National Treasury made a submission about its concerns with the hope it would prove useful in the Committee’s deliberations on the Companies Amendment Bill. It noted the Companies Act was not a Money Bill but it did have tax implications. The forced conversion of par value shares to non-par value would force firms to pay taxes. It thus proposed a change to Section 35(2) to ensure that the undesirable tax consequences would be effectively dealt with. It also discussed the conflict of laws provision in Section 5(4) of the Act, the conflict between Section 136(2) of the Act and the National Payment System Act, the need for clearer wording in the new Section 30(2A) exemption from audit and review requirements of certain private companies, and the potential negative impact of Section 133(1) of the Companies Act upon the rights of regulators to conduct regulatory proceedings once business rescue proceedings commenced.
The SARS submission noted pressure of time had meant that a number of matters could not be taken up in the Bill despite constructive engagement with DTI. SARS supported Section 30(2)(b)(ii)(bb) but the exemption in terms of the proposed Section 30(2A) should be restricted to the requirement of Section30(3)(d) that the AFS must be presented to the first shareholders’ meeting after approval by the board. On the matter of reportable irregularities, SARS requested that the reporting mechanism be brought back under the umbrella of IRBA in the case of independent reviews. SARS suggested that the exception of shareholders approving a person as director convicted of fraud (within the five-year ban) should be removed or a monetary cap on a company should be introduced so that only small companies would be allowed to do this. On the matter of the forced conversion of par value shares, SARS agreed with Treasury that the compulsory conversion should be removed. Alternatively item 6(3) should be amended to provide that such a conversion should not affect the rights of the shareholders immediately prior to conversion. In business rescue proceedings, SARS supported Treasury’s proposal that business rescue not prevent regulators, including SARS, from regulatory action. Regulatory bodies should be exempted from the moratorium. A business rescue practitioner could also demand records from anybody, this could also mean law enforcement agencies. This was an unintended consequence and should be corrected. Section 142(4) should be amended to exclude records held in terms of a search warrant or other statutory authority. SARS last point dealt with appraisal rights. Section 164(19) excluded payments of appraisal rights of aggrieved shareholders from the insolvency and liquidity test. Section 164(17) should be amended so that a company must approach a court for direction if it foresees that a shareholder exercising appraisal rights would lead to the solvency and liquidity test being failed.
The Financial Services Board proposed that the financial services laws should be included under clause 5 of the Amendment Bill so that they were exempt from the Companies Act and could override it. Financial sector legislation should prevail over the Companies Act where there was a conflict. The FSB needed to act swiftly when bringing in a curator in a specific situation. Clause 133 provided for a moratorium on legal proceedings once a company underwent business rescue, the exclusions in this clause did not provide the Financial Service Board with assistance when it needed to take swift action. Likewise, Section 116 provided that a notice of amalgamation or merger must include a confirmation that transaction has been approved by the Minister of Finance under the Banks Act.
The FSB, in certain instances, must also approve an amalgamation or merger to ensure a sound financial services industry and the protection consumers. Rationale for affording Banks Act preferential treatment, but refusing to allow same for other financial services sector legislation not understood as the risks posed are the same. The definition of “securities” was also flagged.
The Independent Regulatory Board for Auditors presented to the Committee that it was important to have strong regulators in order to protect the economy, investors and the general public. The Independent Regulatory Board for Auditors was created to regulate assurance services and to set the standards for assurance services. Section 37 of the base Act should be expended so that there was a definition that defined the necessary competences that were needed for carrying out the assurance. The Association of Chartered Certified Accountants (ACCA) presented to the Committee that it was important to remember that the Companies Act affected big and small companies. There were different kinds of companies under the Companies Act and one could not just say that stringent measures had to be introduced for companies in general when they were so diverse in nature. The old Close Corporations should not have to follow a particular accounting standard. The big companies should be the ones that follow the highest order of governance. The definition of accounting records should be amended so as to follow the common law meaning of assets, creditors and liabilities. The definition of auditing was supported by The Association of Chartered Certified Accountants. The clarity provided under clause 34 and 32 was welcome. There had to be more clarity on the issue of business rescue.
The Independent Regulatory Board for Auditors disagreed with the definition of “audit” and the provisions in the Regulations about independent reviewers.
