Accounting Standards Board; Independent Regulatory Board for Auditors Annual Reports 2011/12; Multilateral Convention on Mutual Administrative Assistance on Tax Matters; Exchange of Tax Information with Gibraltar, Dominica, Liberia

NCOP Finance

19 June 2012
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The Independent Regulatory Board for Auditors (IRBA) regulated auditors and ensured quality service when it came to the financial interest of the public. The entity was regulated by the Public Finance Management Act, and it prepared financial statements using GRAP. IRBA was responsible for developing and maintaining auditing and ethical standards that were internationally comparable. IRBA provided the framework and training for qualified public auditors, set the final paper for the Board Exams for candidates to qualify as chartered accountants, and later registered them with IRBA as auditors. It was the responsibility of IRBA to ensure that only suitably qualified individuals were sent out to the market to audit financial statements. The highlight for the year was being named number one out of 139 countries, on auditing standards, for a consecutive year running by the World Economic Forum's (WEF) Global Competitiveness Report.

Members voiced concerns on the poor quality of financial statements. This was very serious and would have to be addressed by Operation Clean Audit 2014. Members queried the role of the Accounting Standards Board and IRBA in improving auditing standards and financial management on the African continent.

Agreements had been reached with Gibraltar, Dominica and Liberia on the exchange of tax information. SA was a signatory to a Multilateral Convention on Mutual Administrative Assistance on Tax Matters with 35 other countries. The Convention intended to increase cooperation among tax authorities and combat tax evasion. The briefing on the ratification of the SA and Oman Double Taxation Agreement was postponed as the Agreement had not been formally referred to the Committee.

Meeting report

The Chairperson said he had engaged the Chairperson of the National Assembly’s Standing Committee on Finance that Annual Reports were presented to both Houses of Parliament at around the same time. Things had to be done differently as per the directive of the Minister of Finance. He noted that Fridays had been set aside by Parliament for joint committee meetings.

Accounting Standards Board (ASB) presentation
Ms Erna Swart, ASB Chief Executive Officer, said the institution worked closely with the Auditor General (AG) and the Accountant General (AccG). The key responsibility of the ASB was to set standards of generally recognised accounting practice (GRAP) for all levels of government. Departments had been preparing financial statements on the modified cash basis. All public and constitutional entities were using GRAP since 2009. Municipalities started in 2008 and should be fully compliant by 30 June 2012. Trading entities would be from 2013. The move by Parliament and provincial legislatures to Generally Recognised Accounting Practice (GRAP) had been since 2010 and had depended on the passing of the relevant legislation.

The only exception would be Government Business Enterprises (GBE). At the moment National Treasury (NT) regulations required these institutions to use statements of GRAP, which were private sector standards. Those standards were being withdrawn with the establishment of the financial review committee. ASB had, as a result of the new Companies Act, adopted International Financial Reporting Standards (IFRS) for the private sector. A guideline had been issued for the continuation of statements with the two standards (GRAP and IFRS). Research had been conducted to analyse the needs of the users of financial statements. The findings of the study would determine whether these institutions remained on IFRS or moved to GRAP.

ASB set the standards and could decide on implementation dates together with the Minister. The AccG was responsible for the implementation of the standards. After each Board meeting there were tri-lateral meetings with the AccG and the AG where issues of common concern were raised.

Ms Swart said setting standards was a lengthy process that took close to five years, when there was sufficient consultation process. Input was sourced from the actual preparers by way of holding workshops, notices and using the government gazette. The one stage that had not been done was the post implementation reviews. This was something that would be looked at in the next year to ascertain effectiveness, and if standards had been implemented.

Municipalities had completed the implementation and lessons could be drawn especially if clarification of the standards was needed. ASB had developed a core set of standards that was agreed to in 2002 by the then Minister of Finance, Mr Trevor Manuel. ASB's work programme was focussed on the gaps where there were no national or international standards. The office monitored and coordinated its work on international programmes.

She said although national and provincial departments were still on the modified cash basis, all other institutions had adapted. The transition would be determined by the completion of the financial management systems being developed together with the Department of Public Service and Administration (DPSA).

So far 32 standards approved by the Board had been issued, five of which were awaiting approval by the Minister.

ASB worked on public sector specific financial instruments (receivables and payables arising from legislation). The entity also was doing research on GBEs. Recently ASB had issued a discussion paper on principal and agent activities entities. Often, municipalities were required to do work for the departments and it was difficult to gauge if they did that work on behalf of the departments or as entities.

