SOX and the Transition from Apartheid to Democracy: South African Auditing Developments through the Lens of Modernity Theory

• Author: Warren Maroun,Milton Segal,David Coldwell
• Date: 01 November 2014
• DOI: http://doi.org/10.1111/ijau.12025
• Published date: 01 November 2014

SOX and the Transition from Apartheid to Democracy: South African Auditing

Developments through the Lens of Modernity Theory

Warren Maroun, David Coldwell and Milton Segal

University of the Witwatersrand,South Africa

This paperuses South Africa as an example to explore how crises of trust – stemming from the legacy of Apartheid,

local and international corporate failures and the changing regulatory framework in the United States – have

contributed to shaping aspects of South African corporate governance. Using Giddens’ theory of modernity, the

research considers how the country’s racist past and recent corporate scandals have converged to shape South

Africa’s corporate governance landscape. In turn, mechanisms of modernity explain why South Africa has

developed a highly sophisticated system of corporate governance.

Key words: Auditing regulation, Apartheid, corporate governance, crises of trust, modernity, SOX, South Africa

1. INTRODUCTION1

For decades, external audit has been a primary means of

ensuring confidence of non-experts in financial reporting

(Watts & Zimmerman, 1983; Power, 1994). As a rational

technical process, grounded in prudential professional

judgement, the audit opinion has served as a powerful

symbolic token in which stakeholders automatically place

their trust (Pentland, 2000; Unerman & O’Dwyer, 2004).

To, ‘generate trust in financial statements’, however,

‘audit practice must generate trust in itself’ (Power, 2003,

p. 380). Self-regulatory measures – including the

codification of audit practice, systems of peer review and

development of codes of professional conduct – have,

historically, played an important role in this regard

(Humphrey & Moizer, 1990; MacLullich, 2003; Wyatt,

2004). A host of corporate failures have, however,

precipitated a diminution of confidence in the

profession’s largely self-regulatory franchise (Malsch &

Gendron, 2011).

In the context of a global economy, where information

exchange is instantaneous, a crisis of trust in one

jurisdiction, and at one point in time, has significant

ripple effects leading to a reflexive withdrawal of

confidence in the expert system (Unerman & O’Dwyer,

2004; Bazerman & Moore, 2011). Traditional models of

self-regulation are, therefore, unable to secure the

continued credibility of the audit process, leading to the

use of ever more sophisticated systems for monitoring

audit practice. The promulgation of the Sarbanes-Oxley

Act (SOX, 2002) – and resulting formation of the Public

Company and Accounting Oversight Board (PCAOB) – is

an example which commonly springs to mind (see

Canada, Kuhn & Sutton, 2008; Carcello, Hollingsworth &

Mastrolia, 2011; Church & Shefchik, 2011). Renewed

interest in the structure of the European auditmarket and

nature of professionalservices provided to clients, on the

back of the ongoing financial crisis, is another (Sikka,

2009; European Commission, 2010; Humphrey et al.,

2011).

While the institutionalisation of external regulation

of the audit profession in the United States and Europe

has been studied in detail, we know relatively little

about how crises of trust have impacted regulatory

developments in developing economies (Brennan &

Solomon, 2008; Humphrey et al., 2011; Malsch &

Gendron, 2011). As explained by Cooper and Robson

(2006), most of the prior auditing research is specific to

the Anglo-American context. This research addresses this

deficiency by exploring the change in certain corporate

governance systems, including select audit-specific

regulations, in South Africa. The theory of modernity as

developed by Giddens is used as a framework to help

understand how SouthAfrica’s transition from Apartheid

to democracy, local and international audit failures,

and a proliferation of external regulation in leading

international economies, have resulted in the gradual

erosion of South African auditors’ traditional

self-regulatory franchise. These events have also

contributed to South Africa being regarded as a world

leader in terms of the quality of its auditing and other

governance standards (Independent Regulatory Board

for Auditors (IRBA), 2010b, 2012b; Solomon, 2010;

Solomon & Maroun, 2012).

At this point it should be noted that the research

concentrates specifically on select audit-focused statutory

provisions in South Africa and how these might have

been influenced by SOX and the country’s transition from

Apartheid to democracy.2The remainder of this paper is

organised as follows: Section 2 provides a brief overview

of modernity theory and its relevance for explaining the

shift from arm’s-length to external regulation of the audit

profession. Section 3 discusses how South Africa’s

political past contributed to corporate governance

reform. This is followed by Section 4 which highlights

how certain audit-specific regulations in South Africa

have been informed heavily by comparable provisions in

SOX. The research focuses specifically on SOX because it

is possibly one of the most significant and well-known

examples of external regulation of corporate governance

systems, including external audits, introduced by the

world’s largest economy, the United States (Canada et al.,

2008). (As discussed in Sections 3 and 4, it has also been

specifically referred to by the South African legislature

when developing local audit-specific prescriptions.)

Section 5 concludes and identifies areas for additional

research.

Correspondence to: Warren Maroun,University of the Witwatersrand, 1

Jan Smuts Avenue, Brammfontein, Johannesburg 2002, South Africa.

Email: warren.maroun@wits.ac.za

International Journal of Auditing doi:10.1111/ijau.12025

Int. J. Audit. 18: 206–212 (2014)

© 2014 John Wiley & Sons Ltd ISSN 1090-6738