-audit fees. The unethical behaviour of large companies and the impact of such on the value of shares raises questions about the value of company audits, auditor independence and the quality of audit work, economic incentives for good audits and the knowledge base of auditors.

The external audit is supposed to operate as a trust mechanism to persuade the public that capitalist corporations and management are not corrupt and that companies and their directors are held accountable. In an uncertain world, corporate audits are expected to reassure stakeholders that there is an external and objective check on the way in which financial statements are prepared and presented, and it is an essential part of the checks and balances required. Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true, and fair accounts of corporate affairs. This expertise, it is claimed, enables markets, investors, employees, citizens, and the state to limit and manage risks.

Such claims of expertise are, however, frequently exposed as inadequate by unexpected corporate collapses, frauds, and failures and, more recently, by systemic unethical and corrupt practices by corporations that the public would have trusted in the past, even without the reassurance of an external audit.

Auditors behaving badly

Beside the problems of the audit, the unethical and corrupt practices of the auditors themselves have been in news, as illustrated below.

Ernst & Young

In September 2016, public accounting firm Ernst & Young (E&Y) agreed to pay $9.3 million to settle charges against three of the firm’s audit partners. The US Securities and Exchange Commission (SEC) found that Gregory Bednar, a former senior partner on the engagement team for a client that was a New York-based public company, “maintained an improperly close friendship” with the company’s Chief Financial Officer, thus violating rules that ensure objectivity and impartiality during audits. Bednar reportedly spent close to $100,000 in travel and entertainment expenses between 2012-2015 while socialising with the client’s Chief Financial Officer and his family, according to the New York Law Journal. E&Y was aware of the expenses but did nothing. In a separate case, former E&Y partner Pamela Hartford, who served on another audit team, had a romantic relationship with Robert Brehl—the former Chief Accounting Officer of E&Y client Ventas, a real estate investment trust, according to the USA SEC (Farber,2016)2.

PricewaterhouseCoopers (PwC)

PwC was banned from auditing listed companies in India for two years after being accused of negligence in its audit work at the now defunct Satyam Computer Services. The Securities and Exchange Board of India said that PwC chose to rely on “glaring anomalies” and huge differences in Satyam’s balance confirmations during its audit work between 2001 and 2008. Although the initial ban did not include ongoing 2017/18 audits for listed companies, the date was extended into 2019, and now PwC continues auditing its clients until 31 March, 2019.


KPMG’s South African branch came under fire and suffered a severe reputational hit after becoming caught up in a growing corruption scandal surrounding one of the country’s most powerful families, the Guptas. KPMG was accused of facilitating the Gupta family in tax evasion and corruption. The Gupta family, once called South Africa’s ‘shadow government’, is a very wealthy and politically influential family with close ties to former South African president Jacob Zuma. It is alleged that the family exerts undue influence over government policies and dictates high-level governmental appointments in exchange for commercial opportunities. Note that HSBC (the bank’s unethical behaviour was detailed in the May-June 2018 CEO Message) has been accused of money laundering for the Gupta family.

Following the above allegations, financial services company Sasfin and investment company Hulisani announced plans to drop KPMG because of reputational risks. Sygnia Asset Management had fired it earlier. In all, six companies terminated their KPMG contracts within two months of the scandal erupting.

While the firm denied any wrongdoing, it admitted to missing several red flags in relation to the Gupta family’s accounts. At least eight senior KPMG South Africa officials resigned in the wake of the scandal, including CEO Trevor Hoole.

It is clear that it’s not because they had a sudden change of heart that they suddenly came forward. If they were not caught there would not be this pseudo-accountability.