Internationally, ASB worked on a conceptual framework that underpinned the standards, but also financial statements and analysis. The important thing was long term sustainability of institutions.

Mr Vuyo Jack, ASB Board chairperson, said the key consideration was the post implementation review so that when government moved to the accrual basis of accounting it was able to absorb the lessons. Another important thing was ensuring the Integrated Financial Management System (IFMS) embedded the accounting standards and made them easy for the roll-out.

Independent Regulatory Board for Auditors (IRBA) presentation
Mr Bernard Agulhas, CEO, IRBA said the organisation became a stronger organisation in 2006 when it merged with the Public Accounts and Auditors Board (PAAB). The organisation existed not to protect auditors but the public. IRBA regulated auditors and ensured quality service when it came to the financial interest of the public. The entity was regulated by the Public Finance Management Act, and it prepared financial statements using GRAP.

The Minister appointed the Board following a strict process, and ensuring that Board members were adequately equipped. IRBA adopted the international auditing standards in 2005, and it participated in international programmes and regulatory processes.

Mr Agulhas said the strategic focus of IRBA was to protect the financial interest of the public by ensuring that only suitably qualified individuals were admitted to the auditing profession. It was crucial that the profession played a role that would ensure confidence of local financial markets, and that investor fears were allayed. The role of IRBA was two fold: it set the standards for auditing and at the same time regulated the sector.

The objectives of the entity flew from this mandate. IRBA was responsible for developing and maintaining auditing and ethical standards that were internationally comparable. The Act stipulated that the entity could not develop its own local standards, but could add to the international developed standards. IRBA should provide a framework and training for the public qualified auditors, and also set the final paper for the Board Exams for candidates to qualify as chartered accountants, and later register them with IRBA as auditors.

It was the responsibility of IRBA to ensure that only suitably qualified individuals were sent out to the market to audit financial statements. If this did not happen, the financial statements that were produced would not be reliable. IRBA monitored compliance, and reported irregularities. This was in line with the Minister of Finance's call in 2006, that there needed be additional measures to curb white collar crime in SA. A unique legislation that required auditors to report irregularities during audits to IRBA was introduced. The entity then reported these instances to the relevant authority, including the South African Revenue Service (SARS); the Johannesburg Stock Exchange (JSE); and the SA Police Service (SAPS). This was intended to reduce white collar crime in the country.

In terms of money laundering legislation, IRBA was designated as a supervisory body and interacted with intelligence. The Finance Intelligence Centre (FIC) relied on IRBA to assist them monitor compliance with the money laundering legislation.

IRBA also monitored registered member's compliance with standards and this made it one of the few professions to police its members. Twelve inspectors monitored about 4 500 auditors daily, in 3-6 year cycles, depending on the risk level of the clients. Non-compliant auditors were subjected to an investigations process, that ended in disciplinary action. Where guilt was determined, sanctions ranged from a fine to being struck from the register.

The highlight for the year was being named number one out of 139 countries, on auditing standards, for a consecutive year running by the
World Economic Forum's (WEF) Global Competitiveness Report. A stricter code of conduct for auditors had been issued in 2011. This would make regulating SA auditors even more stringent.

Mr Agulhas said the European Union (EU) approved IRBA as among the best auditing regulatory institutions in the world. This meant international regulators were comfortable that auditors were properly regulated in SA and therefore there was no need to come and conduct inspections. The implication was that SA auditors could audit companies listed in Europe without being supervised. IRBA was also working with the US to attain such an accreditation for approval. But the Americans were strict when it came to funding of the organisation.

IRBA was also approved last year to provide Broad Based Black Economic
Verification Assurance Services; and the Department of Trade and Industry had, since, made progress on legislation that would allow the entity to also register non-auditors to perform black empowerment economic Verification Assurance services. The aim was to have IRBA become the ultimate auditing institution for such services.

He said IRBA operated on a budget of about R70 million a year. This money was sourced from NT; auditor’s registration fees; and performing inspections. It was important for IRBA to be seen as independent such that the funding needed not come from auditors at all. A new funding model was being developed, where the entity looked not to receive any money from auditors.

Mr Agulhas explained that IRBA had sold its building for R10 million and was requested by the Minister to invest the money for the purpose of supporting new entrants to the profession. The entity also had to build an education fund to help students with the exams to become chartered accountants and auditors. There also was a disciplinary fund in case there was a disciplinary case that might require large sums of money. He said there was such a case, and it was scheduled for December.

