IRBA 2017/18 Annual Report

Meeting report

The Acting Chairperson welcomed everyone and indicated the Chairperson was unavailable owing to work-related commitments abroad. She invited the Independent Regulatory Board for Auditors to present its 2017/18 annual report. 

Independent Regulatory Board for Auditors (IRBA) Annual Report presentation
Mr Bernard Agulhas, CEO, IRBA, took the Committee through IRBA’s 2017/18 annual report presentation. The regulator’s strategic focus was protecting the financial interest of the public by ensuring that only suitably qualified individuals are admitted to the auditing profession, and that registered auditors deliver services of the highest quality and adhere to the highest ethical standards. Highlights for the year were as follows: opportunities to interact with Parliament regarding high-profile investigations and demonstrating the role of auditors and audit regulation in strengthening the credibility of financial markets; progressing the amendments to the Auditing Profession Act to strengthen the IRBA’s oversight and ability to institute the required measures against errant auditors; gazetting of Mandatory Audit Firm Rotation rule; transformation research and workshops were conducted; and the Africa Forum of Independent Accounting and Audit Regulators (AFIAAR) charter that was signed and South Africa being elected as deputy chair in March 2018.

The breakdown of IRBA’s income sources was as follows: R39.6 million worth of government grants; R70 million worth of revenue from regulatory functions- of which exchange transactions (licensing, monitoring, registration fees) and non-exchange transactions (firm fees and contributions toward disciplinary and investigations and sanctions for improper conduct) constitute 30.6% and 32.8% of total revenue respectively. Expenses amounted to R115 million, and total revenue was R109.7 million. Major operating expenses were employee costs as well as disciplinary and investigation expenses.

IRBA received a clean audit opinion from the Auditor-General for 2018 and 2017 year ends. The Regulatory Board has recorded clean audit opinions for nine consecutive years. The clean audits were in respect of reports on the financial statements, report on other legal regulatory requirements, predetermined objectives, compliance with laws and regulations as well as internal controls. During the period under review, IRBA’s achievement against performance targets was 100% for the programme: development and maintenance of auditing and ethical standards which are internationally comparable, of which auditing pronouncements, auditor reports and comment letters were issued. Additional guidance on ethical issues, comment letters and Code amendments were also issued. On the education and transformation programme which entails provision of an appropriate framework for the education and training of properly qualified auditors, monitoring visits were completed in accordance with the monitoring plan approved by ADCOM on a quarterly basis. Further, 100% compliance was achieved in monitoring the education and transformation programme. On the target to monitor registered auditors’ compliance with professional standards through inspections and reviews on a regular basis, 85% adherence to the inspection plan was realised. 

Mr Agulhas identified challenges IRBA was currently grappling with. Limited funding was proving to be a significant challenge. The R39 million allocated by Treasury pays for IRBA to deliver on all of its objectives, but when it came to investigations, IRBA needs to appoint three or four additional investigators, given the high-profile investigations that have come onto its agenda. Currently, IRBA could only afford to pay five investigators. In an effort to deal with capacity constraints, IRBA does employ consultants which come at a cost. IRBA was however making efforts to build up internal legal capacity. The current Act was also encumbering and resulted in unnecessary costs. To deal with some of the challenges and restore confidence in the audit profession, the Board had put together various interventions and initiative- the key themes being: business process review of functions; comprehensive regulation; mandatory audit firm rotation; audit firm governance; strengthening audit committees; skills and competencies of Auditors; auditor behaviour; and audit product and quality. IRBA was also looking into how standards could be changed in order to address the aforementioned challenges. 

Discussion
Mr D Maynier (DA) asked for an update on the status of high-profile investigations by IRBA. How were cases being prioritised? Was there any material progress in the investigations? It appears the work-rate of IRBA’s investigation and disciplinary committee was slow and an impediment to progress on the investigations.

Mr N Nhleko (ANC) noted IRBA’s operating expenses. He asked how having 78% of its budgeted expenditure going to employees costs could be affecting the delivery side of its mandate.

