Auditing Profession Amendment Bill: public hearings

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Finance Standing Committee

14 October 2020
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Video: Standing Committee on Finance (National Assembly) 14 Oct 2020

In this virtual meeting, the Standing Committee on Finance received public input on the Auditing Profession Amendment Bill from COSATU, OpenSecrets, EY, Deloitte, SAICA and Messrs B Agulhas and D Mahlangu.

COSATU largely agreed with the Bill, noting complicity of the auditing profession in state capture and the billions lost to the state each year in wasteful expenditure. It recommended retaining 4 mandatory IRBA meetings per year, expanding IRBA’s search and seizure powers to have no time constraint, and formalising mandatory audit firm rotation every 5 years in law.

OpenSecrets stressed auditing’s public interest functions, and noted how audit failure had led to massive costs to the public in terms of jobs and assets at Steinhoff, VBS, Tongaat Hulett and in SOEs. Open Secrets called for greater transparency in IRBA and auditing processes, more investigative capacity for IRBA and higher sanctions for firms convicted of wrongdoing.

EY largely agreed with the Bill, but noted that the provisions for search and seizure warrants impinged on the constitutional right to privacy of audit firms. 

Deloitte shared EY’s concerns on search and seizure, arguing processes should be in line with Constitutional Court and parliamentary precedent. Deloitte also advocated for making all IRBA processes explicit in the Act. Deloitte noted its concern at the lack of maximum limits for sanctions in the Bill, and argued that having no registered auditors on the Board may harm IRBA’s capacity.

SAICA agreed with the need for greater capacity at IRBA. It advanced more stringent conditions for appointments, the need for a formalisation of IRBA’s relationship with SAICA to avoid duplication of processes, reform of the Disciplinary Committee’s term limits and minimum experience requirements and aligning the search and seizure processes with those included in the constitution.

Mr Agulhas and Mr Mahlangu largely covered similar points, noting the need for greater capacitation of the regulator and the extension of its mandate across the financial reporting ecosystem. Mr Agulhas noted the importance of sanctions, including non-monetary ones, for the strength of the regulator. Mr Mahlangu noted the dwindling numbers of auditors and the field’s lack of transformation.

Members noted that the audit profession had let South Africa down badly, and had to be held to account in a much better way.

Meeting report

The Chairperson opened the meeting.

 

Apologies were noted.

 

The Chairperson welcomed presenters and indicated that they were allocated 15 minutes to make their submissions.

 

COSATU Submission
Before commencing with his presentation, Mr Matthew Parks, Parliamentary Coordinator, COSATU, passed on his condolences to the Committee on the passing of Professor Daniel Plaatjies, former head of the Financial and Fiscal Commission.

Mr Parks said that COSATU supported the Bill and thought it was critical in the context of state capture and the damage this had done to the state and economy. Auditors had played a role in state capture in both the public and private sector.

COSATU did see some weaknesses in the Bill and proposed 3 amendments.

Regarding the context of the Bill, the state lost 10% of its budget yearly to corruption and wasteful expenditure, which had a devastating impact on the state and the economy, as well as public and private sector workers. Public sector workers were being denied their salary increases due in part to the complicity of auditors in state capture. Auditors had whitewashed state capture. No auditor had yet gone to prison for state capture.

COSATU supported that service on IRBA (the Independent Regulatory Board for Practicing Auditors) excluded practicing auditors. COSATU wanted to empower IRBA to conduct search and seizures. COSATU supported IRBA having more disciplinary capacity, as there was a need to tackle complicit auditors.

COSATU proposed deleting Clause 5(5) which reduced the required number of meetings of IRBA from 4 to 2, as 4 was not a high number of meetings and could be executed virtually, reducing costs. Given that IRBA would be critical in dealing with corruption and state capture, this clause did not make sense.

COSATU proposed that Clause 7(e) be deleted, which limited search and seizure operation to normal office hours. COSATU saw no reason to limit search and seizure to office hours, which would weaken such critical operations and was not in line with standard search and seizure practice. COSATU did not see a reason to treat criminals with diplomacy, and proposed allowing IRBA to execute operations 24/7.

