By: Siyanda Pali
Even before the plane had taken flight, the pilots engaged in a series of erroneous actions. The initial error, caused by the Captain, was to look at the flight plan and misconstrue the magnetic heading needed to arrive at Belem as 0270 degrees. This, however, couldn't have been further from the truth. Due to the airline's procedure of an implied decimal point to the right of last digit, the correct magnetic heading was actually 027.0 degrees, or simply put, 27.0 degrees.
It is highly probable that because this was the Captain's 7th flight for the day, an element of fatigue or carelessness had led to him neglecting this seemingly menial but pertinent task. The Captain entered 270 degrees into his HSI, due west, followed by the distance to Belem, 187nm, into his flight computer.
The second in a series of blunders was carried out by the First Officer. It is standard procedure for the First Officer to read the magnetic heading directly from the flight plan. Instead, upon returning from inspecting the exterior of the aircraft, he simply copied the magnetic heading of 270 degrees from the Captain's HSI into his own.
Shortly after take-off, the aircraft made a large inevitable swivel to the left, 270 degrees, towards the Amazon jungle instead of Belem. Despite this, for some reason, the pilots were unaware that they were headed into no-man's land.
Image: Imgur.com
Approaching what the pilots perceived to be Belem, the pilots make an attempt to contact the Belem tower, to no avail, because of a poor VHF signal. The aircraft was out of range. They did manage, however, to send communication via another aircraft. After attaining confirmation that they could begin descent for landing, the crew were puzzled about the fact that no familiar landmarks were in sight. The combination of a sunset and haze would have drastically decreased visibility. Unfortunately, because Belem did not have radar technology, the controller had no idea the aircraft was, in actual fact, several hundred kilometres away, over the Amazon jungle.
The aircraft's flight computer began alerting the crew that their destination of 187nm at 270 degrees magnetic had eluded them. The pilots' endeavour to correct the situation included a 180 degree turn, a 121.9 meter descent, slowing to 200 knots and visually attempting to locate Belem. They sincerely believed they were headed in the right direction. However, despite this, they did not make use of any navigational aids. Instead, they followed a river which they had inaccurately pinpointed for over 30 minutes, another blunder.
At this point, there is a very high probability that the crew is operating under a confirmation bias, falsely accepting any new information to confirm their hypothesis. The First Officer then sees the incorrect magnetic heading. However, by tuning into Goiania (675 nm away) and Barra do Herons beacons instead of what he believed to be the Maraba and Carajas beacons, and because of a fixation to accurately locate their position, failed to see the incorrect Morse code identifiers, committing a 5th and 6th error. The tragic result of the above was a crash landing which caused 13 fatalities and 54 survivors.
The aircraft was forced to land after running out of fuel, 959 km's off course. The aircraft was mechanically stable. The main or initial error, caused by the Captain, was to incorrectly enter a heading into the aircraft's flight computer. One misplaced decimal point was the start of a series of errors on the day. Although the pilots had erred initially, it was the latent error which enabled the initial error to occur. The counter-intuitive design of Varig's flight plan had the potential to cause confusion for pilots. The First Officer's failure to cross-check further complicated matters. His disregard of standard procedures unfortunately contributed in the outcome on the day.
Following the accident, Varig altered its flight plan layout, correcting this latent error. Furthermore, Varig equipped their aircraft with Omega Navigation Systems.
Varig flight 254 is an example of what can go wrong in an industry or profession in which disregard for high quality professional standards or ethics is ignored. This is the case today in the Auditing profession. There are numerous cases globally in which signed off audits have left much to be desired upon completion. One of the most sensational of these was work done by KPMG for Tennessee-based oil and gas company Miller Resources in 2011. KPMG was hired as an External Auditor, and gave the company a positive, 'unqualified' report. However, an investigation into the companies assets by the Securities and Exchange Commission revealed that their Alaskan oil wells bought for less than $5 million US, were valued at $480 million US, a more than 100 fold over-valuation. The SEC fined KPMG $6.2 million US in 2017 for what it deemed as a fraudulent estimate.
In 2016, Deloitte's Audit unit received a 2 year ban by the Saudi Arabian regulator from doing any audit work in Saudi Arabia for authorised persons or any securities issuer. The ban was handed to the firm in relation to work done for a former client, Mohammad Al Mojil Group (MMG), between 2008 and 2011. Three of MMG's executives were given prison sentences ranging between 3 to 5 years each. The executives were also given a decade-long ban from working in any Saudi Arabian Stock Exchange-listed company. Deloitte was also slapped with an approximate $73 000 US fine, this due to an inaccurate impression regarding the value of MMG upon its IPO in 2008.
In 2017, the Ukrainian Central Bank banned the local unit of PwC from auditing banks. “The audit report issued by PricewaterhouseCoopers Audit LLC failed to highlight the credit risk exposure faced by PrivatBank, which led to the bank being declared insolvent and nationalised, with substantial recapitalisation costs borne by the state,” said a Central Bank statement. This meant that PwC was only eligible to apply for the right to audit Ukrainian banks after 3 years.