The South African accounting watchdog launched an investigation of Deloitte’s audit of Steinhoff International after the retailer disclosed accounting irregularities that triggered a share price collapse. The Independent Regulatory Board for Auditors in South Africa is investigating audit work done by Deloitte South Africa for the South African-based retailer from 2014 to 2016. The watchdog plans to liaise with accounting regulators in Germany, where Steinhoff is listed, and the Netherlands, where the company is incorporated. Deloitte has signed off on Steinhoff’s accounts for at least 18 years, according to the retailer’s annual reports. The investigation is another blow for Deloitte, which admitted in September 2017 that it had suffered a cyber-attack that undermined its reputation as an expert provider of security advice. The breach, which affected clients, also prompted an investigation of Deloitte by New York State’s attorney-general, which is ongoing. Steinhoff’s announcements that it had discovered accounting irregularities and planned to restate its 2016 financial results caused the company’s share price to plummet by more than 80 per cent. The company’s former Chief Executive, Markus Jooste, stepped down and apologised in correspondence with close associates for making “some big mistakes” that “caused financial loss to many innocent people”. German prosecutors said they were investigating whether Steinhoff inflated its revenue and book value, and Steinhoff’s supervisory board commissioned PwC to carry out an independent investigation into the accounts (the same PwC mired in the Satyam scandal in India!!).

Such events fuel the suspicion that auditors lack the requisite independence, expertise and incentives to construct the promised ‘true and fair’ account of corporate affairs. It also begs the question of whether the rules and principles of the International Financial Reporting Standards (IFRS) are, in fact, hopelessly outdated and cannot differentiate between ethically and unethically generated company revenue and expenses, or provide a true and fair valuation of a company that has significant intangible assets.

A Royal Commission into the Audit profession?

These examples call into question the role, value and independence of auditors. Perhaps what is needed is a Royal Commission into the Regulation, Independence, Politics, Production and Knowledge Base of Auditors. An independent inquiry into the role of auditing, especially at financial institutions, would help to highlight the shortcomings of current practices and indicate why there has been a ‘Silence of the Auditors’ while the banks were marched like lambs to the slaughter to admit their significant ethical and moral shortcomings in the Banking Royal Commission.

We have considered the unethical, and often corrupt and fraudulent, behaviour of large corporations, financial institutions and even external auditors. What about the professional bodies of accountants that educate, train and certify the competency of the auditors and provide good governance guidelines for their professional members?

CPA Australia, the country’s largest accounting body, had a tumultuous year in 2017 after an unprecedented member uprising over indiscriminate spending and exorbitant salaries led to the sacking of CEO Alex Malley and the resignation of the entire Board.

The issues related to the ‘CPA Scandal’ have been well documented in the Australian financial press and include the revelation that CEO Alex Malley’s salary was $1.79 million per annum, the details of the over-the-top pay of Board members, the excessive salaries of senior management, Mr Malley’s termination payout of $4.9 million, and so on. These revelations outraged members, and were key factors that led to the revolt over the way the body was run.

A group of CPA Australia members submitted 10 resolutions at the accounting body’s make-or-break Annual General Meeting in May 2018. Among these were resolutions to cap director pay, permit members to directly elect the Board, and to have Chairman Peter Wilson removed.

The CPA Board and Mr Wilson opposed all 10 of the member resolutions, citing a variety of reasons including that the ideas were impractical, costly and not in the interests of the body.

Instead, the new Board and Chairman put forward resolutions that stemmed directly from the controversial independent review commissioned into the CPA late last year and subsequent (so-called) member consultation.

A key CPA member group spokesperson, Mr. Brett Stevenson, said the rejection of all the members’ resolutions showed the Board did not want to deal with the major governance issues at the body.

“After all that has been exposed and reported on about the terrible leadership, at both Board and management level, and resultant shenanigans at CPA Australia over the last decade, it appears we are just being taken for a ride. In more blunt terms, we are just being treated with the same disdain and patronising professionalism that has gone before,” he wrote in his governance blog in May 2018.

