Accounting Standards Board (ASB) on its 2014/15 Annual Report

Meeting report

Opening Remarks

The Chairperson welcomed everyone and noted that the Accounting Standards Board (ASB) also presented last year and made a good impression, although this was not always reflective of the quality of the entity; Parliament must not be too complimentary. Look at how Eskom turned out. The job of this Committee is to uphold the Constitution, and the charter of the ANC called for the party to be an activist party that was representative of the people. Parliament must hold the executive accountable. Our job is not to just create reports, but also to take decisions and ensure that the Executive undertakes them. Our report must be brief and action-oriented. 

On the following day, the Committee will hear presentations on the Twin Peaks Bill from representatives of the Netherlands and the UK. The Chairperson suggested that members attend a lunch after the representatives present to the whole Committee. The Chairperson requested that members RSVP for this lunch with the Committee Secretaries.

There were implications for members on the tax reform proposals that were before National Treasury. Whoever earned a certain salary must pay the adjudicated tax. There was no special dispensation for members. The Chairperson only heard about this matter over the weekend.

The Chairperson had requested that National Treasury partially fund a study tour for the Committee to Mexico and The UK. It was very time-consuming to write up the motivation for this trip. The Twin Peaks Bill would be tabled in a week or two and the FICA Bill had already been tabled. There would be public hearings this year for FICA.

There were implications for MPs with regards to tax reform proposals that were before the Committee from National Treasury. The Committee must look at this matter objectively. While there should be no special dispensation for members, members should be made aware of any implications.

The Chairperson noted that it might be indecorous to speak about only members during a proper open meeting of the Committee.

The Chairperson gave the floor to the Accounting Standards Board (ASB).

Accounting Standards Board (ASB) Annual Report

Ms Erna Swart, CEO, ASB, noted that the entity had had a new Board appointed as of last March. She agreed that the Committee should hold the Executive accountable and hoped that the Committee could use the ASB to help in this mission.

The main objective of the ASB was to set standards. The ASB set standards, facilitated the implementation of, and monitored the application of GRAP. The ASB ensured that its seven personnel were adequately trained and that its stakeholders were constantly engaged.

The ASB had developed a standard for accounting by differentiating between Principles and Agents. In many cases, even though the national department may be in charge, responsibility fell to municipalities; the ASB had issued standards to clearly delineate powers between national and municipal jurisdictions. The ASB did a research study on revenue from contracts performed. The ASB took note of developments in both the public and private sectors. The ASB continued its post-implementation projects, including property, plant, and equipment, investment property, impairment, and materiality. At the moment, accounting standards were used as a compliance checklist; this practice could result in pages and pages of meaningless disclosures.

The ASB had a member nominated Deputy Chair of IPSASB. This body published drafts including:

• Strategy & work plan consultation
• Applicability of IPSAS to GBEs
• Reporting in Service Performance Info
• IPSASB Improvements Project
• The ASB also submitted four comment letters to the International Public Sectors Accounting Standards Board (IPSASB) and commented on three private sector exposure drafts.

The ASB developed a brochure on its role for Parliament and other legislatures. The ASB had been translating its standards into Zulu, Sesotho, and Afrikaans; however, due to its 13-year history and extensive amount of publications, this had taken a long time. The ASB had encouraged GBEs to conduct self-assessment to answer whether they should use GRAP or IFRS.

The ASB had worked to monitor the application of GRAP Standards through a post-implementation review. The objective of this review was to assess whether users of financial statements use the information in the financial statements and to identify improvements based on user and preparer input. The ASB had amended some standards and issued the guidance on materiality. There is inconsistency in this area. The National Housing Framework required municipalities to build houses within this framework. The ASB is creating a National Housing Guide. The ASB was creating a Standard Chart of Accounts for municipalities. A pilot study was being run in many municipalities to see what changes need to be made to this standard. Articles on the subject had been published in various journals.

The loss of key staff was a key risk area for the entity. The private sector paid far better than the public sector. Training took at least three years; the ASB focused strongly on staff development. The ASB employs performance-based remuneration and 64% of ASB costs go to staff remuneration.

The ASB published a newsletter, articles for journals, and had reached all nine provinces. National and Provincial Preparers did not participate this year; though it was a low priority for them, standards would have to be addressed by these areas soon. The ASB engaged with stakeholders on thirty-nine separate occasions.

The ASB had received a clean audit for 13 years. The ASB had also run internal audits to assess readiness for audits and performance information. The ASB had a net budgetary deficit due to depreciation and provisions for leave pay, among other factors.

The ASB had six employees (excluding the CEO), four of whom were Chartered Accountants. These employees required continuous training and development, and were often overworked. Employee remuneration was no longer market related. The ASB had four board meetings a year with at least three technical documents per meeting. The ASB frequently had to fly to Toronto to engage with international bodies, which was quite expensive.

