Auditing Profession Amendment Bill: National Treasury briefing & adoption; Banks Amendment Bill, Financial &Fiscal Commission Amendment Bill: National Treasury briefings

Meeting report

Auditing Profession Amendment Bill: National Treasury briefing
Adv Empie van Schoor, Chief Director: Legislation, National Treasury, gave a background to the Bill noting that the primary objective of  the Independent Regulatory Board For Auditors (IRBA) was to protect the public through the regulation of the auditing profession. The objects of the Amendment Bill were to provide for the regulation of candidate auditors and to update references to the Companies Act.

She explained that currently, a person, in order to become a registered auditor, would have to obtain an accounting degree, serve articles and complete a Public Practice Examination and register as an auditor. Candidates could become chartered accountants, and then choose the audit or financial management route or candidates could choose the audit route and pass the Public Practice Examination, and become chartered accountants (CAs) and register as auditors.

This had changed because of the termination of the Public Practice Examination. The SA Institute of Chartered Accountants (SAICA) had changed its education and training model. Chartered Accountants would no longer be able to qualify through the specialist route, of audit or financial management. All would in future have to follow a similar qualification path, and write only one final assessment of professional competence.

The new SAICA assessment did not assess audit competency to the same level as before. IRBA considered that it would have to ensure that the professional skills and competencies of auditors were responsive to the needs of the public, in a manner that protected the public. Thus, IRBA had developed the Audit Development Programme (ADP), entailing a period of specialisation in which candidates would have to demonstrate on the job audit competence. Candidates would also perform roles more senior to those undertaken while being an articled clerk. Candidates had to submit a portfolio of evidence of work undertaken for the ADP.

The audit firm had to provide the candidate auditor with the required skills and competencies to register as an auditor and give them practical exposure to a wide range of matters faced by registered auditors, yielding a more mature auditor. The registration with IRBA of candidate auditors was desirable to protect the public, as it placed them under IRBA’s jurisdiction in regard to ethical standards and discipline. The ADP had started in 2015.

The proposed steps to become a registered auditor were thus to obtain a professional accountancy designation from a professional body accredited by IRBA, complete articles, register as a candidate auditor with IRBA, successfully complete the Audit Development Programme, and finally register as auditor.

The Amendment Bill would authorise IRBA to register and regulate candidate auditors, define a “registered candidate auditor” as an individual who had obtained professional accountancy designation from an accredited professional body, was registered with IRBA as a candidate auditor and was serving under the supervision of a registered auditor.

The amendments in the Bill relating to the Companies Act dealt with the definition of “Companies Act” in section 1 of the Auditing Profession Act and references to other provisions of the Companies Act. These related to the registration of firms as registered auditors; the requirements for a letterhead when practising under the name of a firm which is a company in section 41(6) of the Auditing Profession Act; and IRBA’s inspection or review of practice of registered auditor that audited a public company in terms of section 47(1)(b) of the Auditing Profession Act.

Ms van Schoor set out that the National Treasury had received comment on the Bill, which she explained.

The submission by the SA Institute of Professional Accountants (SAIPA) raised the issue of the possible confusion in using the term “professional accountant” in the definition of “registered candidate auditor”, since SAIPA members were designated Professional Accountants (SA). National Treasury responded that these professional accountants were the target group for candidate auditors, and the term was recognised by the International Federation of Accountants (IFA). The term used in the definition was actually “professional accountant designation”.

A second issue was that the abbreviation “CA” should not be used for a candidate auditor, to avoid confusion with the term "Chartered Accountant". National Treasury responded that in fact IRBA was using "RCA -registered candidate auditor”. She suggested that to clarify matters, section 36(4) should include reference to “candidate auditor”. 

Members agreed that this would make sense and decided to adopt this proposed amendment.