The Association of Chartered Certified Accountants and the Southern African Institute for Business Accountants supported the exclusion of review from the definition of ‘audit’ as this would alleviate costs for smaller businesses. However, Pricewaterhouse Coopers said that review should be given the same status as an audit in the Amendment Bill. The exclusion of review from the definition of ‘audit’ meant that the Independent Regulatory Board for Auditors was excluded and there was no reference to an independent body that governed reviews. Companies should not be required to consider the assets of its holding company or its subsidiaries when determining whether solvency and liquidity tests were met. If it was the intention of the legislature to restrict the audit and review exemptions for private companies, then this had to be made clearer in the Bill.
The Committee often directed participants to refer to the Amendment Bill only and not to the Act which had been finalised during the Third Parliament. There were concerns about National Treasury and SARS making submissions at public hearings as this was unprecedented. The Committee asked questions about the conversion of shares from par value to non-par value, asked if various government bodies were ready for the implementation of the Companies Act, and requested SARS draft proposed amendments. A Member proposed that copies of records be made available to a business rescue practitioner of a company under investigation for criminal offences and SARS keep the originals. There were differing views from Members about convicted fraudsters prohibited from serving as directors. They also asked about qualifications for independent reviewers and how they should be appointed. The Committee will meet again in January.
National Treasury submission
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, said National Treasury had had extensive engagements with the Department of Trade and Industry (DTI) on the Bill. The Bill had far reaching implications in the financial sector. Various financial regulators such as the South African Revenue Service (SARS) had approached National Treasury with their concerns after the global financial crisis of 2008. The first issue was that in theory the Companies Act was not a Money Bill which could only be introduced by the Minister of Finance, however it had tax implications. For example the conversion of par value shares to non-par value would force firms to pay taxes. Financial institutions such as banks pose systemic risk, for example, when a bank goes under clients rush to withdraw their funds. To cure the problem a court would appoint a curator immediately. The big issue at all the G20 summits was the global Systemically Important Financial Institutions (SIFI). SIFIs posed a moral hazard which meant that there were unintended consequences where banks were taking more risks because at the end of the day governments could not allow banks to fail because this usually had a ripple effect. In order to regulate the financial sector, during the last Medium Term Budgetary Policy Statement (MTBPS) the Minister of Finance announced that South Africa would strengthen financial market and prudential regulations in line with international standards. National Treasury would also take a tougher stance where market conduct and consumer protection was concerned. National Treasury was currently reviewing all financial sector legislation and would release policy papers where the powers and functions of regulators would be strengthened. One of the big changes internationally was the coordination of financial regulators, this was the same in South Africa as some regulators reported to the Minister of Finance and others to the Minister of Trade and Industry. The Minister of Finance had announced the setting up of a council of regulators that would deal with the coordination process of regulators.
Mr Keith Engel, Chief Director: Legal Tax Design, continued with the submission and stated that the Companies Act sought to protect creditors through liquidity and solvency tests. What the Act tried to combat was that dividends which were going to undermine the value of the company so that creditors would be left with nothing were not going to be distributed. The Act protected against the distribution of dividends that would leave a company insolvent or leave it without the necessary cash flow. Most companies still had the par value concept which in essence had nothing to do with the real value or market value of shares. The intention behind the liquidity test in the Companies Act was to get rid of the par value test. However an extra rule was included in the Act which said that all par value shares should be eliminated. This would force companies to convert their shares within the prescribed five year period. This would be commercially irritating and meaningless because the liquidity test already protected creditors. The problem from a tax point of view was that once there was a conversion, one would have a capital gains disposal. Companies would be worried about the tax consequences of conversion as there could be gains or losses. The way that the Act was drafted seemed to suggest that there would be compensation for loss during the process of conversion from par value shares to non-par value. If the conversion process happened to be a tax event then in a year or two there would be lobbying from companies who would want some sort of tax relief as the conversion process would have been enforced upon them via the Companies Act. The non-par value shares could remain as they had no effect in the liquidity test. This issue should be left as it was and National Treasury strongly recommended that there should be no changes at all in this regard. The merger and acquisition rules were problematic in that they were trying to do too much. There were different types of mergers and acquisitions and the rules would make things easier if they were put together to take into consideration all scenarios.