Communications costs were so high due to the costs of translating standards into other national languages. The ASB took efforts to cut print costs by keeping documents electronic.

The ASB had attempted to pursue cost containment policies. The ASB renegotiated lease escalation from 10% to 5.5%; it also renegotiated all service costs.

The ASB did not have much room for budget cuts, but it has made efforts by creating hypothetical cuts to training, traveling, print, and translations. However, the ASB recently was allocated R1.1 million of additional budget money. Four office members do not speak any of the translation languages, so translation reviews will have to be paid for.

Discussion

The Chairperson called for questions.

Mr D Maynier (DA) asked whether he understood the ASB’s mandate correctly. You set accounting standards, the AG monitored the application of those standards, and you also monitored the capacity of entities to implement those standards. Do you have information on the application of and the capacity of entities to implement your standards? It would be very useful for this Committee to have those reports.

Mr A Lees (DA) asked whether there was any risk in materiality: especially with regards to non-exposure to relevant information. What is the connection to SAICA? Does the ASB work with other entities? What is the implication for computer software? It is great that your staff sits in on audit meeting.

Mr D Van Rooyen (ANC) asked to what extent was the ASB involved in ensuring that the institutions it helped were able to comply with its standards? You said that you could help this Committee. Can you expand on this? You referred to a brochure given to Parliament; this is the first time I have heard about this. How technical is the brochure? The Committee may require a special session to unpack the brochure. I know that your staff is very small, but does your employment approach comply with transformation?

Ms D Mahlangu (ANC) pointed to slide six. Translations were welcomed. Your cost-cutting measures were concerning, but as you said you have received money for training and translations. On page 10 where you talk about stakeholder consultation, you say that provinces were not part of consultations. You explained that there were no active stakeholders in various provinces. How can Parliament help remedy this, because surely people in these provinces could benefit from your services? The Committee is happy with your efforts at self-regulation. Institutional sustainability is important; they cannot rely on bailouts. The fruit salad you spoke about also highlights the need of oversight from public representatives. We need a standard approach; standards will help oversight be more efficient. You claim in a different report that you have reached all provinces; which is the truth? Training, for example: the ASB has budgeted 92 and spent 242. I also have questions about travelling. How will the ASB survive the rest of the month? Will the bailout allow you to survive the financial year? Are you under-budgeting?

The Chairperson noted that Ms Kekana had been on leave and should speak as long as she liked.

Ms P Kekana (ANC) admitted that she was learning about finance. In municipalities, there were only two terms that CFOs were using: GRAP was the main one. On one of your pages, the ASB cited that National Treasury would fully implement GRAP by 1 April 2016. With regards to government departments and municipalities, how ready are public entities to use these GRAP accounting standards? From the Auditor General’s (AG’s) report, we have cause for concern. Tell us that you can do an overall analysis to find performance gaps in departments. Of course, there are entities that the AG did not audit. How did the ASB follow up that these un-audited entities use the GRAP standard? Why does the AG not audit the ASB? Your standards help the AG. The first thing the AG picked up was financial misstatement. How would you enforce that institutions comply with GRAP? What kind of support will you give to institutions?

The Chairperson said that, last time the ASB addressed this Committee, the Committee lauded the entity’s good work. Have the authorities above me in Parliament enlisted your help? I have done what I can do. The Committee still felt that, based on what we hear, that the ASB was doing a good job. Of course, the ASB could have hidden some expenses, so members must be careful in what they say. Researchers were overworked. My subjective instinct tells me that you do good work. The Committee should study whether the budget for ASB should be increased and, if so, for what. You should write a page entailing exactly what must be done. Who are the Board Members of the ASB? My view is that we must acknowledge the people who have served the country, but equity and representivity is also extremely important. The ASB needs to be representative. My job now is to encourage others to occupy the spaces I have had the honour to occupy. Your work must allow for others to do the same good work. I would urge members to appreciate that we will be better at reports next year. We are lacking a researcher.

MsTrix Coetzer, ASB Board Member, pointed to the demographics of the Board. It was fair that they are not here in this presentation, but they are in the report. The work of the ASB was not the most exciting for CAs. Setting standards was not as exciting as mergers and acquisitions; men go to mergers and acquisitions because that was where the money is. This desk job work of setting standards was easier for women. A typical accountant was not good at writing, which was another challenge for the ASB.

The Chairperson understood the structural challenges, but these challenges must be addressed.

Ms Swart said that the ASB did not monitor the people employed in the public sector when implementing standards. Smaller municipalities generally get more time. There were very few differences with the private sector GARP and the public sector GRAP.

As for materiality, something was material if it was likely to raise questions. Materiality was very low, even less than the transfer payment sometimes. Materiality helped determine what to audit. Materiality had led to unnecessary disagreements between preparers and auditors. There was a risk, which was why the ASB assists in this matter.

