MINISTER NEEDS TO ARM HIMSELF WITH A NERDY TOOL

This article first appeared in the Business Times section of The Sunday Times on 10 January 2016

A fascination I developed in my early days as a trainee auditor was the opportunity to finally see, in real life, all that I had spent years studying in textbooks at university.

The nerd in me developed a liking for auditing concepts and was most intrigued by the responsibility of auditors to exercise professional scepticism in carrying out their duties.

According to the US’s Public Accounting Oversight Board, the concept of “professional scepticism” refers to an attitude that includes a questioning mind and a critical assessment of evidence.

This responsibility includes obtaining sufficient appropriate evidence to determine whether there are any material misstatements, rather than merely looking for evidence that supports management ’s assertions. Of course, this is also the reason many people viewed my colleagues and I as the company ’s police brigade. To an extent, they were right.

Nonetheless, this proved auditing was no “tick and bash” exercise but a profession where a tremendous amount of judgment is required in order to formulate that ultimate opinion. This is where independent evidence is critical.

In fact, according to the South African Institute of Chartered Accountants’ journal, Accountancy SA, “calls by oversight bodies for increased auditor scepticism followed in the wake of a number of high-profile corporate failures, including the role that accounting practices played in the 2008 financial crisis”.

Unlike many auditing concepts, professional scepticism is not a technical procedure. You cannot prepare a work paper documenting that you’ve carried out your professional scepticism. It’s a frame of mind, constantly exercising a critical questioning mind. It’s watchful diligence.

I was reminded of my rather nerdy auditing concept as I considered what trait our new (but old) Finance Minister Pravin Gordhan would need as he takes on the mammoth task of managing low economic growth, rising inflation, rising interest rates and a rising fiscal deficit.

Gordhan will need bucket loads of professional scepticism.

He will have to constantly obtain sufficient appropriate evidence to determine whether there are any material misstatements, rather than merely looking for evidence that supports other people’s assertions.

Late last year, rating agencies downgraded South Africa’s credit status to one notch above “junk”, with little hope that the country will pick itself up out of slow economic growth.

Fitch downgraded the rating by one notch to BBB-, the lowest investment grade, putting it in line with the ratings of Standard & Poor’s and Moody’s. S&P went further and dropped its outlook for the country to “negative ”.

If we do slump into “junk” it means we can say goodbye to billions in foreign investment, as many asset managers of hedge funds, pension funds and the like would be unable to invest in South Africa and its companies.

These are the assertions.

What evidence is there that South Africa is likely to slump into non-investment grade? What factors determine the credit rating of a country? Are these factors so irretrievably in place that a downgrade to non-investment grade is a likelihood? What about the fiscal discipline South Africa has displayed over the years? Does that count for nothing?

Gordhan should not look for evidence that supports the assertions of these rating agencies. Instead, he should seek to demonstrate that there is empirical evidence that proves South Africa is a compelling investment destination and a solid investment destination in the long term, notwithstanding its recent slump. Nothing fundamental has shifted in South Africa’s fiscal discipline. There is no indication of any imminent shift.

Let’s take this mindset to the rating agencies.