COSATU proposed insertion of a new section in the Bill formalising in law the existing IRBA rule providing for mandatory auditor rotation. COSATU proposed making auditing firm rotation mandatory every 5 years as a matter of law, rather than the existing IRBA rule requiring rotation every 10 years.

Auditors had to pay the price for white collar crime taking place during state capture, in the context of their impact on the state, economy, workers and society. COSATU saw the bill as progressive and long overdue.

The Chairperson thanked COSATU for its submission. He mourned the passing of Prof Plaatjies, as well as Adv Priscilla Jana, the anti-apartheid activist and lawyer.

Open Secrets
Ms Mamello Msiyana, Researcher, Open Secrets, informed the Committee that Open Secrets focused on private sector economic crime. In its submission, Open Secrets used evidence from the Corporations and Economic Crime report released earlier in 2020 on the role of auditors in private sector financial crimes, focused on the Big 4 (PWC, KPMG, EY and Deloitte). This report focused on audit failures at VBS, Steinhoff and Tongaat, and auditor involvement in state capture at SARS, SAA, Eskom and Estina.

Auditing was a social function and had to be executed in the public interest. Audit failure had led to huge costs for public entities, particularly failures of the Big 4 audit companies. Open Secrets emphasised the public utility function of auditors and the role of auditors in global economic crime. The auditing industry was globally in crisis. Open Secrets supported the Bill although it had identified some gaps and recommendations.

Open Secrets also highlighted the impact on the public generally due to audit failure. This had been evident in job losses at Steinhoff and Tongaat Hulett, as well as losses to the Government Employee Pension Fund (GEPF). This made auditing a public interest issue.

Mr Michael Marchant, Researcher, Open Secrets, continued the presentation. He recalled the context of large corporate failures (e.g. Steinhoff) and losses in SOEs due to audit failures. Audit failure could be explained through a few key issues:
-Lack of audit independence
-Lack of IRBA power to impose effective and powerful sanctions
-Insufficient investigative capacity at IRBA
-Lack of access to information for the public and transparency for IRBA and the audit firms

Open Secrets was broadly supportive of the Bill, including clauses on removing registered auditors and expanding IRBA’s investigative and searching capacity. Open Secrets thought sanctions might be insufficient to back these new powers up though. Open Secrets also supported the creation of the enforcement committee.

Mr Marchant grouped the comments by theme:

Appointments to the Board: Open Secrets supported the removal of conflicts of interest by removing registered auditors from the Board. However, the Bill did not require Minister to consider allegations of impropriety or conflicts of interest in appointing a board member. Open Secrets argued this should be explicit. Open Secrets also called for transparency in the appointment of board members.


Investigations of improper conduct: Open Secrets called for findings of investigations into improper conduct to be fully available to the public. When IRBA made serious findings about PWC’s audit failures at SAA, it did not make the findings fully public. Open Secrets thought this went against the right to access to information.


Regarding the disciplinary processes, the Bill did need to provide for hearings in camera, however Open Secrets wanted hearings in camera to have a publicly available rationale for this denial of access.


Lack of sanctions: Open Secrets saw this as a fundamental lacuna in the Bill, especially regarding S51(1) and 51(3). Open Secrets did not think that a reprimand was ever an appropriate sanction for dishonest behaviour. When added to the fact that fines were insufficient, there could be a situation where audit firms repeatedly acted improperly without proper sanction. Fines needed to be more commensurate with the gravity of the impropriety and the harm to the public. Open Secrets urged the Committee to make the fines more in line with audit firm contract values or revenue and turnover. He also submitted the committee could consider minimum fines for specific offences. Open Secrets had often seen audit failure punishment focus on a specific auditor, ignoring the environment which firms created which allowed audit failure.


Open Secrets urged the Committee to consider enforcing disclosure where this was in the public interest, in lines with S32 of the Constitution and PAIA.

Open Secrets’ suggestions on the existing Act spoke to the idea of greater sanctions, greater transparency, and more investigative capacity.

Ernst and Young
Mr Steve Ntsoane, Assurance Leader, EY, recognised the public interest role of auditors. EY was broadly in support of the Bill, but thought it was important to make the Bill balanced and fair. Auditing needed to regain its position of public trust. Much had to be done by authorities to hold firms accountable.