Ms Jeanine Bednar-Giyose, Director of Fiscal and Intergovernmental Legislation, drew the Committee’s attention to the issue of certificated and uncertificated securities. The Companies Act provided for the right to hold certificated and uncertificated securities in both listed and unlisted companies. National Treasury had identified that there were strong reasons for shares to be in electronic form and not paper certificates where listed companies were concerned. The Act currently did not provide for this. Certain legislation could be amended to correct this situation such as the Financial Markets Bill which would be introduced next year. Another concern was the overlapping provisions of the Companies Act with financial sector legislation particularly legislation that provided for dedicated regulation of the financial institutions by the Financial Services Board (FSB) as well as the Registrar of Banks. A particular conflict that was highlighted by the South African Reserve Bank (SARB) was the conflict between the implementation of section 1(2) of the Companies Act and section 8 of the National Pay Systems Act. Wording should be included at the beginning of the new subsection 2A that was included in clause 19(d) of the Companies Amendment Bill to make it explicit that if the regulations issued in terms of section 30(7) of the Companies Act required a company to be audited or undergo an independent review, then the exemption for a company having a single shareholder who was a director for a company, would not apply. DTI was amenable to this suggestion from National Treasury and the necessary amendments would be developed.
DTI had been notified that Section 133(1) of the Companies Act would negatively impact upon the rights of regulators to conduct regulatory proceedings once business rescue proceedings commenced. DTI agreed that it would develop appropriate amendments to section 133(1) to address this issue. Section 133(1) was amended to make clear that a business rescue would not prevent regulators from initiating or continuing with regulatory actions in terms of their legislation. National Treasury proposed that the relevant regulatory body could be included with the definition of an ‘affected party’ in section 128 of the Companies Act.
Ms C September (ANC) said that it appeared Treasury was mooting for a number of Bills to be changed or amended, what would be the effect of this on the Amendment Bill? It was not normal for departments to be invited to appear before a Committee at public hearings, the Committee had a choice to reject their submission. The Committee could not be put in a situation where it had to choose between Treasury and DTI. The Committee should seek a legal opinion on this matter.
Mr J Smalle (DA) asked if Treasury was requesting the Committee to strengthen clause 133 in favour of regulators. Had Treasury compiled a feasibility study to ascertain the impact cost of the conversion of par value shares to non par value?
Ms C Kotsi (COPE) asked what was Treasury’s view on some of the submissions that requested that Section 30 should be done away with altogether.
Adv A Alberts (FF+) asked for clarity on the conversion of par value to non par value shares. Was Treasury in agreement with DTI on the stringent measures that would be introduced in the financial sector and were the two departments in agreement with the amendments that Treasury was considering in the Financial Markets Bill? Had any audits been conducted to ascertain which pieces of legislation overlapped with the Companies Act and to what degree?
Mr T Harris (DA) said that in a public hearing domain anybody could present and nobody had a special status, the Committee had to accept the views of all submissions and then decide whether it wanted to amend the legislation. The Committee had to consider the proposals from Treasury which made sense. What were the implications for the amendment Bill and Act regarding the non-coordination of the financial regulators? Had Treasury seen the draft Regulations and what was its view about them? What were the implications of mergers and acquisitions for purposes of this Bill? Several presenters had made the point that the business sector was not ready for this legislation, and some had said that the departments were not ready especially the Company and Intellectual Property Registration Office (CIPRO). What was Treasury’s response to that? Was it in line with international best practice that directors convicted of fraud could serve as directors again after a five year lapse period whereas in the old Companies Act you could no longer serve as a director?
The Chairperson noted that Treasury had said certain areas of the financial sector falling directly under it - for example the banking sector - would be reviewed at some stage. Was Treasury merely highlighting this or was it suggesting that something had to be done now?
Mr Momoniat replied that the matter of Treasury appearing before the Committee was up to the Committee to decide. It was important that the Committee should be made aware of all unknown issues. Often legislation cut across departments and parliamentary committees and it was important for the two departments to work together. Treasury and DTI were working closely together. There were about 15 pieces of legislation that affected financial institutions and would thus be affected by the Companies Act. The way that the Companies Act was currently drafted, if there was a conflict with the Banks Act, then the Banks Act would apply. If there was a conflict with the Insurance Act then that Act would apply and not the Companies Act. There was coordination that took place between the regulators the question was whether this was enough. Regulators also had to be more accountable to Parliament. The issue of regulators had been highlighted even more since the 2008 global financial meltdown. There would always be lobbyists that want more time and in South Africa there was a tendency to leave things till the last minute. The review of legislation was after the 2008 crisis and to accommodate Basel III. Most of the changes were to strengthen the powers of regulators so as to enable them to act quickly, boldly and without fear or favour. The review of legislation was an ongoing process. Treasury did not want a situation where an Act was enacted whilst bypassing another. On the issue of convicted directors, there was not an answer now but certainly the entry requirements for a directorship would be much tougher.