One of the key resolutions put forward by the CPA Board (as a counter to those proposed by the CPA members’ group) was the creation of an Appointments Council to appoint Board members. It would replace the discredited 23-person Representative Council, where the Board appointed 11 members to a body that in turn selected the Board members. The proposed Appointments Council would have 13 members with Mr Wilson taking up the position of non-voting Chairman. Each division and branch would select a member of the Council, meaning that NSW and Victoria, where more than half of the 163,000-strong membership reside, would get only two representatives. Regions such as Singapore, with around 8,500 members, and Greater China, with 5,800 members, would each have one representative on the Appointments Council. Critics of this resolution fear it will be a back-to-the-future move that will disenfranchise the majority of members in Australia.

It was claimed in the media that CPA Australia actively harvested proxy votes from overseas members and was successful in preventing the CPA members’ group from gaining majority acceptance of any of the resolutions that could have transformed the way the embattled accounting body is run.

This will result in a situation where the Europe Divisional Council, with 1,750 members, will have the same voting power as the NSW Council with 45,000 members and Victoria with 40,000 members. The NSW and Victoria divisions have over 50 per cent of the membership of CPA. They are only going to have two votes on the Appointments Council. The other divisions and branches, which have less than 50 per cent of the members, are going to have 11 votes. This is gerrymandering at its best, says Mr Stevenson.

The bottom line is that ordinary members of the CPA cannot directly vote for their Board or President. However, it appears that such lack of governance by CPA Australia will not affect its financial viability as a majority of its professional members appear to be indifferent to the lack of good governance practices in their own body. It is hoped that ICMA members take a more active role in how their professional body is run.

It appears that not only is the desire for social responsibility dead in the corporate world, but also among the auditors of those very corporates and the professional financial accounting and auditing bodies that promote such governance practices.

The role management accountants can play

It is time for management accountants to further distance themselves from the financial accounting and auditing profession and ensure that they are able to inculcate good strategic governance and strategic audit practices in the organisations in which they work.

Since businesses are behaving badly in the (legitimate) pursuit of higher profits and shareholder value, the key is for the government to legislate that companies undertake compulsory strategic audits to evaluate business practices beyond simply the financial reporting of the past. Key business practices in marketing, advertising, supply-chain, manufacturing, human resource management, information technology and finance need to be strategically audited to ensure that brand reputation and shareholder value is future-proofed against such rampant bad behaviour by corporates, their compliant financial auditors and the professional accounting bodies given the legislative responsibility of training such auditors.

Further, it is important for government legislation to significantly increase the cost of bad behaviour. Even though the fines and penalties listed by Mr Sims appear large, they are often easily absorbed by the sheer volume of revenue generated by such unethical actions. In other words, companies assess the profitability of law breaking by weighing the benefit to be gained against the cost of being caught, multiplied by the probability of being caught. Mr. Sims said in his speech that “the penalties for misconduct, given the likelihood of detection, are comparatively weak”.

Many firms invest heavily in their brand reputation to signal that they can be trusted. The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against behaviours that significantly diminish brand reputation.

Mr Sims is recommending to the Australian government that once bad behaviour is exposed, penalties and fines should be 10 to 20 times higher than they are today. Alongside such hefty fines, a statutory strategic audit, alongside strong whistle-blower protection, will increase the chance of bad behaviour being exposed and fined, and their executives sent to jail.

As I said in my last CEO Message, no company should be ‘Too Big to Jail’.

– Professor Janek Ratnatunga, CMA, CGBA

  CEO, ICMA Australia

About the Author

Professor Janek Ratnatunga is the CEO of Institute of Certified Management Accountants, Australia. He has held senior appointments at the University of South Australia, Monash University, University of Melbourne, and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked as a chartered accountant with KPMG. He has also been a consultant to many large Australian and international companies and to the World Bank. Prof Janek can be contacted on janek[at]


The opinions in this article reflect those of the author and not necessarily those of the organisation or its executive.

1 Ross Gittins (2018), “Businesses Behaving Badly”. The Age, Business, July 18, page 18.

2 Madeline Farber (2016), “Ernst & Young Was Just Fined $9.3 Million for Inappropriate Client Relationships’, Fortune, September 20, 2016.

About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.
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