IRBA Annual Report and legislative changes to its powers and functions

NCOP Finance

11 February 2020
Chairperson: Mr Y Carrim (ANC KZN)
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Meeting Summary

Annual Reports 2018/2019

The Independent Regulatory Board for Auditors (IRBA) Annual Report outlined steps taken to restore confidence in the auditing profession following a number of high-profile scandals. IRBA’s code of ethics was revised. Guidance documents on audit quality indicators were issued to auditors and audit committees. Audit firms were requested to provide IRBA with transparency reports and these would become compulsory in future. Good progress was made with the implementation of mandatory audit firm rotation. There was a big increase in the number of candidates registered for the IRBA audit development programme.

The Committee was told that the Auditing Profession Amendment Bill would be presented to Parliament shortly. It focused on improving IRBA’s investigative and disciplinary processes and on strengthening its enforcement powers. It would give IRBA search and seizure powers and the power to issue subpoenas in the investigation process. It would simplify the disciplinary hearing process. It would increase sanctions and give the Minister of Finance the power to determine maximum fines which currently were limited to R200 000.

However, the law applied to the auditing profession only and not to accountants, which were legislated by their own professional bodies. IRBA was proposing that it should be made responsible for comprehensive regulation of both professions.  It would do this by overseeing the 10 professional bodies for accountants, in the same way that it had oversight of the SA Institute of Chartered Accountants.

Committee members expressed support for the work done by IRBA and for the legal changes to enhance its powers. They expressed concern about the growing backlog of cases being investigated, particularly the investigation into the Steinhoff Group and asked how much cooperation was IRBA getting from Steinhoff. Members asked if there was push back about mandatory audit firm rotation. They were concerned about the low number of black auditors on the IRBA register and asked what steps were being taken to remedy this.

Meeting report

The Chairperson said IRBA did excellent work and invited the CEO, Mr Bernard Agulhas to present.

IRBA Annual Report and legislative changes to its powers and functions
Mr Bernard Agulhas, IRBA CEO, listed highlights of the 2019 Annual Report:

• Steps were taken to restore confidence in the auditing profession and counter negative public perceptions. IRBA’s code of ethics was revised. Guidance documents on audit quality indicators were issued to auditors and audit committees. Audit firms were requested to provide IRBA with transparency reports and these would become compulsory in future. Good progress was made with the implementation of mandatory audit firm rotation (MAFR).  There was a big increase in the number of candidates registered for IRBA’s audit development programme.

• An investigation into a Gupta-linked firm, Linkway Trading, was completed and sanctions were applied against the Linkway auditor.

• There were 4 076 auditors on the IRBA register at year-end.

• IRBA dealt with 848 reportable irregularities during the year. These were discovered by auditors and reported to IRBA which in turn reported them to the relevant agencies such as the SA Revenue Service (SARS), the Johannesburg Stock Exchange (JSE) or the police.

• IRBA initiated 138 new investigations into disciplinary cases in 2019. It completed 69 investigations and a further 211 were in progress. IRBA did not meet its target for finalising investigations because the number of cases had increased and they were more complex. The limited number of staff were focusing on high profile matters of public interest.  IRBA welcomed the proposed legislative changes which would speed up disciplinary hearings and which would prevent the firing of auditors for reporting misconduct.

• IRBA’s total revenue for the year was R116 million, of which R41 million was a government grant.  The rest came from regulatory functions such as licensing, registration fees, assurance fees and training contract levies. There was a 172% increase in disciplinary and investigation expenses. IRBA received a clean audit report for the year, the ninth in a row.

IRBA’s mandate
Mr Agulhas said IRBA’s legislative mandate was to protect the public by regulating audits performed by registered auditors. It sought to develop and maintain internationally comparable ethics and standards which would promote investment. High quality audits promoted integrity in financial reporting, reduced financing costs and contributed to the efficiency of capital markets. The law provided procedures for IRBA to take disciplinary action against improper conduct.

A key principle of effective regulation was that IRBA be independent of the auditing profession, but act as the custodian of the profession. There is a difference between the regulator which looks after the public interest and professional bodies such as the SA Institute of Chartered Accountants (SAICA) which represented the interests of accountants.