There were fewer registered auditors in 2011, and this impacted on revenue generation for the entity. This was caused by the introduction of the Companies Act, and had led to doubt about the need for auditors as there was an alternative independent review. This had led to some auditors deregistering and fewer students taking up articles. However the numbers were stabilising and the profession was in a healthy state.

IRBA received a clean report from the AG for both the 2010 and 2011 financial years; there also was a clean report on its predetermined objectives. The issuance of a professional code of conduct had not been achieved. It was difficult to have a plan of standards if the need was not determined. IRBA was putting togethers a programme that specified what the requirements might be to auditors for guidance and ethics.

IRBA fell short on its 90% target of closing files within 40 days because auditors did not submit reports on time. Auditors reported irregularities to IRBA and had a 30-day grace period to confirm if suspicion of irregularity was correct or not. Only 60% was achieved on this target.

With regards to inspections, IRBA was supposed to supervise accountable institutions who provided financial services. At the end of the year the entity was still busy putting together a list of accountable institutions. The entity was still engaged with the Financial Services Board (FSB) as it was responsible for supervising all financial service providers. The idea was to compare the lists and see if all auditors had declared.

IRBA had hoped to complete 80% of its legal cases within 12 months. But since cases became protracted and evidence would sometimes not be available, that target was not achieved. This target was not realistic, and it had as a result increased the time it took to complete cases by a further six months.

Mr Agulhas said IRBA operated in high risk environment where registration was easily lost. It had realised that there was a need to intensify marketing, and a branding strategy had been completed where a new stakeholder plan and a new communication plan were factored in.

He said the targets on renewal of registration had not been achieved but the entity would work hard in the future. Auditors were expected to annually renew registration. He said there was supposed to be an IT plan and strategy in place by year end. This was not achieved because IRBA had to first clean the database.

Discussion
The Chairperson congratulated IRBA on ensuring SA was rated number one, out of 139 countries, for having the best accounting standards at the World Economic Forum in 2010. He noted that both institutions had received unqualified audit opinions from the AG.

He said that it was worrying that the ASB had not met with four provinces - Limpopo, Mpumalanga, North West and Northern Cape. It was part of the Committee's work to address issues of disregard. He would personally engage the Northern Cape and facilitate a meeting between the province and the ASB.

Mr B Mashile (Mpumalanga) asked if the meetings that the ASB needed to have with Limpopo, Mpumalanga, North West and Northern Cape had not happened. He asked if the Committee could assist in any way.

Ms Swart replied that the outreach to stakeholders had been extended to all provinces. The ASB had been to all provinces and the list in last year's Annual Report was no longer an issue. The issue of concern with the provinces was the timing of interaction. There was interaction - around six standards that had been implemented - with preparers, users and auditors of financial statements.

The interaction had to happen during the development of the standards, and not only during implementation. Outreach programmes were done with all municipalities to raise awareness on what was required as per the standards; and what municipalities had to prepare in advance. Municipalities needed not to start working on compliance to the standards only when auditors started knocking at their doors. Any support from the Committee around the timing of interaction was welcomed.

The Chairperson commented that the pertinent issue that regularly came from the AG's audit reports was the poor quality of financial statements. This was very serious and would have to be addressed in terms of the programme Operation Clean Audit. He asked if both the ASB and IRBA played any role in Africa to improve auditing standards and financial management on the continent.

Mr Jack replied in terms of Operation Clean Audit, the ASB, AG and NT had realised there was no university that offered accounting courses to the public sector. The impact of this on the economy was immeasurable. The three institutions had put together a programme to address the issue of an academic programme and would thus engage universities to suggest the kind of curriculum that could be covered.

He said the Committee could assist in raising awareness on the need to have a public sector accounting programme. If that was in place, objectives for Operation Clean Audit could easily be set and met. Even the distinction of high and low capacity municipalities would need not be there. Such an academic programme could also map out a role in Africa. Currently there was no role that the institutions played in Africa as there was no budget for it. But if such a programme was initiated, students from the continent could be invited and enrolled into such a programme.

Mr Agulhas replied that there was a need to support the rest of Africa. IRBA had concluded a contract with the World Bank to set up an inspections department in Zimbabwe. The idea was to help with auditing standards and regulations. Good governance meant that the audit regulator must be independent of the profession. The World Bank had paid money, and staff had been sent to train people in Zimbabwe. The project would be completed at the end of September, and if the World Bank was satisfied that the pilot project was a success, it would become a much bigger project for Africa. The idea was to establish a forum in Africa to look at the auditing profession.

