Founder: Turnaround Talk
Since 2015, South Africa has been rocked by two major accounting scandals.
Steinhoff were dragged over the coals for their inability to supply the JSE with updated financial statements. Upon investigation, it was discovered that the company was actually involved in a much deeper scandal where the company’s financial reporting was severely questioned. This resulted in the company’s former CEO – Markus Jooste – facing a major fine and being barred by the JSE from being a Director of a listed company for 20 years. Steinhoff proved to be one of the biggest accounting scandals in South Africa’s history.
This was quickly followed by an accounting scandal that had a similar impact on its company. One of the root causes of Tongaat Huletts financial distress was scandal involving the company’s former executives where they were accused of inflating profits.
This highlights the fact that South Africa is facing some major challenges when it comes to accounting practices and the regulation that enforces it. I recently read an article by News24 which points out that the Annual reports of the country’s biggest companies are clear as mud.
Unreadable or difficult to read
The article points out that JSE board chairs’ statements in Top 40 companies’ annual reports are either unreadable or difficult to read, according to a new study.
Long words and sentences, technical language and the use of the passive voice were some of the problems identified by a team from the school of accounting, economics and finance at the University of KwaZulu-Natal.
The academics obtained the 2021 annual reports of the JSE Top 40 companies but omitted six financial institutions from their analysis because they report differently from companies in other sectors.
Maybe the next accounting scandal is just around the corner?
Verbosity is a problem in accounting
The article points out that the chairs’ statements were evaluated using the Gunning Fog Index and the Flesch Reading Ease Index, which look at syllables per word and words per sentence to measure the complexity of text. They also indicate how much formal education is needed for a reader of average intelligence to understand a piece of writing.
Of the 34 chairs’ statements analysed, 21 were difficult to read on the Fog Index and 13 unreadable. The split using the Flesch Index was 27 and 7.
The article adds that the intention may be to disguise poor performance, the UKZN team said, pointing out that research in 2020 found that as the performance of a listed company declines, the length of all its reports increases.
The author of that paper, University of Cape Town master of commerce student Shreeya Jugnandan, said this was an indication that companies use “impression management” techniques to confound readers.
It is unfortunate that chairs’ comments in annual reports are not governed by laws or regulations, and that they are unaudited, say Mankayi and colleagues. Accounting standards need to improve.
Picture by Steve Buissinne via Pixabay
Calls for more accounting governance
They recommend the adoption of rules similar to those introduced by the SEC in 1998 to improve the readability of documents that disclose company information.
“These rules govern the content and writing style to ensure disclosure narratives are readable to the ordinary reader,” they say.
The article points out that the Plain English Handbook adapted for SEC purposes recommends avoiding long sentences, using the active voice rather than passive sentences, using everyday language, presenting information in tables and bullet points whenever possible, and avoiding technical business language and double negatives.
Other things to avoid are legalistic, overly complex presentations, vague boilerplate language, excerpts from legal documents and repetition. None of this should appear in accounting language.
“Plain English means creating a document that is visually inviting, logically organised and understandable on the first reading,” the handbook says.
“You create a plain English document by knowing your readers and presenting information [they] need in an order they’ll understand.”
South Africa’s response
Is this not part of the problem that got us into trouble with the Financial Action Task Force in the first place? The easiest way to hide illicit practices is to bury it under reams of useless information so that it becomes difficult for authorities to make the woods for the trees.
The way that South Africa responds to this will be a key indicator about whether we are serious about an early exit from our current greylisting. We are apparently looking at Mauritius and the interventions they made to get them off the grey list fairly quickly. I don’t think it even needs to go to that extent. The Zondo Commission of Enquiry was a statement of intent against corruption, albeit an expensive one from a taxpayers perspective.
Picture by Tumisu via Pixabay
There are mounting calls from industry for increased regulation; if we have the Consumer Protection Act – which protects consumers from the use of vague language – why can we not develop an act that compels companies to do the same?
The other option is to go after companies that wantonly engage in dubious accounting practices with the full extent of the law and then throw the book at them making an example that we will not stand for this.
South Africa cannot afford another Steinhoff. However, if the News24 article is anything to go buy, will it be a case of sooner rather than later?