Ms van Schoor continued that the third issue raised was that disqualifications should be worded in line with other legislation, such as the Companies Act. National Treasury’s response was that it was outside the scope of the amendments in the current Bill. However, the current Act did cater for non-compliance with other Acts as grounds for disqualification for registration, and suggested that it could be dealt with in IRBA’s rules of improper conduct. This would later also be considered during a review of the whole Act.

A fourth issue was a query why provision for auditors performing independent review services, as recognised by the Companies Act, was not in included in the Bill. National Treasury responded that this was outside the scope of the current Bill and was also already regulated in another Act, so there was no necessity to deal with it in the Auditing Profession Act. Again, the proposal would be taken into account during a review of the whole Act.

Discussion 
The Chairperson asked when the review would be completed.

Ms Van Schoor said the review of the whole Act was still ongoing, but some urgent amendments needed to be processed by way of this Bill.

Mr V Mtileni (EFF – Limpopo) asked for the relationship between the National Treasury, SAICA and IRBA, as well as their roles, to be defined.

Mr T Motlashuping (ANC – North West) asked to what extent auditors were qualified to audit performance.

Mr F Essack (DA – Mpumalanga) said that senior auditors generally abused junior auditors in terms of workload. He asked how the fact that senior auditors signed off on work done by junior auditors was deemed to protect the public. He also asked for a further explanation on RCA. He asked if unqualified auditors could sign off on statements.

Mr S Mohai ANC (ANC – Free State) asked what the amendments were intended to resolve.

Ms E van Lingen (DA – Eastern Cape) asked whether the profession was protected from an influx of outside people being brought in.

Ms van Lingen asked for an indication of the financial implications of the Bill?

The Chairperson said there were no financial implications.

Mr L Gaehler (UDM – Eastern Cape) asked what period of training trainee auditors did and who monitored them. He asked how this Bill could, for instance, assist a child in a rural village to take up the profession of auditing?

Mr Mtileni asked whether the institution was doing enough to ensure that public funds were not misused. He wanted to know how it would collaborate with other bodies.

Ms Laine Katzin, Director: Education and Training IRBA, said IRBA was an independent regulatory board for auditors' educational training and professional development, with the ability to accredit professional bodies like SAICA and its training programmes. SAICA used IRBA’s programs and examinations. SAICA had done a review of its training programme and implemented changes to it, because business wanted a more rounded business leader rather than specialists. IRBA could have stayed with its existing exams but that would have meant that an auditor would have to pass three exams. IRBA had then reviewed its own programme, concluding that the best way to assess professional competence was on the job assessment not only tests. For this reason it had developed the ADP, which was not as onerous, gave an opportunity for a better testing and resulted in a more mature auditor after completion.

She said that National Treasury housed IRBA, and IRBA accredited SAICA’s university and training programmes. She reiterated that SAICA was the body for chartered accountants. She assured the Committee that South Africa was not producing under qualified professionals. SAICA produced top notch candidates, and worldwide South Africa was rated the no.1 country for such training.

With regard to assessing the performance information, she said IRBA was training the auditor to do the work of auditors. Auditors tended to understand business on the general level, and did not specialise in one role and could operate in any environment.  In America the stock market sometimes required performance information from companies. Auditors could audit a wide range of organisations, from a football club to a mine.

On the abuse of junior clerks, she said that IRBA was currently doing an exercise on the experiences of trainees and that IRBA saw the ADP as a prime opportunity to provide a skill set and meet competencies at a senior level.

She explained that someone who was not an auditor could not sign off accounts. In cases where this might have occurred a disciplinary process was followed.

She said IRBA supported SAICA in not going via the two-route system.

Mr Robert Zwane, Senior Manager: Candidate Development, IRBA said that auditors or accountants could specialise later, similar to the case where a person might have qualified as a doctor and then specialise later. He said the focus was not just on development. The additional two years experience meant candidate auditors would have a better marketability on completion.

Ms Katzin said foreigners' qualifications were not accepted until the qualification was adjudged to be at an equivalent level. IRBA did have reciprocity agreements with other countries' institutions and it also recognised prior learning. She reiterated that IRBA monitored SAICA’s training programs.