Mr Engel said that most of the comments at the public hearings including those of Treasury were on the base Act because they related to small unresolved technical issues. The conflict of laws with the Companies Act should not be an issue at all and that should be left to judicial interpretation. Treasury did not conduct an impact study on the issue of par value shares, this subject area was too technical. The five year transition period would not help; the issue was why should there be a conversion of par value shares. The liquidity test was enough to protect creditors. There would be tax implications involved with the conversion and the Amendment Bill or the base Act was not clear on what would the process be in this instance. In any case tax laws were Money Bills and only a Minister of Finance could introduce them. One could not have a situation where a non Money law Bill overrides the Minister’s power. There was confusion that par value equaled market value, this was not the case, and par value was something completely different. The issue of mergers and acquisitions was a general comment, at some point Treasury and DTI would have to sit down and discuss this as there had been a lack of coordination on this issue.
Ms Jeanine Bednar-Giyose added that Treasury had engaged with DTI in respect of the draft Regulations and would do the same in respect of the recently published ones. Treasury was not of the view that the Bill should be delayed in light of other future legislation that was in the pipeline. Once the Bill was passed, future legislation would be drafted in accordance with the contents of this Bill.
Mr B Radebe (ANC) said he had a serious problem with the comment made by Mr Engel that most of the comments at the public hearings including those of Treasury were on the base Act because they related to small unresolved technical issues. The Committee was not re-opening discussion on the Companies Act; the public hearings were on the Amendment Bill only. The current Committee was at a disadvantage when the base Act was discussed as all the members of the current Committee were not there.
Mr Harris repeated the question on whether the business sector and the departments especially CIPRO, were ready for this legislation.
The Chairperson said that CIPRO still fell under DTI and the question would have to be directed to them.
Ms September said that her view about a department making a submission at public hearings remained and the Committee had to consider this. Would the stringent measures apply to all the different types of companies that already existed?
Mr Momoniat replied that the issues raised were on the basis of an assessment on the impending consequences of the base Act. Treasury would not want a situation where these issues were not raised. There were no blanket provisions in the Act.
South African Revenue Service (SARS) submission
Mr Franz Tomasek, Group Executive: Legislative Research Development, said the first point that SARS wanted to make was on the verification of annual financial statements (AFS). If a South African company happened to be a subsidiary of a multinational company whose headquarters were in a jurisdiction that did not have stringent financial sector regulations, then for audit purposes such a subsidiary would be considered as a public company if the holding company was also considered as a public company. The audit would be according to South African standards and not those of the holding company in a foreign jurisdiction. SARS supported Section 30(2)(b)(ii)(bb) but on the basis that the exemption in terms of the proposed Section 30(2A) be restricted to the requirement of Section30(3)(d) that the AFS be presented to the first shareholders’ meeting after approval by the board.
The second issue was reportable irregularities. The proposed change of how an audit was defined in the Companies Act meant that the role of the Independent Regulatory Board of Auditors (IRBA) would fall away where it came to material irregularities. A material irregularity was where the person doing the auditing of a company comes across fraud of some sort in the company, a reporting mechanism automatically got created. If the company did not act, then that auditor had to report this to the relevant law enforcement authorities. If the concept of verification was removed from this scope then the whole mechanism of reporting irregularities fell away. SARS was of the opinion that the reporting mechanism should be brought back under the umbrella of IRBA or CIPRO in the case of independent reviews.
The third issue was that of persons allowed to act as directors in Section 69(12). The Companies Act allowed somebody who was convicted of fraud to become a director within the five year ban period provided that all the shareholders agreed. This was problematic because somebody who was a sole shareholder could be permitted to become a director even though they would were a convicted fraudster. In the tax world there were frequent encounters with individuals who started companies defrauded the state, disappeared and started the process all over again. Essentially even if SARS caught such an individual, this person could still become a director. SARS suggested that the exception of shareholders approving a directorship should be removed or a monetary cap on a company should be introduced so that it would only be the smallest companies that would be allowed to approve a directorship.