In South Africa, the World Economic Forum had ranked the nation in 1st place for 7 years in a row for it's Financial Reporting and Regulation of its bourse, the Johannesburg Stock Exchange. However, the Auditing profession over the last few years has experienced a massive loss of confidence due to some notable accounting scandals which have rocked the country, which saw it slide from 1st place in the world to 30th in the rankings. A September 2017 report by KPMG revealed that they had found the work they had done at SARS as well as Gupta-owned companies unsatisfactory, playing a role in enabling the massive state capture of certain institutions. KPMG continued to haemorrhage clients. The likes of African Rainbow, Sygnia, Interwaste, Sasfin as well as most notably, the Auditor General of South Africa ended their relationship with the auditor. Following sub-par work which KPMG had done on VBS Mutual Bank, Board Chairman Professor Wiseman Nkuhlu has stated that there would be staff background checks every two years, as well as the review of work done over the past 18 months by the firm, in a bid to restore confidence. Approaching what the pilots perceived to be Belem, the pilots make an attempt to contact the Belem tower, to no avail, because of a poor VHF signal. The aircraft was out of range. They did manage, however, to send communication via another aircraft. After attaining confirmation that they could begin descent for landing, the crew were puzzled about the fact that no familiar landmarks were in sight. The combination of a sunset and haze would have drastically decreased visibility. Unfortunately, because Belem did not have radar technology, the controller had no idea the aircraft was, in actual fact, several hundred kilometres away, over the Amazon jungle.
The aircraft's flight computer began alerting the crew that their destination of 187nm at 270 degrees magnetic had eluded them. The pilots' endeavour to correct the situation included a 180 degree turn, a 121.9 meter descent, slowing to 200 knots and visually attempting to locate Belem. They sincerely believed they were headed in the right direction. However, despite this, they did not make use of any navigational aids. Instead, they followed a river which they had inaccurately pinpointed for over 30 minutes, another blunder.
At this point, there is a very high probability that the crew is operating under a confirmation bias, falsely accepting any new information to confirm their hypothesis. The First Officer then sees the incorrect magnetic heading. However, by tuning into Goiania (675 nm away) and Barra do Herons beacons instead of what he believed to be the Maraba and Carajas beacons, and because of a fixation to accurately locate their position, failed to see the incorrect Morse code identifiers, committing a 5th and 6th error. The tragic result of the above was a crash landing which caused 13 fatalities and 54 survivors.
The aircraft was forced to land after running out of fuel, 959 km's off course. The aircraft was mechanically stable. The main or initial error, caused by the Captain, was to incorrectly enter a heading into the aircraft's flight computer. One misplaced decimal point was the start of a series of errors on the day. Although the pilots had erred initially, it was the latent error which enabled the initial error to occur. The counter-intuitive design of Varig's flight plan had the potential to cause confusion for pilots. The First Officer's failure to cross-check further complicated matters. His disregard of standard procedures unfortunately contributed in the outcome on the day.
Following the accident, Varig altered its flight plan layout, correcting this latent error. Furthermore, Varig equipped their aircraft with Omega Navigation Systems.
Varig flight 254 is an example of what can go wrong in an industry or profession in which disregard for high quality professional standards or ethics is ignored. This is the case today in the Auditing profession. There are numerous cases globally in which signed off audits have left much to be desired upon completion. One of the most sensational of these was work done by KPMG for Tennessee-based oil and gas company Miller Resources in 2011. KPMG was hired as an External Auditor, and gave the company a positive, 'unqualified' report. However, an investigation into the companies assets by the Securities and Exchange Commission revealed that their Alaskan oil wells bought for less than $5 million US, were valued at $480 million US, a more than 100 fold over-valuation. The SEC fined KPMG $6.2 million US in 2017 for what it deemed as a fraudulent estimate.
In 2016, Deloitte's Audit unit received a 2 year ban by the Saudi Arabian regulator from doing any audit work in Saudi Arabia for authorised persons or any securities issuer. The ban was handed to the firm in relation to work done for a former client, Mohammad Al Mojil Group (MMG), between 2008 and 2011. Three of MMG's executives were given prison sentences ranging between 3 to 5 years each. The executives were also given a decade-long ban from working in any Saudi Arabian Stock Exchange-listed company. Deloitte was also slapped with an approximate $73 000 US fine, this due to an inaccurate impression regarding the value of MMG upon its IPO in 2008.
In 2017, the Ukrainian Central Bank banned the local unit of PwC from auditing banks. “The audit report issued by PricewaterhouseCoopers Audit LLC failed to highlight the credit risk exposure faced by PrivatBank, which led to the bank being declared insolvent and nationalised, with substantial recapitalisation costs borne by the state,” said a Central Bank statement. This meant that PwC was only eligible to apply for the right to audit Ukrainian banks after 3 years.