The Chairperson said the issue could be raised when the Committee met with the Department of Higher Education and Training (DHET) concerning appropriations. The overall objective was good governance and sound financial management.

Mr S Montsitsi (ANC Gauteng) said the accounting standards that were used appeared to be far advanced than the type of economy that SA was. SA was still at a developmental stage and governance programmes needed to be aligned to that.

Mr Jack replied that when developing a standard, ASB looked for guidance in the standard and tailor made that for SA's reality so that the user’s needs were met. The key litmus test for the ASB was to ask if such a standard promoted accountability and if it facilitated efficient decision-making. Comment was always sought on the standards and that assisted in determining the way in which the local condition would be best suited. Sometimes there were departures from the international standards for local based reasons.

Mr Jack said this also emphasised the importance of the post implementation review process, as it would inform exactly what was really needed in the country. Suitability to local conditions was the thing that would also be factored into the review. When looking at the post implementation review, ASB would be looking from the user point of view.

Ms Swart replied that accounting standards in their very nature were not written with a particular focus on level of development. These were written focussed on transactions; so it did not matter if a country was developing or was industrialised. Transactions did not change as a result of the kind of economy. The irony was that most compliant countries to the accounting standards were those countries that were inclined to communism. Those countries that one would expect to adopt the public sector accounting standards, especially in Europe, had not done so.

Mr Montsitsi wanted to know how local government and national departments could be rated on implementation of the GRAP. He sought clarity on the post implementation review of whether the standards were implementable that the ASB talked about.

Mr Jack replied that NT had segmented municipalities into high, medium and low capacity. The use of the standards at high and medium capacity municipalities was much better, whilst at the low capacity municipalities the lack of skills was the problem. It was possible at some of these municipalities to find chief financial officers without accounting degrees. These were municipalities that tended to use consultants to plug the skills gap, and this was not sustainable. The key was how one enhanced the capacity of the preparers at the low capacity municipalities, and ensured that the high capacity municipalities maintained that level of expertise. This was critical in achieving the objectives of Operation Clean Audit 2014. With the low capacity municipalities, it was going to be difficult to achieve these objectives given the kind of skills that needed to be embedded, on a sustainable basis. That would take time way beyond 2014.

Ms Swart said it would be difficult to rate the extent to which the national departments were complying with the standards. The departments were still using the modified cash basis which was developed by NT. In interaction with preparers, there were those that were capable of maintaining unqualified audit reports, but also there were those where training was needed.

Mr Montsitsi wanted to know if accounting practices that were implemented were any friendlier to small businesses. One other thing would be whether leadership of the BEE establishments were trained in these processes and the practices that were used in auditing. Such basic training could enable small businessmen to identify fraudulent auditors. He was also interested in the publicity programmes that IRBA undertook, to ensure that it was known.

Ms Swart replied that ASB had compared its standards with the private sector to see if there were any possibility of simplifying the standards for small businesses. As a result of this, two standards had been identified,  the standards on Borrowing Costs and on Non-Current Assets Held For Sale had been discontinued, as the value of these in the public sector was not appropriated. This was among the reasons that gave rise to the post implementation reviews. Simplification when appropriate would be the key to ASB in the future.

Mr Agulhas replied that private sector accounting standards had developed standards for small practitioners. Small business did not have to use international standards, if there were those that were slightly easier and lighter for them. From the auditing side, the objective of the Companies Act was to make it easier for small business to operate in SA. For this reason small business would not need an audit but only an independent review, and for those below the small business threshold that too was not needed. Audits that were required now were really for the public entities. The issue at the moment was that the independent reviewers still provided assurance to the public, but were not subject to any regulation. Government still had to decide if it wanted small business to be regulated; and if regulated it would be at a lower level than auditors.

On the BEE side, the dti was in the process of finalising legislation, but auditors had been providing this service. Until the legislation was changed, IRBA could not do anything for any verification agent that had not been audited. In the meantime a standard had been developed to regulate the sector.

Mr Agulhas said not much had been publicised on their role, and they had been requested by the dti not to say much until legislation had been amended.

IRBA had started to develop a competency framework for BEE.

Mr Montsitsi asked why comparison of accounting standards had to be done with international entities instead of the level of development of the local economy. Was being number one out of 139 countries of any benefit when it came to attracting foreign investment?

Ms Swart said ASB was required by law to use international standards, and as a result decided to base its standards on international public sector standards. ASB agreed in principle to make amendments, and in the last three years, it was agreed that simplification would be made. Recent standards on financial instruments, employee benefits and the transfer function had significantly deviated from the international equivalents of those standards in an attempt to make them relevant to SA conditions. There were instances where the SA developed standards were used in the international arena, where such standards were non-existent.