IRBA sought to exercise balanced, “right touch” regulation. It should intervene only when necessary and remedies should be appropriate to the risk to the public. Regulation should be consistent and targeted. 

Legislative changes
Mr Agulhas said criticism of IRBA by the public and by Parliament had led to proposed changes to the law governing its activities. There had been complaints that its investigations took too long and that its sanctions were too lenient. There had been high-profile financial scandals and systemic governance failures. There had been a lack of independence and professional  scepticism on the part of auditors.

The Auditing Profession Amendment Bill would be presented to Parliament shortly. It focused on improvements to the investigation and disciplinary process and on strengthening the regulator’s enforcement powers. It gave IRBA search and seizure powers and the power to issue subpoenas in the investigation process. It simplified the disciplinary hearing process. It increased sanctions and gave the Minister of Finance the power to determine maximum fines which currently were limited to R200 000.

Mr Agulhas said the increased sanctions would act as a real deterrent to unethical or negligent behavior by registered auditors. However they did not address accountants. IRBA had proposed to the Minister of Finance that there should be comprehensive regulation of both the auditing and accounting professions and that this should be carried out by IRBA instead of creating a new regulator for accountants. The World Bank had recommended that there should be comprehensive regulation. Fragmented regulation by multiple regulators made it difficult to monitor systemic risk, as had been shown by scandals involving the Guptas, KPMG, Steinhoff and VBS Bank.

There had been a significant increase in rotation of audit firms by companies. The intention to introduce mandatory audit firm rotation (MAFR) had been gazetted in 2017. At present audit firm rotation was voluntary. It would become compulsory from April 2023, when the maximum tenure of an audit firm would be set at 10 years.

Mr Agulhas said IRBA was experiencing funding and capacity constraints. Increased legal costs would result in annual budget deficits over the medium term of R32.9 million, R36.2 million and R40.7 million. It had requested additional government funding.

Mr D Ryder (DA, Gauteng) said the Select Committee supported the good work done by IRBA. He asked how much more money it was seeking and whether, given its current workload, it would be feasible to extend its mandate to overseeing the accounting profession. The figures supplied by IRBA showed a growing backlog of cases not finalised. How could they take on additional responsibilities? There was a public perception that the investigation into the Steinhoff Group was taking too long. How much cooperation was IRBA getting from Steinhoff?

On the issue of “right touch” regulation, Mr Ryder used an analogy of traffic officers targeting a stretch of road where speeding was rife until motorists realised they would be penalised for speeding there. In the same way, he suggested, increased regulation now could result in greater compliance by auditors and reduce the amount of funding needed for oversight activities in the future. The figure of 4 000 registered auditors seemed very low. How many audit firms were there? Rotating auditors might not be that easy, given the dominance of a few big firms. What was IRBA’s relationship with the SA Revenue Service (SARS)?

Mr E Njadu (ANC, Western Cape) said the Committee would like to see a more efficient turnaround of cases being investigated. He asked for suggestions on what the Committee could do to fulfill its oversight role.

Mr M Moletsane (EFF Free State) asked for a breakdown of the race and gender of the registered auditors. He said auditors were sometimes threatened or offered bribes. What was IRBA doing to prevent auditors from “falling into traps.”

The Chairperson asked why there had been a reduction in the number of auditors. How many were needed in South Africa? He said there was a general feeling that there should have been greater consultation before the implementation of MAFR. There had been threats of court action by some audit firms. Such threats were often made by interest groups opposed to proposed legislation. Had any audit firms actually gone to court about MAFR?

On IRBA’s disciplinary investigations, the Chairperson said there was general public frustration about a perceived lack of action against corruption. IRBA needed to do more to inform the wider public about the work it was doing and about the time  it took to complete investigations.  The auditing profession had in the past been held in high regard, but it seemed this was no longer the case. What were the reasons for this? In his view, over-regulation would be justified for as long as people misbehaved.