On the question of who benefited and who it would assist, she said transformation was an imperative of IRBA. SAICA ran the Thuthuka programme. IRBA was doing research to find out at what point people left the auditing programme. She said all professional bodies had a code of conduct and ethical behaviour and members had to adhere to standards.

On the question of a RCA, Ms Van Schoor said SAICA called its members "professional accountants" so Treasury would use the term "professional accountant designate", as the target group for auditors were candidate accountants registered with IRBA who were called "candidate auditors".

Regarding Mr Essack's question on norms and standards she said it was comparable with the UK and Australia.

Ms Van Lingen asked what the Bill’s socio economic impact on the ground would be. She said that while there was legislation, it did not protect against back door entries. There was a case of people claiming to be qualified engineers working in the country at present, and a case of two finance officers claiming to have chartered accountant qualifications. That issue was not covered by law, even though professional bodies had regulations in place.

Mr Mohai said there should be a systematic rather than a piece-meal approach to the promotion of the auditing profession in rural areas.

Ms Katzin said South Africa had relationships with other countries with similar standards and accounting standards and it did have an arrangement regarding qualifications being equitable and sound.

Regarding socio economic costs, she said there were no costs to the public. The main costs involved would be in relation to time to complete the portfolio of evidence and the registration cost, which was once off and paid by the firm.

She said that she was not familiar with the case of the engineers, so could not comment. She said the Act prescribed that nobody could audit unless registered with the IRBA. IRBA did monitor, and in cases of non-compliance, it would prosecute via the Act. In addition, there was capability to do verification of an auditor on its website.

Ms Katzin said that there was an attempt to run awareness programmes in schools, and that although some areas were inaccessible it partnered with SAICA in these areas. She acknowledged that there was a lot of work to be done in promoting auditing to pupils in the rural areas.

Mr Zwane said the transformation agenda was bigger than IRBA, and it needed the participation of other partners. He himself had gone back to the rural area he had come from and it had resulted in one other person taking up the profession. Alumni were encouraged to go back to the rural areas. IRBA also used radio stations in all the official languages to promote the profession.

The Committee adopted the Bill, with amendments.

Banks Amendment Bill: Preliminary briefing
The Chairperson said that the Bill had not yet officially been referred to the Committee but in the interest of speeding up the process, the Committee would take this briefing before considering the Bill at its next meeting.

Mr Roy Havemann, Acting Chief Director: Tax and Financial Sector Policy Unit, National Treasury, said the Bill had attracted a lot of media attention and had been to some extent controversial because it applied to current curatorships. The Standing Committee on Finance had put forward a number of changes and the majority of stakeholders had written a letter of support. An additional two weeks consultation period had been allowed. Adv Frank Jenkins, Senior Parliamentary Legal Advisor, had concluded that the new proposals were also constitutional and had summarised the legal opinions on the constitutionality of the Banks Amendment Bill well.

Mr Ismail Momoniat, Deputy Director General, National Treasury, said banks were not treated under the Companies Act but under the Banks Act, to avoid a systemic crisis, because if banks collapsed this happened very rapidly. In addition, banks were global in nature,and so needed to meet international standards while still complying with a country’s own laws.

The Chairperson asked if the Bill would put banks in a better position in future.

Mr Havemann said that in section 69 of the Banks Act, under the current framework, there were certain powers to resolve banks in distress. Section 68 was used to liquidate a bank, rather than following a Companies Act process. The legislation lacked the ability to segregate bad assets from good assets, which was essentially what National Treasury was trying to do in the case of African Bank. If a company was in distress, there was an attempt to reach a compromise. The Banks Act, however, did not allow for this and the Bill was now allowing for a curator to be appointed to try and reach a compromise. The question was what powers the curator should have. On the one extreme it was possible to liquidate the bank, where creditors would receive 30-40c in the rand. On the other extreme it could be nationalised, so that the public assumed all the losses. It was not possible to foresee the powers required by a curator when a bank went into distress. South Africa had been fortunate not to have a systemic crisis in its banking sector following the global crisis of 2009, but it needed more resolution options since banks in distress could not be resolved through normal insolvency / company laws. Since the global financial crisis, almost every country that had had a bank failure required revisions or emergency legislation. The urgency in amending this now was owing to South Africa’s highly interconnected and complex financial systems, which meant that curatorship required flexibility. Even small banks collapsing could have systemic implications.