The ASB worked with SAIPA, SAIGA, and other government entities. Not everyone was a member of these bodies, but to reach out to them the ASB needed more funding. The ASB had an Accounting Forum, which was an almost monthly meeting that allows stakeholders to attend a meeting to discuss new practices and stakeholder struggles. The ASB strived to work with all of government.

Software developers had said that they would withdraw from the public sector due to these requirements. ENSCA would not impact everyone. There were many different accounting systems.

The ASB could not assess the capacity of institutions to implement its standards. The National Treasury assisted the entity with this. Accounting policy choices could be misleading; the role of the ASB would be to assist the Committee when entities adjust their accounting policies. Before the last election, the ASB had a workshop with the AG exploring general committee assistance. Standards should be based on general users who do not have access to a preparer. The ASB also could not work with other preparers.

The Brochure was in plain English. The ASB was very small, but these standards were very widespread in their influence. The ASB tried to reach out to stakeholders as much as possible. The new Board and the old Board are both representative. There were two Coloured ladies, one Indian gentleman, one African woman and two African men. It was disproportionately female. The black lady had asked me to be her mentor; she had developed so well over the last few years. She handled herself so well.

As for translations, we initially did want to cut this, yes. It created an enormous backlog and was discretionary during our budget woes. Now that we have the funding, both translations and training would continue. Training was a huge risk issue. The ASB must submit a balanced budget. In most years, the ASB has normally had vacancy. For the past 18 months, those positions have all been filled. Much of the budget disproportion in the table presented came from the translation backlog and the brochures. A UCT professor at the last board meeting said that her students find the Zulu translation on the ASB website very helpful.

Ms Mahlangu asked again how the ASB would survive for the rest of the financial year.

Ms Swart replied that the ASB was now actually in line with the budget, though certain costs like travel and consultations simply had not been done. The ASB would continue the translations. The additional money was also for post-implementation reviews.

The ASB participated in all provinces. The Western Cape and Free State invite the entity most often, though the offer was open to all provinces. The ASB also needed to be able to fly in and out on the same day. We get the experts when we need them. Hopefully the experience with provinces will be similar to the experience with municipalities.

As for implementation, each year various standards begin to apply. We rely on the Auditor General and the Accountant General to advise us on whether entities are ready to implement. Frequently, entities do not fully understand the ramifications of implementation before they do it.

The AG did not audit the ASB because he was an ASB board member. There was a conflict of interests. The ASB was not responsible for enforcement. However, the ASB understood the areas of difficulty on these matters, and the ASB tries to provide guidance here where it can.

The ASB could use one more staff member to do post-implementation reviews. All staff were involved otherwise in drafting standards or consulting stakeholders. This would take R1 million.

The Chairperson asked for a motivation paragraph to be sent to the Committee by the end of the day. There seems to be reasonable sympathy for your request. National Treasury will be involved.

Ms Swart said that, when fully staffed, the ASB did not have enough money.

Mr Van Rooyen said that all MPs need to take financial statements seriously. It was a very necessary requirement in assessing departments to know how to read financial statements. This discussion is ongoing, but expectations needed to be clear.

The Chairperson said that he had pursued this issue at length last year. The ordeal had been very frustrating; the services of the ASB should have been used. He thanked the ASB for its presentation.

Committee Business

The Chairperson said that he spoke to Mr Majola yesterday. Mr Majola said at that time that he agreed that the financial implications of any nuclear programme should be looked at.They did raise this matter yesterday and that the President said that procurement must be done by the end of the year. Apparently, the President meant by the end of the financial year.

This matter must be addressed in the new year. Mr Majola was very amenable.

Mr Maynier thanked the Chairperson for taking it up. The President created the impression that the procurement would be done within the financial year. I had an appetite due to the calendar to finish the matter this year. The Director-General told us that the work had already been completed. Treasury would be able to brief this Committee on the possible implications of a deal. This should be done this year. The Nuclear Build Programme was a large financial risk, but there were other agenda items that posed risks, like National Health Insurance, Higher Education, and others.

Mr Van Rooyensaid that this process should be expedited, and that there was nothing else to say.

Ms Kekana said that the Chairperson has started the appropriate process.

The Chairperson said that there was no way that the Minister of Finance would appear for a one-on-one presentation on this issue. There was one government. The Cabinet would discuss the matter. Everyone across government wanted the Nuclear issue out in the public domain. The Committee had put pressure on Mr Majola, but beyond that, members must be realistic in their requests.

Tomorrow we have Mr Gert Luiting and Ms Claire Lawrie from the Netherlands and the UK respectively coming to the Committee and for lunch to discuss Twin Peaks. It appeared that all Members would be able to stay for lunch.

Mr Maynier said that he hopesdthe joint meeting will happen before the end of the year.

The Chairperson agreed.

The meeting was adjourned.