The fourth point was that of the conversion of par value shares. SARS agreed with Treasury that the compulsory conversion should be removed. Alternatively SARS suggested that item 6(3) be amended to provide that such a conversion should not affect the rights of the shareholders immediately prior to conversion.
The next two points dealt with business rescue proceedings and legal proceedings or enforcement action by regulators. From a tax perspective, SARS could not recover tax such as employees tax, UIF or VAT without the permission of the business rescue practitioner or court. SARS supported Treasury’s proposal that business rescue not prevent regulators, including SARS, from such regulatory action. Regulatory bodies should be exempted from the moratorium. Alternatively these taxes could be treated as trust monies. A business rescue practitioner could also demand books and records from anybody; this could also mean law enforcement agencies that would have books and records of the business for the purposes of an investigation. This was an unintended consequence and should be corrected. SARS suggested Section 142(4) be amended to exclude records held in terms of a search warrant or other statutory authority.
The last point dealt with appraisal rights. The Companies Act set up a mechanism where an aggrieved minority shareholder may exercise an appraisal right and be paid out by the company. Section 164(19) excluded such payments from the insolvency and liquidity test. Individuals could manipulate these payments in the sense of who would receive money and how they would receive it. The companies would also be able to balance the rights of the various stakeholders without any external intervention. SARS suggested that Section 164(17) be amended to provide that a company must approach a court for direction to ensure that the rights and obligations were all balanced correctly, if it foresees that a shareholder exercising appraisal rights would lead to the solvency and liquidity test being failed.
Mr Harris requested proposed amendments from SARS on the issues raised.
Adv Alberts asked what the monetary cap would be for these “small” companies that would be allowed to appoint a person convicted of fraud as a director if its shareholders approved. Copies of books and records should be made where both the business rescue practitioner and SARS needed them.
Mr Tomasek said that SARS would make the proposed amendments available to the Committee. Tax legislation provided for copies of books and records to be made available in the case of an investigation.
Mr Radebe said that where a court had convicted someone of fraud, there should not be additional punishment, in the sense that they would not be allowed to serve as a director.
The Chairperson felt that even if only small companies were to be allowed to have a person convicted of fraud serve as a director, the potential harm could be great. Could SARS comment on this? What was SARS concern in the Amendment about the retention of books and records by a business rescue practitioner?
Mr Tomasek replied that the five year lapsing period that prevented an individual convicted of fraud from becoming a director was currently overridden by the provision that shareholders that were in agreement could appoint an individual convicted of fraud within a five year period. SARS was trying to make the point that shareholders would not be the only persons in the company affected by this decision. Fraud in a smaller company could be very serious. The point however was that the ripple effect in a smaller company would not be so great. In a larger company, the number of creditors and employees would be much higher. SARS would have to engage with DTI to decide what would be a reasonable threshold and try and come up with a proper balance. In a criminal investigation, SARS could not break the chain of evidence by providing the business rescue practitioner with the books and records of a company under investigation. However the Companies Act prevented SARS from not providing the records to the business rescue practitioner.
Ms September asked for clarity on the discussion between SARS and the DTI.
Mr Smalle asked for further detail on the issue of seized documents and books which SARS would be obliged to hand over if requested by a business rescue practitioner.
Mr N Gcwabaza (ANC) asked how the Act would apply where a person was convicted of fraud but received a suspended sentence.
Mr Tomasek replied that SARS and DTI would have to consult on a useful threshold because SARS did not have enough information to decide what a reasonable threshold would be. The Companies Act provided that where it was in conflict with another law it would prevail save for certain legislation that was listed within its provisions. Tax laws were not on the list of exempted legislation, therefore if a business rescue practitioner requested seized books and records, SARS had to hand them over even in a criminal investigation. On the question about suspended sentences, an answer could not be provided right now because this fell in the domain of criminal law.
Financial Service Board (FSB) submission
Adv Nonku Tshombe, FSB Head of Department: Legal & Policy Development, explained that FSB enforced and supervised compliance with the laws that regulated financial institutions. The FSB was responsible for the Pension Funds Act, Financial Services Board Act and the financial supervision of the Road Accident Fund Act amongst others. The FSB aimed to be more protective of consumer funds invested and managed by financial institutions. The general legislative framework must provide for a regulatory regime that was very effective and in the public interest. It was unclear why banks had to be treated differently from the other financial services providers such as insurers. It was inappropriate that the Companies Act did not require a subsidiary to establish an audit committee.