Five main groups had made submissions on the proposals. He noted that these included groups with substantive concerns. The senior creditors in African Bank stood to get 90c in the rand back. Mr Momoniat explained why a creditor could give two different and opposing views during submissions - which were essentially because the creditor could have been the fund manager for three or four funds, with each fund fighting to attain the best deal for itself. A concern had been raised that there was not a mechanism for creditors to participate in the process or financial arrangements when credit was subordinated. A proposal had been made to introduce the Companies Act process, to get consultation with creditors and their approval in the case of African Bank. In the opinion of the Minister, this had been removed to make the process more objective. It was important to note that no creditor should be worse off than if a liquidation was to occur so their rights were substantively protected.

National Treasury had sought input from around the world on the question of the valuation of the transferred assets and there were checks and balances to ensure the value was correct. Market value would not apply as the market value of the bank would be worthless. The other issue had been on the constitutionality of enacting the legislation retrospectively. He said stakeholders had agreed with the need for the Bill and Treasury had obtained three legal opinions including that of two senior counsels who had agreed that the Bill was fine.

Discussion  
The Chairperson asked what monitoring tool was used to pick up that banks were in distress. He asked about the role of the SA Reserve Bank and also how accountable the banks were.

Mr F Essack asked how constitutional it was that this Bill should be applied to current curatorships, and what advice the Minister had received on the legalities of the matter.

Mr Gaehler asked what pay-outs would be given to the ordinary citizen who had savings in the bank.

Mr S Mohai (ANC – Free State) said he struggled to understand why the Bill was controversial.

Mr Momoniat said, in regard to questions of constitutionality, that in the case of African Bank people had lost money, so the question was which creditors should be paid first. No matter what National Treasury said, people would push to get back their money. The constitutional questions were related to how the Bill, once passed would apply to current curatorships, but he did not expect that there would be constitutional challenges.

Mr Essack asked how the case of Greece would relate to this case.

Mr Momoniat said that the Greek debt was 200% of its GDP, and this was a case of a whole country being insolvent so there would be a run on everything. The exit of Greece from the EU might cause a European crisis, but one would not know until it happened.

Mr Havemann said depositors got everything back.

Mr Momoniat pointed out that whilst this was so, people who had shares in the bank lost money.

Financial and Fiscal Commission Amendment Bill
Adv van Schoor gave a background to the Bill, saying it was important to note the function of the Financial and Fiscal Commission (FFC), which was to make recommendations. The National Treasury had worked with the FFC when developing the Bill.

The Bill was intended to enhance institutional and other governance arrangements for the FFC, and the functioning of the Commission, to align the FFC Act with the Constitution and the Public Finance Management Act, and to  introduce procedures for determining the remuneration of Commission members.

The amendments in the Bill would separate out the roles of the Chairperson and CEO - the current Chairperson was also the CEO and accounting officer. A new post of CEO, which would also have the functions of an Accounting Officer and Secretary to the Commission, was proposed. This would remove the anomaly of the Chairperson also being the CEO and Accounting Officer. The Commission would exercise oversight over the CEO. The CEO would be under a renewable contract not exceeding five years. The Commission would now be responsible for determining and overseeing the strategic direction and operational policy of the Commission. The Commission’s functions would be aligned to the Constitution and other legislation, bearing in mind that the Commission only made recommendations, and did not, as currently provided for, act as consultative body or give advice. This would strengthen the Commission’s role in making recommendations.

