Unusual or suspicious transactions: What are the reporting obligations of Registered Auditors?

Section 45 of APA is one of many pieces of legislation aimed at combating fraud and corruption perpetuated by companies through their management (and sometimes with the assistance of its auditors), which often goes undetected in the company’s annual financial statements. These pieces of legislation place an obligation on all persons who hold positions of authority such as registered auditors, or accountable institutions such as banks, who know or suspect, or ought reasonably to have known or suspected, that any fraudulent acts (such as unusual or suspicious transactions) have been committed by management to report them to the relevant authorities. Such other pieces of legislation include inter alia the:

• Section 4 of the Prevention of Organised Crime Act, 1998 (POCA) , which provides “for the prohibition of money laundering and for an obligation to report certain information”;
• Section 29 of the Financial Intelligence Centre Act, 2001 (FICA), which imposes “certain duties on institutions and other persons who might be used for money laundering purposes and the financing of terrorist and related activities”; and
• Section 34 of the Prevention and Combating of Corrupt Activities Act, 2004 (PRECCA), which places “a duty on certain persons holding a position of authority to report certain corrupt transactions.”

A reportable irregularity is defined in s1 of APA as an unlawful act or omission perpetuated by any person responsible for the management of an entity. It must be material. Irregularities that may cause or have caused financial loss or that amount to a breach of fiduciary duties are reportable only if they are regarded as material. If the irregularity amounts to fraud or theft, it must be reported even if no financial loss was or could have been suffered by any party. The report must furnish the IRBA with particulars of the irregularity in question and be accompanied by any other information that the auditor may consider appropriate.

In the recent matter of IRBA v Jacques Wessels prosecuted by CDH, the disciplinary committee presiding over the matter found the Respondent guilty of numerous transgressions of the Auditing Standards on the grounds inter alia that:

1. he had failed to apply his mind or to document any considerations regarding unusual transactions relating to revenue and the loan account of the audit client;
2. he reflected a lack of understanding and compliance with the laws and regulations governing money laundering and terrorist financing, namely s45 of the APA, POCA, FICA and PRECCA, amongst others; and
3. by attempting to cover up for misconduct which the IRBA sought to investigate, he was dishonest when called upon to account for his conduct in correspondence with the IRBA.

On 1 March 2019, the disciplinary committee ordered that the registration of the Respondent as a registered auditor be cancelled permanently and that his name be removed from the IRBA register of auditors.

The Commissions of Inquiry currently underway come at a time when fraud and corruption eat at the very fabric of the South African economy. It is against this background that the findings of the disciplinary committee serve as a reminder to all persons holding positions of authority, including accountable institutions, of the reporting obligations imposed on them by the legislation referred to in this article, amongst others. A failure to report such unlawful activities is a serious offence which may attract grave penalties by the relevant authorities.