Mr Agulhas replied that there was a specific requirement from the then Minister of Finance because SA operated in a global village. Business took place across borders, and in order to deal with other countries one had to understand what standards they used. Most countries were adopting international standards, and SA had been working, since 1994, to harmonise its standards with international standards.

 SA served on various boards and therefore influenced those standards; SA would not adopt those standards if it did not have input. Locally, the standards had to respond to the needs of regulators. IRBA worked closely with the JSE, Financial Services Board (FSB), and the National Credit Regulator (NCR). There was also a standing committee that was focussed on offering guidance to the AG on local issues. The entity always ensured that it did not focus on international terrain but the local sector as well.

Mr R Lees (DA KZN) said he was perturbed by the provision of depreciation under expenses. There was no reason to show depreciation as an expense, especially as the ASB paid no taxes. A lot of people did not pick up that depreciation was not an expense. The bottom line was that these financials were a misrepresentation of the true state of financial affairs on those councils who have no accounting background.

The standards that the entity was setting should make it possible for people performing oversight to really understand what they looked at. Very few people actually understood any of these financial statements. He asked if the Board believed there was a need to simplify and make relevant the standards, and perhaps ignore the international best practices.

Ms Swart replied that one of the big issues for depreciating assets as opposed to expensing was because millions of rands were spent on assets and there was no accountability. This was the reason ASB believed that everybody should be on accrual accounting. Assets on expense did not appear on anyone's balance sheet; and thus no one was held accountable for the assets. The non-reflection of expense assets on financial statements provided a loophole for non-performance.

When looking at the ASB, where the main work was more intellectual and office based work, it would seem appropriate to expense the assets. Depreciation was meant to be a charge for the use of those assets. There was a theory that depreciation should be sufficient over a period to cover for the replacement of the assets. This was not the case in a high inflation environment. The depreciation that was written off could never be enough to replace the existing assets. This was the reason in financial statements there was disclosure about fully depreciated assets. If accounting standards were applied correctly, in theory, one should never have fully depreciated assets, but in reality this did not happen. The post implementation review would ensure that theory and practice were aligned. The objective was to make standards simpler.

Mr Lees commented that he believed the post implementation review would assist. He pointed out there were dramatic accruals in the payroll related payments in 2011. He sought clarity on the money that was surrendered to NT both in 2010 and 2011.

Ms Swart replied that when ASB started, it had a budget that was planned around a CEO, two standard setters and two additional people it could train. This never happened; and the surrenders were based on inability to provide the training and finding the right staff. Most of the surrenders were based on staff savings.

She said the organisation was operated by seven people, four of whom were qualified chartered accountants. This was the required skill for standard setting. The entity had found that the increase in salaries of these people outpaced the increase of transfers by about 5%. Any reserve funds had been eroded as a result of the mismatch between transfer payments and salaries. Without suitably qualified people ASB could not set the standards. It had been agreed with the Minister to increase the staff by two junior standard setters. But the positions had not been filled in about 18 months, and a million rands had already been availed for one position.

Mr Lees asked if IRBA could justify the cost of putting together a colourful Annual Report. He sought clarity on the R10 million that was invested - with the SA Reserve Bank - for an old building that IRBA sold. He asked if there was a justification in selling a building for R10 million and then resort to paying R4.3 million annual leases.

Mr Agulhas replied that a lot of detail was required for the Annual Report otherwise the AG would qualify the institution. But also the intention was to satisfy the Members on the detail. The cost of printing the report was reduced significantly in 2011 compared to 2010.

He replied that the old building became too small for the increased staff - from 30 to 70 - at IRBA. The current arrangement would provide for any growth in the organisation. The Board also took a decision that it was a regulator and did not have an interest in owning a building. It was decided that the organisation would rather lease a building and that lease was above board.

Mr Lees commented that the trade and other receivables from transactions appeared to be high with majority of that going to inspections. He pointed out that IRBA's loan book had increased from R120 000 to R160 000. Were these staff loans or who got these loans? Bad debt was written off regularly. He wanted to know if creditors were registered auditors who did not manage to pay their debt.

Mr Agulhas replied the debt that was written off related to when IRBA fined auditors. The auditors might resign or were no longer involved in the profession. There was a process that was followed before any bad debt was written off. If it cost more to recover the debt, then the organisation just wrote it off. He replied that the loans were study loans.

Mr Lees sought clarity on the number of Board meetings held annually and how the amounts paid out to Board members related to such meetings.