EY brought attention to S48 A and B (power to enter and search premises). EY understood the need for the regulator to access information. However, the rights of the auditor should also be protected: EY submitted that areas in this section needed additional consideration.

 

S48B(1) allowed the issuance of a warrant for any contravention of the Act. This did not make provision for the nature of the contravention. EY submitted that warrants should only be issued for material contraventions of the Act, not trivial infringements. Warrants should be issued as a measure of last resort after all reasonable steps were taken. The current provision granted greater power to IRBA than the powers which SAPS had. EY’s aim was to protect the right to privacy of auditors, as guaranteed by S14 of the Constitution. EY submitted that S48(B) did not provide direction for the courts, nor did it provide guidance to determine whether a warrant should be issued or not. This was why EY referred to material versus trivial contraventions. EY also proposed that the act include timelines for information and steps to be taken if this was not achieved. EY also submitted that the APA should provide for the right of appeal. EY sought to ensure that the Bill was strong and sustainable.

Deloitte
Ms Carla Budricks, Regulatory Leader, Deloitte SA, presented Deloitte’s submission. Deloitte agreed with amendments aimed to accelerate and streamline the IRBA process to provide regulatory oversight. Deloitte submitted verbal comments in 2019 on substantially the same issues as in the current Bill.

The environment in auditing was substantially different from 2019. Regulatory reform was taking place worldwide.

Deloitte submitted the Bill was found wanting in terms of transparency and overprovision of power without necessary protections. Deloitte also highlighted parliamentary precedent on search and seizure issue.

As a matter of principle, Deloitte supported strengthening the powers of IRBA to conduct investigations and disciplinary actions. However, there was a lack of concomitant correction of procedural and constitutional balance, for instance recourse to courts in terms of appeals processes. This was established in precedent from the Constitutional Court and previous parliamentary acts on similar regulators.

Deloitte proposed a review and rewrite of the structure of IRBA. Deloitte recommended that the functions and duties of all committees should be clear in the main Act, and processes should all be contained in Regulations to the Act. This particularly applied to the Disciplinary and Enforcement committees. The current amendment processes provided an opportunity to rectify this.

Deloitte proposed that removing registered auditors from the IRBA was inconsistent with how other professional bodies were organised in South Africa, including the Healthcare Practitioners Council. Deloitte proposed that registered auditors should serve on the IRBA to bring current professional skill, experience and knowledge. The current IRBA Board lacked registered auditors, which may have damaged its capacity.

The lack of legal expertise at IRBA may slow down processes instead of expediting. Deloitte submitted that the requirement of a retired judge or senior advocate as chair of the Disciplinary Committee be retained.

Deloitte noted there was no monetary limit for the setting of fines by the Minister, which may serve as a deterrent for entry and continued service in the audit profession. Individuals and firms with lesser economic means may be deterred by unlimited liability and lack of an appeals system. Deloitte proposed a maximum sanction.

The delegation of investigations and disciplinary proceedings to professional bodies such as SAICA was legally dubious, given SAICA was not subject to the APA or PAJA.

Deloitte had submitted substantial comments on search and seizure in its submissions. IRBA’s existing powers allowed it the power to inspect and review auditors at any time. IRBA’s existing powers gave it powers similar to those of other professional regulatory bodies. Deloitte opposed extension of these powers, but if this was to be introduced it should be appropriately balanced and limited. Parliament should follow a consistent approach similar to that used in the Property Practitioners Act of 2019. The Bill should provide for right to appeal at courts. The Bill was not in line with the procedural balancing measures and legal recourse provided by other similar Acts.

South African Institute of Chartered Accountants (SAICA)
Mr Freeman Nomvalo, CEO, SAICA, said SAICA was pleased that the Bill process had re-started. SAICA welcomed the Bill and the strengthening of IRBA. SAICA would seek to make sure that the Bill was making IRBA more effective in its submission.

Currently, the legislation made provisions on who could not be accepted as a registered auditor, focusing on financial crimes. The scope of this criteria was too narrow. SAICA proposed that those convicted of violent crime should equally be excluded from becoming a registered auditor. SAICA was investigating a by-law amendment for this to apply to itself as well.