The Chairperson asked what could be done to ensure that IRBA and other regulatory bodies shared information with one another. He listed a number of questions prepared by the Committee’s researcher: What was IRBA doing to ensure that smaller and medium sized audit firms obtained work? Had there been any “push-back” from large firms against the new regulatory measures? Were there any concerns that MAFR would have unintended consequences?

In response to questions, Mr Agulhas said the requested increase in government  funding would be used mainly to cover the costs of investigations and disciplinary cases. For the coming year, it had budgeted R44 million for hearings alone. If this did not come from the government, IRBA would have to increase the fees it charged auditors for its regulatory activities. This could affect its independence from the profession.

On proposals to increase the IRBA mandate to include oversight of accountants, Mr Agulhas said it would not require a big increase in its budget. The aim would be not to regulate 50 000 accountants but to regulate the 10 professional bodies in the same way that IRBA had oversight over  the SA Institute of Chartered Accountants (SAICA).

There were 2 000 audit firms on IRBA’s register, including single practitioners, small, medium and big firms. MAFR meant that there had to be efforts to improve the capacity of smaller firms to take on big clients. The market was reacting to the new opportunities. IRBA had been approached by several smaller firms which were considering the possibility of mergers. IRBA was looking at giving overseas auditors access to its register so that they could be used to build capacity at local firms.  The audit committees at big companies would have to  “open their minds” to providing opportunities to companies other than the so-called Big Four. For instance they could be hired to do audits at smaller branches of a big company in order to gain experience. IRBA was providing guidance on how joint audits by big and small firms could be used to transfer skills. The Reserve Bank was supporting this project.

On whether South Africa had enough auditors, Mr Agulhas said he believed market forces would ensure the right supply. 

On the case backlog, he said the proposed amendments to the Auditing Profession Act would allow IRBA to refer investigations into matters that did not affect the public interest to SAICA or other professional bodies. If the amendments were approved, IRBA would be left with only a few high-profile cases. 

The Steinhoff investigation was still being hampered by a lack of financial statements for the 2016 and 2017 years. However, cooperation between IRBA and Steinhoff’s management was now better than it had been initially. 

Mr Agulhas said while IRBA did refer tax non-compliance cases to SARS, there was no formal cooperation agreement. He agreed this would be a good idea.

The Chairperson asked him to provide the Committee with suggestions on how legislation could be amended to ensure greater cooperation between regulatory authorities.

Mr Agulhas replied that race statistics for the registered auditors were 7% African, 0.2% Chinese, 1.2% Coloured, 7.4% Indian and 79%  white. Gender statistics were 75% male and 25% female.

The Chairperson said the figures were “appalling”. While he acknowledged that this fell outside IRBA’s mandate, could it play any role in ensuring greater representivity?

Mr Agulhas replied that IRBA did have a transformation and education unit which worked at “socialising” the concept of auditing among students. However, SAICA was the pipeline which produced the chartered accountants registered by IRBA. SAICA did have transformation projects.

The Chairperson asked what Parliament and the government could do to ensure black students had the wherewithal to become auditors.

Mr Ryder suggested that the Committee should call SAICA before it to discuss this.

The Chairperson agreed.

Mr S du Toit (FF+ North West) said he wished to caution against pushing too hard on the issue. Becoming a chartered accountant did not happen overnight. Improvements in education and access to universities meant that more people were being provided with opportunities. However people who were currently doing a good job should not be pushed aside to make space for new entrants. There should be equal education and opportunities for everyone.

The Chairperson responded that there was no suggestion of deploying people who were not qualified as auditors. The current situation in the auditing profession was untenable in the view of the majority of the Committee. 

Addressing the question about auditors being trapped into misbehaviour, Mr Agulhas said there had to be stronger guidelines on retaining their independence. IRBA was strengthening its code of ethics. The 10-year limit on employment of the same auditors would also have an effect as they would be cautious about what new auditors would discover when they took over.

Only one small group of auditors had launched legal action against the introduction of MAFR. Most of the market had accepted it.

Mr Agulhas said he agreed that the IRBA had to do more to tell people about the work it was doing.

The Chairperson thanked IRBA for its presentation.

After a brief discussion of the Committee’s programme, including meetings with the Reserve Bank and the Land Bank, the meeting was adjourned.

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