Mr F Shivambu (EFF) said audit firms were a big problem as they legitimated corruption. However, nothing was being done by IRBA as a regulatory body. He suspected regulatory bodies were captured by the audit firms. This had to be looked into as there were reasonable grounds for such suspicions. What measures had been taken against KPMG? Why were the operating licenses of firms which collaborated in corrupt practises not being withdrawn?

Ms P Nkonyeni (ANC) expressed concern that there had not been clear sanctions imposed on KPMG. KPMG was still operating as if nothing happened. She asked why one board member had attended two out of seven board meetings during the period under review. Why were board members not in attendance during a Committee meeting?

Mr Agulhas, in response, gave an update on the status of high-profile investigations. Among the high-profile investigations are probes into Steinhoff’s auditors Deloitte, African Bank, VBS Bank and Gupta-linked Nkonki. To be able to conduct more investigations, funding is required to boost capacity. Up until the end of this year R6 million was budgeted for these investigations and for the disciplinary hearings. But in fact an additional R16 million was needed- up to March 2019. For the medium-term budget, IRBA had increased its requirements to R25 million. That was what would be needed for the investigations to complete faster. IRBA in March managed to conclude an investigation into Linkway Trading, and the KPMG auditor was charged for improper conduct and tax evasion related to the Linkway account. The hearing for the matter started just after the case was opened in June 2017. Although the matter was heard over a few days, the next step was for the sanctioning hearing to take place- which could only happen when all the disciplinary committee members and the legal counsels for both sides are available. Although IRBA would like the hearing to be done before year-end, it might only be done in February 2019. This was beyond its control, as the decision rests with the disciplinary committee. IRBA could not enforce what it wants, necessarily. IRBA’s investigation was conducted faster than would have been expected. There were also a number of investigations linked to the Guptas underway, as several complaints had arisen against KPMG. These investigations were completed and tabled before the investigations committee at a meeting, which will decide on the recommendations to be made to the disciplinary advisory committee. As for the KPMG investigation related to the SARS rogue unit report, IRBA appointed an external service provider, as it did not have internal capacity. However, this service provider is busy with an existing investigation into African Bank. The African Bank hearing was scheduled for later this year between November and December, so little progress had been made on the SARS report. The investigation into VBS Mutual bank was on track and in the case of the Steinhoff investigation, a collaboration with foreign investigators was still underway. Steinhoff is extremely complex as it involves many companies and auditors. IRBA had made a lot of progress and has one investigator dedicated to Steinhoff. He clarified that only Steinhoff’s auditors were being investigated, not former CEO Markus Jooste and former CFO Ben la Grange, as they are not auditors. This probe would not be concluded by the end of 2018, as it is too complicated and complex and must be done right. On how long it would take to complete, these details could be provided to the Committee at a later stage.

Mr Agulhas said having the bulk of IRBA’s budgeted expenditure going to its wage bill was not unexpected as its mandate relates to service provision and setting competence requirements for auditors. 70% of the expenditure goes to the remuneration of the competent professionals as IRBA who discharge these duties. It was quite unfortunate that there is a perception that the IRBA is captured. Everything was being done to ensure the regulator’s independence. The independence of IRBA was critical as it impacts on its credibility. He added that implementation of mandatory audit firm rotation was being monitored, and positive behavioural change was being noted. Implementation was on track in spite of resistance from some sections. On board meeting attendance, the board member who attended two out of seven meetings was on maternity leave.

Mr Maynier proposed that the Committee consider, subject to legal advice, writing to the disciplinary committee expressing concern about the delays in the completion of high-profile cases and possibly urging them to speed up. However, this should not be misconstrued as interference on the work of an independent body by the Committee.

Mr Nhleko said the Committee could take the route suggested by Mr Maynier but cautioned that IRBA investigations by their very nature were both technical and complex. Public perceptions and pressures were well-understood but the Committee should not fall into the trap of overriding the technical aspects of any investigation and the need to follow due and thorough processes.

The Acting Chairperson said the Committee appreciated the progress being made by IRBA but that should not stop Members from expressing concern about the pace of the investigations. This would not be helping the process. The intention was never to frustrate processes but to assist the regulatory board in delivering its mandate. She thanked everyone for their inputs.

The meeting was adjourned.