Mr Agulhas replied that Board members’ meeting attendance was on page 46 of the Annual Report. Meeting attendance fees were high because the Board was quite huge, and IRBA operated on statutory committees, and a lot of money was paid to those statutory committees. It would be difficult to determine the salaries Board members got from board meetings as they also were paid for sitting in the statutory committee meetings they serve on.

Mr Lees commented that the R1.3 million for auditing services was just too much for an organisation that did not have that many transactions. This sounded like a huge fee.

Mr Agulhas said he agreed the audit fees were high. These consisted of the internal and external audit fees. But the organisation was audited by the AG, and he determined the fees.

Mr Lees said he was curious about the new funding model. He understood the argument about members funding an entity that set standards for them. However, such a step would reduce the cost structure for the provision and that cost structure would have to be picked up somewhere. He foresaw resistance from the bigger firms if they were to pay for people's professional status. He was curious to see what was proposed in the new model.

Mr Lees commented that he had already seen the effects of the Companies Act in small towns. The old firms scrambled for the kind of business used to be done by accounting officers. Competition had increased but the fee structures made the environment uncompetitive. In small towns there would have to be realignment of how business was done by IRBA members. He was wondering how that would fit in with IRBA, and whether the entity would lose more members.

Mr Agulhas explained that what IRBA was moving away from was not to base the inspection on the number of hours spent at an audit firm. Auditors had been asked to submit the fees that they collect from the different levels of clients. These clients had been categorised as A, B and C with A being the high risk clients. IRBA believed that it needed to focus on the high risk clients. Auditors were getting huge fees from those audits and they should pay a fee for that. The JSE was unwilling to assist by charging a levy for the listed firms, and as a result IRBA was devising other means.

He agreed that the Companies Act was having an impact on the business but it was the case of the market adjusting to the new environment it found itself in. The Companies Act was a good thing and markets would successfully adjust with time.

Mr Mashile commented that the AG had lamented that auditing standards were generally going down. He wanted to know if the two organisations could do anything to assist in municipalities.

Mr Mashile wanted to know if it was still possible for SA to achieve Operation Clean Audit in 2014. It was important that the Committee got an advice early in the process, so that if the operation was not achievable corrective measures were taken.

Mr Mashile said since the talk about Operation Clean Audit 2014 started, many public entities started appointing consultants to do their accounts. Some entities went as far as appointing firms to do pre-audits. He wanted know what informed such behaviour. Could it be that capacity had collapsed at these entities; if so, was it not the time to have standards that would regulate the use of consultants at public entities. These consultants presented what the auditors wanted to see. Such standards would ensure that government was not misled.

Ms Swart replied that the use of consultants was a huge problem. The recent reports by the AG indicated that positions were being filled, and yet municipalities used consultants. The question that the ASB was asking was whether the people being employed were suitably skilled to perform their duties. It was these people's responsibility to prepare the financial statements. Municipalities should not be using consultants. Sadly,  ASB had no mandate to regulate consultants, but it organised a workshop every year with consultants to addressing accounting issues identified during the audit cycle. The entity alerted consultants to new standards that were coming in.

Mr Mashile wanted to know the kind of feedback the ASB got from both Treasury and the AccG. Were these two institutions querying the work that ASB was doing? He also asked if there was synergy on the work that was done, if not what were the challenges?

Ms Swart said challenges included consultation with stakeholders and outreach at the right time and getting input from the stakeholders. The outreach was functioning well, but there was a need for improvements. Departments took interest in the standards only when they had to report on them. Implementation of the standards was not ASB's mandate. Other than the Department of Cooperative Governance and Traditional Affairs (COGTA) and NT, departments were not taking interest in the standards.

She said ASB was struggling with finding the right staff. ASB could recruit chartered accountants, but the ones ASB was looking for were those who had an academic interest and could come up with policy proposals on how to improve accounting. Most chartered accountants were in the private sector, and government could not match salary offers at those firms.

Ms Swart said another challenge was the capacity to implement. Implementation was not the ASB's responsibility, but the AccG. Conducting the workshops at municipalities was outside ASB’s mandate.

She said the IRBA had to report to NT, and it had a very good working relationship with the Office of the AccG. The Office participated in all ASB projects, and commented on all ASB documents. And, in fact, the Accountant General, Freeman Nomvalo, was an ASB board member. When standards were developed, there was consultation with the AG and the AccG. Both offices provided guides for implementation; but also when workshops were undertaken, staff from those offices accompanied ASB. There were regular meetings with the AG and AccG during the audit cycle, where technical people from all sides tackled issues that arose.