Membership vacancies of the Commission would now have to be filled within six months, compared to the current situation, which were inconsistent, since section 5(3) referred to "within 90 days", and yet in section 12  the wording "as soon as practical" was used. The Chairperson would be appointed on a full-time basis and other members on a part-time basis - the current Act was silent on the appointment basis. Currently there was no limitation to the time Members may serve, but this would change to a period of not more than 10 consecutive years. The current Deputy Commissioner would remain full time.

The Act also provided for the remuneration of office bearers. Currently, the President determined the FFC’s remuneration. The Bill also proposed more extensive provisions on the conduct of members.

To accord with the FFC’s constitutional status, it was proposed that the Minister’s regulation-making power be replaced with rule-making powers for the Commission. However the Commission would have to consult with the Minister of Finance before making these rules. The current rule-making power, without ministerial consultation, on corporate governance would be expanded. The amendments distinguished the distinct roles of, and relationship between, the Chairperson and the CEO.

Other amendments related to aligning the FFC Act with the Public Finance Management Act (PFMA); enabled the Commission to obtain information from any organ of state or person required for performance of its functions; dealt with the definitions of  “chief executive officer”, “Independent Commission” , “Public Finance Management Act” and omitted or updated obsolete terminology, and repealed obsolete provisions.

The FFC’s submission to the Standing Committee on Finance sought a definite period for filling of vacancies, but it considered six months to be a reasonable period for this. The Bill as now proposed by the Standing Committee of Finance provided for a six month period. Furthermore, in line with the FFC's recommendations, the Standing Committee proposed changes to the Bill provided for a full-time Chairperson.

The FFC had suggested that members of the Commission may be eligible for appointment as CEO, although the purpose of the Bill was to provide that a person may not be a Commission member and CEO at the same time. The Bill as changed already by the Standing Committee of Finance made it clear that a member may be appointed as CEO and, if this did happen then he/she was regarded as having resigned as a member of the FFC, from the date of assumption of duty as CEO.

Discussion 
Mr Essack said he was not impressed, as this amendment appeared to be "just another bloated creation" of a job.

Mr Motlashuping said the President appointed members of the Commission, but it was not said who would be appointing the CEO. He asked what the duties of the current Chairperson/CEO were and what the duties of the new CEO would be. He also asked that the basis of appointment of the Chairperson be clarified, as it was stated that the Chairperson would be a full time member. Surely the Chairperson was a member of the Commission?

Mr Mohai said the separation of the two posts was long overdue as its continuance was not a good model for good governance. He wondered if the FFC was going to get additional staff establishment. He also asked if there were other bodies like the FFC that had the same problem of a person filling the posts of Chairperson and CEO at the same time.

Mr Gaehler said the President appointed the Chairperson and Deputy Chairperson, but he had thought that the CEO was appointed by the Commission. He said he hoped the Committee was not setting a precedent in this Bill, and urged that the functions and duties of the CEO and of the Chairperson had to be clear.

Ms Van Schoor said the FFC was the only Constitutional institution where the Chairperson and CEO roles were filled by the same person, and the FFC had complained about this matter for some time. Most of the other Commissions had a full time Chairperson and then also a CEO. The CEO’s duties were to be the Secretary for the Commission, and the accounting officer.

She clarified that the President appointed members of the Commission, while the Commission appointed the CEO. If the new CEO was from the Commission, that person would have to resign as member of the Commission. The Commission did currently have a Secretary, but that person would not automatically become the CEO.

The Chairperson said that the FFC had to submit its Annual Performance Plan and Budget to Parliament and the NCOP could take such a presentation from them.

He noted that briefings in the provinces would be held between 18 and 22 May. Mandates were required before 3 June and final mandates by 10 June.

Limpopo Province Oversight Report
The Committee adopted the report on its oversight visit to Limpopo Province.

The meeting was adjourned