SAICA thought that Treasury had conducted only limited stakeholder consultation on the Bill, arguing that the problems and challenges were complex and interrelated. SAICA saw the need for broader public consultation with stakeholders and the consideration of a socio-economic impact assessment.

SAICA noted that professional bodies were not part of the disciplinary processes of IRBA. SAICA and IRBA had an existing MoU acknowledging that IRBA investigations took preference over SAICA disciplinary actions. IRBA was required to discipline auditors for matters unrelated to audit, which were already part of the mandate of SAICA, the professional body. To avoid duplication of these matters, which were a constraint on IRBA capacity, there had to be a system which made SAICA disciplinary processes and sanctions final, including as they related to IRBA.

SAICA welcomed limiting the presence of registered auditors on IRBA. However, the Bill proposed having no registered auditors whatsoever, which could harm the Board’s capacity. Independence should be balanced with industry knowledge. SAICA proposed retaining the 40% maximum of registered auditors, and the inclusion of registered auditors who did not attest who were more independent. The Bill should allow at least 1 registered attesting auditor to be present though. However, the IRBA Chair should not be a registered auditor.

SAICA noted that the current Disciplinary Committee had little guidance on its roles, responsibilities and administrative powers. The role of the Disciplinary Committee would change as it was now a panel of members from whom the Committee was selected. SAICA proposed the appointment of the panel should be an independent process done by a party other than IRBA. SAICA also noted the issue of the 3-year appointment term, which may conflict with long investigations. SAICA proposed a 7-year, non-renewable term, that could be extended to finalise ongoing allocated matters. SAICA recommended retaining the requirement that the Chair of the Disciplinary Committee be a retired judge or senior advocate. SAICA proposed that IRBA prescribe minimum competence and experience for the 2/3rds non-auditor and non-advocate members of disciplinary committee.

On search and seizure, SAICA noted that what was being proposed had to be compared to the Constitution. Already it was an offence not to cooperate with IRBA. SAICA understood the need for IRBA to have access to information. However, it proposed reconsidering the necessity of warrantless searches, and recommended aligning search and seizure provisions to the Constitutional Court’s judgments in similar situations. SAICA recommended aligning warrant conditions to the minimum requirements laid out by the Constitutional Court.

Overall, SAICA supported the Bill, but noted the need not to include provisions that it could already see would be defeated in a court of law.

Bernard Agulhas
Mr Bernard Agulhas, former CEO of IRBA, said that the goal of the Bill should be protecting the public. He noted that amendments were a response to the criticism levelled at the profession and regulator, in terms of the level of sanctions, lack of regulatory power and the timeframe of investigations (which was partly a function of the capacity of the regulator). Mr Agulhas recognised that the auditing profession was not “business as usual” in the current time. Not only auditors participated in the financial reporting ecosystem, there were many other players ensuring a credible and reliable financial reporting system. The Bill had to consider these players as well.

Mr Agulhas sketched the outline of his vision of a competent regulator: this regulator had to have adequate human and financial resources. Investment in regulators was worth far less than the billions that would be lost to corruption in the financial reporting system. Efficient processes were also a necessity – justice delayed was justice denied. The regulator also needed appropriate sanction capacity. Sanctions could only act as a deterrent if they reached the right level. Processes had to be fair to auditors and the public. Governance structures had to be independent and free of conflicts of interest. A comprehensive approach to regulation was needed that took into account regulation for the whole financial reporting ecosystem.

IRBA had to be empowered and capacitated, and evidence had to be readily available. The search and seizure powers should only be used in situations where there was no cooperation.

In terms of disciplinary processes, it was key to note that auditing was a public interest function. Processes had to be fair to all parties.

In terms of the magnitude of sanctions, the amount of the sanction had to be appropriate to the offence committed. IRBA should also consider non-monetary sanctions.

Mr Agulhas reminded members of the need to address systemic failures in the financial reporting ecosystem. Audit failure was also a failure of the broader ecosystem. He recommended a process of comprehensive regulation to level the playing field. Mr Agulhas gave his support to the Amendment Bill.