Mr Mashile asked how IRBA dealt with the issue of unregistered auditors to ensure credibility in the sector and protect the profession.

Mr Agulhas replied that there were 35 000 chartered accountants in the country, and if one wanted to be an auditor he needed to be registered with IRBA. Auditors performed a public function and needed to be regulated, and chartered accounts were not regulated. Auditing involved giving an assurance on financial statements for the public to make informed investing decisions. This strengthened the case for auditors to be regulated.

There were people who signed of financial statements as auditors. The Act provided that if IRBA became aware, it could take legal action against such people. IRBA did not have jurisdiction over such people, but referred them to the police as that would be regarded as fraud. A few cases were reported every year.

Mr Mashile asked whether there had ever been a reputable auditing firm that had disappointed IRBA on performance.

Mr Agulhas said IRBA did not believe that any firm was not capable of making mistakes. Findings against the big firms were treated the same way.

Exchange of Tax Information Conventions with Gibraltar, Dominica And Liberia
Mr Ron van der Merwe, Senior Manager:
International Development and Treaties, SARS, said information was vital to an organisation like SARS as it allowed for correct taxation. If the information was outside SA, SARS battled. These agreements allowed for easy access of information and subsequent application of domestic law.

It was ideal for countries to follow the model of Norway where the country made a list of 43 off-shore financial centres and wanted to have agreements with all of them. This did not only allow access but also having full coverage of the off-shore financial centres, would act as a deterrent to tax evasion.

Through the Southern African Development Community (SADC), SA had driven a multilateral similar to the multilateral convention it signed last year. There had been a complete campaign for exchange of information and transparency to combat tax evasion.

Mr van der Merwe said the tax information exchange agreements were the same in all three countries and were with off-shore financial centres. And the agreements were all on the exchange of information but only on request. This was the maximum standard that SA had been able to achieve with these financial centres.

The agreements followed the
Organisation for Economic Co-operation and Development (OECD) tax information model or tiers. Tiers ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny request for exchange of tax information.

He explained how the articles in the agreements were structured:

Article 1 dealt with the scope of the agreements. The exchange of information that was relevant to enforcement of the domestic laws of the parties concerning taxes and tax matters was covered by the agreements. Parties needed to ensure that the requested information was not unduly delayed. If a country unduly delayed a request, it was the same as not giving the information.

The taxes covered included any identical taxes imposed after the signing, in addition to the existing taxes. SA would introduce the new Holding Tax on Interest and would have to inform its trading partners.

Article 5 dealt with how parties could exchange information. Information should be exchanged without regard to whether the requested party needed that information for its own tax purposes; or whether the conduct being investigated would constitute a crime under the laws of the requested party. Domestic laws in both states should allow for exchange of information held by banks, other financial institutions, and nominees and trustees acting as agencies. The countries should have full ownership of these entities. This allowed for tax examinations abroad; it also allowed the representative of their requesting party entry to the concerned party. The representative might sit at interviews and such meetings could only be led by the requesting party. But all of this was subject to approval of the domestic law.

Article 7 dealt with possibilities of declining a request. A competent authority might decline a request if the information would be contrary to public policy. It did not impose any obligations to provide items that were subject to legal privilege. These exclusions were also found in the double tax agreements. All information received was subject to confidentiality and could be only disclosed to concerned authorities including courts. Information received might not be used for any other purpose than those expressed in Article 1.

Article 9 dealt with cost. Indirect costs should be born by the requested party; and the direct costs should be borne by the requesting party. Once an agreement was ratified, a memorandum of understanding was drawn to spell out what informed direct or indirect costs.

Article 10 dealt with mutual agreement of procedure. Where there were disagreements or doubt, the competent authority should resolve the matter by mutual agreement.

The agreements with all three countries followed this pattern.

Discussion
In reply to Mr Mashile asking why all the articles were not explained in the presentation, Mr van der Merwe said that the slides were prepared with a view to what was of interest in the agreements, as opposed to describing all the articles.

Mr Mashile sought clarity on the articles giving countries a level of independence in determining whether to provide information or not. There was some level of contradiction which might cause people not to promulgate and implement the agreement. There was a need to interrogate these agreements.

Mr van der Merwe replied that this was true. He cited Gibraltar that clearly pronounced that it would implement the agreement, whilst Liberia and Dominica did not. The Article that dealt with exchange of information did not give a choice but specified that parties should. This was an obligation. There was discretion when dealing with taxation issues abroad. But this was not the case with the agreements; the exchange of information had to be done.