The Chairperson interrupted and requested that the presenter refer to the clauses in the Amendment Bill that alluded to the issues being raised. The Committee was not reviewing the Companies Act it was dealing with the Amendment Bill.
Adv Tshombe said that her colleague would continue with the issue of audit committees.
Adv Jo-Ann Ferreira, Head of Department: Insurance and Regulatory Framework, said that the financial services laws should be included under Section 5 of the Companies Act. The FSB was of the opinion that financial sector legislation should prevail over the Companies Act where there was a conflict. The difficulty was that where the FSB wanted to act swiftly and bring in a curator in a specific situation, it would have to go to the courts first to resolve the matter of whether or not its legislation prevailed over the Companies Act. Currently where the FSB insisted that an insurer should establish an audit committee, the general response was that this would be done once the Companies Act came into effect.
Clause 133 provided for a moratorium on legal proceedings once a company underwent business rescue. The exclusions in this clause did not provide the FSB with assistance when it needed to take swift action. This was especially difficult because not all financial institutions held funds in a trust account. The legislation was not clear on what constituted legal proceedings and enforcement action, this had to be corrected. The financial institutions that the FSB oversaw dealt directly with consumer funds as opposed to shareholder funds. The FSB had to be enabled via legislation to act swiftly in order to protect consumer funds.
Section 116 provided that a notice of amalgamation or merger must include a confirmation that transaction has been approved by the Minister of Finance under the Banks Act.
The FSB, in certain instances, must also approve an amalgamation or merger to ensure a sound financial services industry and the protection consumers. Rationale for affording Banks Act preferential treatment, but refusing to allow same for other financial services sector legislation not understood as the risks posed are the same.
The Amendment Bill and Companies Act did not recognise that the FSB had a specific legislative mandate and currently it would not be able to fulfill this mandate. Also, the definition of “securities” had changed substantially in the Amendment Bill from how it was in the Companies Act and the FSB was at a loss as to what implications this might have.
The Chairperson asked if the FSB had engaged with the previous Portfolio Committee on Trade and Industry on these issues when the Companies Bill was first introduced.
Adv Ferreira replied in the negative, the FSB did however submit comments to National Treasury as the executive authority. The issues had also been brought before DTI on numerous occasions.
Adv Alberts said that he found it disconcerting that the proposed amendments had not been reflected in the Bill. Did the FSB regard all of the Acts that it oversaw as taking precedence over the Companies Act or was it only a few and, if so, which ones would they be?
Mr Harris asked which Acts that the FSB oversaw would it like to see exempted from the Companies Act. There was a cost to having Acts that were exempted from the Companies Act. This increased the burden of companies that had to analyse whether an issue was covered by the Companies Act or another piece of legislation.
Ms September asked if the concerns of the FSB would be in line with the intentions of the Bill.
The Chairperson asked the FSB to expand further on the issue of trusts mentioned in its submission.
Adv Tshombe replied that the financial institutions were not run within the same environment as trusts. One was able to ring fence property that was held in a trust within a trust environment. This kind of protection of property did not exist in financial institutions. This becomes very risky for consumers because if the financial institution was not stable then the investment of the consumer went down with it. The concerns of the FSB were in line with financial services regulation according to international best practice. The legislation listed in the submission would have to override the general provisions of the Companies save for the financial supervision of the Road Accident Fund Act.
Adv Ferreira added that the legislation that fell under the FSB had to be useful so that it could fulfill its mandate and protect consumers. The FSB supported the new regime that was being introduced by the Companies Act however the FSB must be able to act where there was a need.
Independent Regulatory Board for Auditors (IRBA) submission
Mr Bernard Agulhas, Chief Executive Officer, explained that the auditing profession was affected by the Companies Act. IRBA was a statutory regulating authority that aimed to protect the public. It was important to have strong regulators in order to protect the economy, investors and the general public. IRBA was created to regulate assurance services and to set the standards for assurance services. It was important to note that IRBA was distinct from professional bodies. IRBA was created by an Act of Parliament and reported to the Minister of Finance. IRBA registered auditors and set their competency requirements as well. IRBA also inspected and investigated auditors. The regulation of assurance services was important.