In 2017, the Independent Regulatory Board of Auditors (IRBA) produced a report entitled "Strengthening auditor independence to enhance public investor protection through mandatory audit firm rotation (MAFR)." Mandatory Audit firm rotation is scheduled to start in South Africa for financial years commencing on or after 1 April 2023. As cited in Minister Nhlanhla Nene's Budget Speech in 2014, the Office of the Accountant General would put plans to solidify the regulatory environment and resulted in the broadening of the IRBA mandate of it strategic pillars: Being a comprehensive regulator, Independence, Leadership in Africa and Transformation.
Audit failures such as those of Enron in the United States of America as well as those in South Africa have magnified the importance of the independence of auditors and regulators. One may ask, however, what the history and cost of corporate failures in South Africa is? The IRBA reveals that in 1991, Masterbond, audited by EY, lost R600m, with mainly pensioners being affected. In 2001, Saambou, audited by PwC/EY, lost R4 billion. Saambou was bought out by African Bank. In 2005/06, RandGold, audited by PwC, was embroiled in what was a colossal accounting and fraud scandal. In 2007, Fidentia, audited by Maddock Inc, lost R500m, resulting in the collapse of the Living Hands Trust, which supported 47000 widows and orphans. Most recently, African Bank, audited by Deloitte, had R7 billion of market capitalisation disappear, costing the PIC R4 billion in one day. Steinhoff International Holdings NV, in 2017, was also embroiled in a fraud scandal of galactic proportions which wiped out approximately R194 billion of market capitalisation in a matter of days. Deloittle, however, did not ratify their financial results.
One of the issues raised in fascinating research done by the IRBA is the tenure of some auditors with their clients in South Africa. The Distell Group Limited has been audited by PwC for 71 years. Tongaat Hullet Limited has been audited by Deloitte for 78 years. Woolworths has had EY audit its books for 84 years, AECI has been audited by KPMG for 91 years. Naspers has been audited by PwC for 101 years, with audit fees charged for 2015 at R135 million. Deloitte has had the longest tenure with a client, 114 years, with Murray and Roberts. With such long tenures enjoyed by firms, is it likely that auditor independence is still being exercised? Are there no biases which eventually impact the quality of work being done?
The IRBA's research also found that in their review of Audit Firm Inspections in 2015, significant deficiencies in 68% of firms inspected were observed, raising question marks about the independence of auditors. The basis for the inspections was in terms of Section 47 of the Auditing Profession Act. It also notes," While a variety of deficiencies were identified, one of the root causes of these findings was the failure to maintain independence as an underlying principle for high audit quality".
IRBA
As is evident from data above, IRBA CEO Bernard Agulhas states in The Accountant (September 2017) that, "What is clear is that the shareholders are beginning to make their voice heard at AGMs regarding the necessity for firm rotation to end excessively long relationships. Where audit committees may feel a 20-year, 50-year or longer relationship might not impair auditor independence, shareholders are saying otherwise.”
The greatest opposition for reappointment of auditors came from Lonmin, indicating a 40.3% increase from the previous 'No' vote in their last AGM. Agulhas further notes, "The most recent annual general meetings to be subject to this increased shareholder opposition were Telkom and PPC Ltd, which reflected 23% and 14% increases in the 'No' vote. While such an increase may seem insignificant in some instances, it indicates to us that even minority shareholders are finding their voice,"
The IRBA's research reveals that in terms of market concentration, more than 90% of JSE-listed companies have audits which were signed off by a member of the Big Four. PwC, KPMG, EY and Deloitte made up 96% market share, charging JSE-listed companies R3.6 billion in audit fees in 2015. Other firms totalled 4% market share, earning R226 million out of a possible R3.8 billion in audit fees for the 2015 year.
With regards to transformation, the IRBA succinctly states," Transformation must move beyond numbers and must move to truly empower black accountants and black-owned audit firms, which includes providing equal opportunities to access the auditing market. The harsh reality is that out of the 4283 registered auditors in South Africa (2015), 74.8% are white and 10.5% are black". It further states that the focus should not only be about increasing the number of black trainee accountants, but should also give black accountants and auditors long-term prospects in the profession equivalent to those of their counterparts. This, it adds, requires a cultural shift and a more inclusive approach which will provide black accountants with a positive experience at the firms and will result in higher retention. As one of the parting shots in this section, it indents, "The IRBA has conducted research into the firm experience of trainees and managers which suggests that the opportunity and access is not equitable for black auditors. Also, as long as there is no transformation amongst the governance structures which appoint auditors, the status quo will remain."
The auditing profession and industry is one of great importance in any country. Accurate financial reporting allows not only national, but also international investors to make informed decisions about companies which one enters into a transaction with. South African institutions, in tandem with the Independent Regulatory Board of Auditors, need to continue in their efforts to ensure that the industry is one in which fairness and high quality audits are realised, one which is inclusive and inspires confidence, not only amongst third parties, but also for key stakeholders such as market participants and professionals.
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