Multilateral Convention on Mutual Administrative Assistance on Tax Matters
Mr van der Merwe said the Convention had now been signed by 35 countries including SA. A number of African states - Ghana, Tunisia, and Kenya - were applying to be signatories to the Convention. The difference between this Convention and the three agreements on exchange of tax information was that the agreements dealt with information requests. The Convention on Mutual Administrative Assistance on Tax Matters took a signatory to the same standard of exchange of information as SA had in 70 double taxation agreements which were operational and ratified by NT and the National Assembly. The Convention gave countries greater powers than the tax information exchange agreements. The purpose of the Convention was to allow for effective exchange of information and administrative assistance. The Convention was intended to increase cooperation among tax authorities and also combat tax evasion. The Articles of interest were:

Article 1
It allowed for administrative assistance that comprised exchanges of information, including simultaneous tax examinations. In addition it helped with assistance in the recovery of taxes and the service of documents.

Article 2
It dealt with taxes covered, and covered the widest possible range of taxes imposed by the parties. Parties were free to enter reservations on which taxes to cover.

Article 4
It dealt with the exchange of information. It said there would be a full disclosure of the information irrespective of the domestic laws.

Article 5
It dealt with exchange of information on request. The area was similar with the three agreements with Dominica, Gibraltar and Liberia. The ultimate goal for all tax authorities was to have an automatic exchange of information. This article also dealt with spontaneous exchange of information where countries exchanged information without request for so long as there were irregularities. This was the same standard set in all of the double taxation agreements.

Article 8
It dealt with simultaneous tax examinations. Two or more parties might investigate a case on own territory. This allowed for information exchange to allow for proper investigations. This was one of the things SA had been trying in Africa by setting up multilaterals, to be able to do simultaneous investigations of those multinationals that operated in more than one African country.

Article 9
It dealt with tax examinations abroad. Countries were allowed to reserve their positions. If the domestic law was such that countries denied authorities access, then they could enter reservations. SA would not do this.

Article 11
It dealt with recovery of tax claims. This article allowed states to collect on behalf of requesting states once all process had been finalised. The agreement allowed parties to use the full might of the domestic law.

Article 12
It dealt with measures of conservancy. A country could ask a trading partner to ensure that money was not lost through companies liquidating.

Article 17
It dealt with the service of documents. SA had entered reservations here. SA said it did not do service of documents but these could be posted. This was considered the Mutual Legal Assistance Treaty. This was sufficient for servicing of documents

Article 21
It dealt with exclusions. The Convention did not impose obligations on the requested state to provide assistance

Mr van der Merwe said the tax system was looked at before a country became a signatory to the Convention. Administrative assistance was not provided if the information would be used to discriminate people.

Article 22
It dealt with secrecy and confidentiality.

Article 27
It dealt with the assistance provided by the Convention. It did not limit the assistance contained in future international agreements between the parties. States were required to enter into agreements in terms of the taxes they would cover.

The Multilateral Convention gave SA enormous coverage especially as more countries were signing up.

Discussion
Mr Mashile queried the reservation and servicing of documents clauses and pertinent implications.

Mr van der Merwe replied that there was a termination possibility. SA was not party to the drafting of the document. The Department of Justice (DoJ) could give clarity on the servicing of documents.

Mr Mashile asked if there was a link between SARS and the DoJ on servicing of documents.

Mr van der Merwe replied there was no link.

The Chairperson put the agreements to the Committee and they were adopted accordingly.

SA and Oman Double Taxation Agreement
The Chairperson said this had not been referred to the Committee. He asked if the Committee wanted to wait for the referral or accept the presentation and then later adopt it.

Mr Mashile asked if there were any legal implication if the presentation was taken without a referral. The presentation could be presented at a later date.

Mr T Chaane (ANC, North West) agreed and said although there were no legal implications, the presentation could be presented at a later date and adopted then. Procedurally the Committee could not deal with something that had not been referred to it. But it would not be wrong once the matter was referred, to get someone from Treasury inside Parliament without having to invite people from Pretoria.

Mr Lees said he was concerned by sending the delegation back to Pretoria and be called back for a five-minute presentation. There could not be any legal implication with having the presentation without a referral and later adopting it at the next meeting.

The Chairperson ruled that there had to be a meeting with the referrals unit. In terms of parliamentary procedure, it would be incorrect to receive the presentation. The presentation would have to be taken in the following term.

The meeting was adjourned.

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