One of its concerns was the definition of “audit”. The Companies Act should not amend the definition as contained in the Auditing Profession Act. IRBA
recommend that the definition be removed from the Companies Act, or redrafted to be consistent with the Auditing Profession Act or a definition of ‘independent review’ inserted for the purposes of the Companies Act.
IRBA disagreed with the provisions in the Regulations about independent reviews. It had to be properly defined to ensure properly qualified individuals performed the reviews.
Section 30(7) of the base Act should be amended: Minister to make regulations prescribing professional qualifications of persons who may conduct reviews
. Oversight over assurance services increased the public’s confidence in a particular company. The DTI had to have extensive engagements with relevant stakeholders when drafting the Regulations on the competences, accreditation and regulation of independent reviewers.
Ms Kotsi asked if IRBA had raised its concerns with DTI on section 5 of the base Act.
Mr Radebe asked what the minimum qualification standards were according to IRBA.
The Chairperson asked if the auditing of financial statements was the only option used by other international jurisdictions.
Mr Agulhas replied that IRBA did engage with DTI, some of the sections in the base Act addressed the concerns of IRBA. It was not just anybody who had an accountancy qualification who could perform assurance services. IRBA was responsible for regulating assurance services; other countries had alternate assurance services.
Ms Sandy van Esch, Technical Director for IRBA, added that the Close Corporations Act currently identified seven different institutes or bodies, amongst these were institutions which were not accountants. The concern was whether or not some of these institutions understood such things as an accountancy framework.
Association of Chartered Certified Accountants (ACCA) submission
Mr Nicolaas Van Wyk, ACCA Technical Executive, said it was important to remember that the Act affected big and small companies yet not all of its provisions operated this way. There had to be caution in ensuring that the Small Medium Enterprise (SME) was not overburdened by this Act. The independent review improved the accounting regime and was welcomed by ACCA.
The Chairperson interrupted and said that the Committee was dealing with an Amendment Bill and the presenter should re-focus the submission on the Amendment Bill.
Mr Van Wyk continued that the submission was merely trying to contextualize the Act and also for Members to know that there were certain limits to the proposed amendments made by stakeholder departments which had to be considered. There were different kinds of companies under the Companies Act and one could not say that stringent measures had to be introduced for companies in general when they were so diverse in nature. There was a model of international best practice on how the independent review should be conducted and this should be adopted in the Amendment Bill. The old Close Corporations should not have to follow a particular accounting standard. The big companies should be the ones that follow the highest order of governance.
Mr Van Wyk discussed the definitions of ‘accounting records’, ‘assets, ‘audit’, ‘creditors’ and ‘liability’. Definitions for assets, creditors and liabilities should not be in the Act. The definition of ‘audit’ was supported by ACCA. They agreed with the clarity provided in Section 30 and 84. There had to be more clarity on the meaning of “regulatory authority” in Section 134 dealing with Business Rescue. It was not necessary to be regulated by a state regulator because this was not a public interest requirement. Monitoring had many forms and the international community did not prescribe how one should monitor or regulate, this was up to a particular jurisdiction to decide.
The Amendment Bill had to mention the qualification requirements for an independent reviewer (see document for full ACCA submission).
Mr Harris asked if ACCA had made submissions on the definitions during deliberations on the original Act.
Mr Van Wyk replied that there were no previous suggestions on the definitions. The definition of accounting records as well as assets, creditors and liabilities was not in the previous Act, they appeared only now in the Amendment Bill.
Adv Alberts asked if ACCA had any views on the standards and qualifications for the independent reviewer.
Mr Smalle asked how an independent reviewer should be appointed in ACCA’s opinion.
Mr Van Wyk replied that an independent reviewer should be a person who adheres to the International Federation of Accountants Certified (IFAC) standards of education or a professional body that required the International Federation of Accountants Certified IFAC levels of education and experience. It was the onus of the independent reviewers to ensure that they had the necessary qualifications and experience to perform the review.
Ms September asked what unintended consequences did ACCA foresee on the issue of assets. Did ACCA have a proposed amendment for Section 134?
Adv Alberts referred to Section 134, and said that ACCA had to take into consideration industries that were self regulated such as advocates who could possess the necessary expertise to do this type of work.
Mr Van Wyk replied that the definition of assets, creditors and liabilities should be removed entirely. The definition was too narrow. Section 138 of the base Act made provision for the necessary qualifications of a business rescue practitioner. In South Africa it was problematic because not all bodies were members of IFAC. The suggestion was that Section 138 should include the words ‘persons regulated by an Act of Parliament.’ More stringent requirements for experience as a business rescue practitioner should be included.
Pricewaterhouse Coopers (PWC) submission
Mr Thabani Jali, Executive Chairman, said that a review should be given the same status as an audit in the Amendment Bill. IRBA was the only body that could ensure consistency of reviews that were being conducted. The exclusion of review from the definition ‘audit’ meant that IRBA was excluded. There was no reference to an independent body that governed reviews. This issue should be corrected via an amendment of the Auditing Profession Act to ensure that there was consistency in the governance of independent reviews. Only the assets and liabilities of a company should be considered in the application of the insolvency and liquidity test. Companies should not be required to consider the assets of holding and subsidiaries when determining whether solvency and liquidity tests were met. Subsidiaries and holding companies were separate legal entities in their own right. The amendment in the Bill was contradictory to the currently accepted legal position where companies were separate legal entities for insolvency purposes. In applying the solvency and liquidity test, only the assets and liabilities of each individual company should be considered.
PWC was of the opinion that the audit exemption should be for the benefit of those it was meant to benefit. If it was the intention of the legislature to restrict the audit and review exemptions for private companies, then this had to be made clearer in the Bill.
Mr Smalle asked why PWC wanted review to be given the same status as audit.
Mr Jali replied that PWC’s submission was to try and make sure that review was properly defined and brought under the Regulations.
Mr Gcwabaza asked if the assets equalled liabilities, what would be the legal status of a company.
Mr Jali replied that where assets equalled liabilities, the company was not insolvent legally or commercially.
Ms September asked to what extent workers were covered in the submission by PWC.
Mr Jali replied that workers would be covered in the insolvency process.
Southern African Institute by Business Accountants (SAIBA) submission
Mr Stiaan Klue, SAIBA Board Director, said that an appropriate balance had to be struck between the need for growth and regulation. It supported the deregulatory measures of the Companies Act that supported an open economy and would bring benefits to small and medium-sized enterprises in line with international developments.
SAIBA supported the definition of ‘audit’ in clause 1, which excluded “independent review” from it. An independent review was not an audit function. The exclusion from having to perform an audit would alleviate costs for smaller businesses. The benefits of an independent review regime were that a new standard would be set for accountants. Also accountants would be forced to adhere to the standards of IFAC. Distinguishing an independent review from an audit was a step in the right direction and it was in line with international best practice. Accounting officers were perfectly positioned to fulfill the role of independent reviewers.
Adv Alberts asked if IRBA should regulate independent reviewers or should they be placed under CIPRO.
Mr Klue replied that this was a contentious issue that had been debated at length. The accounting officer was currently operating alongside IRBA. The professional accounting bodies were perfectly positioned to co-regulate if needs be. In Australia, a disciplinary body was established in the form of a tax commission that fulfilled the role. The current accounting officer model could be further enhanced.
Ms September suggested that Mr Klue could pass on some of his expertise on the subject matter to the Committee because it could certainly benefit from it. Could Mr Klue comment on the general amendments in the Bill?
Mr Klue as a board member said he was not perfectly positioned to comment on the Companies Amendment Bill. One had to be cautious when digesting the submissions especially since not all stakeholders were present to make representations.
The Chairperson thanked the Members of the Committee including staff and confirmed that the Committee would commence its work in January 2011.
Meeting Adjourned .
- Southern African Institute for Business Accountants (SAIBA) submission
- Webber Wentzel submission
- Lexines submission
- KPMG submission
- SALSA submission
- Southern African Institute for Business Accountants (SAIBA) presentation
- LSSA’s Company Matters Committee and the LSNP’s Company Committee jointly submission
- SAIPA submission
- Association of Insolvency Practitioners of Southern Africa submission
- Payments Association of South Africa (PASA) submission
- IODSA Comment On Draft Companies Amendment Bill
- Financial Services Board submission
- National Treasury presentation
- SARS presentation
- Independent Regulator Board for Auditors submission
- SARS submission
- Independent Regulator Board for Auditors presentation
- Association of Certified Chartered Accountants (ACCA) presentation
- Association of Certified Chartered Accountants (ACCA) submission
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