Dumisani Mahlangu
Mr Dumisani Mahlangu noted his interest in the regulatory environment for auditing. In the main, he welcomed the Bill. He echoed Mr Agulhas’s recommendation of the need for comprehensive regulation in the financial reporting ecosystem. He argued that the Bill should be expanded to allow for IRBA to become a comprehensive regulator. IRBA was dependent on accounting and other domains in the financial reporting chain. He noted that the auditing profession could not rely on other sectors that were not regulated by legislation. He recommended expanding the Bill to including accounting and other non-assurance domains which were related to the auditing profession.

Mr Mahlangu argued that comprehensive regulation was necessary to achieve proper accountability. Those who had misled auditors or provided false information were not regulated. One of IRBA’s strategic pillars was comprehensive regulation including other assurance services. Mr Mahlangu proposed that there was no regulatory framework supporting IRBA in this regard.

Mr Mahlangu proposed that the recommendations of internal auditors were often ignored as they could not report material irregularities elsewhere. Mr Mahlangu proposed that internal auditors should also be covered by IRBA. Mr Mahlangu proposed that expanding IRBA’s scope would lead to greater accountability.

Mr Mahlangu noted the World Bank’s recommendation to enact legislation to increase regulation of the accounting industry, and to capacitate IRBA and fund it better. Mr Mahlangu noted that IRBA’s inadequate funding would hamper its ability to execute its mandate.

Mr Mahlangu also noted with concern the dwindling number of registered auditors. The profession remained largely inaccessible and untransformed.

The Chairperson thanked Mr Mahlangu.

Discussion
The Chairperson opened the floor to members, and asked whether members of IRBA and Treasury were present. Adv Empie van Schoor was representing Treasury and Ms Jenitha John was present representing IRBA.

Dr D George (DA) noted that the audit profession had let South Africa down badly, and had to be held to account in a much better way. It seemed clear that the audit profession was not able to hold itself properly to account, and that the regulator had to do this for them. IRBA had also not been able to do its job properly. He hoped that IRBA would be better funded and capacitated in future.

Ms P Abraham (ANC) thanked those who had submitted comments to enhance public participation. She noted contradictory contributions from the public, for instance Mr Agulhas’ argument that unnecessary processes should be removed, whereas Deloitte wanted all processes to be included in the Bill. She noted COSATU’s input on compulsory meetings, but argued that meetings were often just set down for compliance’s sake and not necessarily to actually fulfil any purpose. She agreed that times should not be limited for search and seizure to take place, and also concurred that mandatory audit rotation should be legally enforced. She agreed with Open Secrets that IRBA appointments should be open and transparent. She noted EY’s concerns with balance and fairness. She agreed with SAICA’s proposal of limiting the number of registered auditors at IRBA. Ms Abraham was glad that there was general support for the Amendment Bill.

The Chairperson noted the issue raised by SAICA that the Board Chairperson should not be an auditor – he asked whether it was workable that someone with no background in the profession be eligible to chair a body that specifically regulated auditors? What skills should this person have for this to be possible? He wasn’t sure that this applied to other professional bodies.

The Chairperson also raised the issue of search and seizure warrants being issued where there was a lack of cooperation.

The Chairperson noted the issue of the profession being untransformed raised by Mr Mahlangu, and asked Treasury and IRBA what its comments were on this matter.

Mr Nomvalo noted that the current prescribed composition of IRBA with a contingent of auditors on the Board would allow the Chairperson to execute their mandate properly even without being an auditor themselves.

Mr Parks agreed with Dr George that the auditing profession had failed the country, noting that the Bill was critical in this regard. Regarding Ms Abraham’s input on mandatory meetings of IRBA, he proposed that reducing required meetings to 2 would create an unnecessary risk.

 

Mr Parks argued that the mandatory rotation of audit firms should be included in the Bill to solidify this in law. He was comfortable that IRBA should not include practicing auditors. He argued that IRBA should err on the side of fighting corruption rather than that of privacy in terms of search and seizure.

 

Mr Parks thought there had been sufficient public consultation on the Bill, and proposed the Bill was vital to fighting corruption. He said it was problematic for auditing firms to argue in the meeting that the laws were too strict.

Ms Jenitha John, CEO of IRBA, thanked members and presenters for their input. IRBA would engage further with stakeholders on their presentation. Ms John announced that IRBA had just concluded a process to recreate the appeal of being a registered auditor to attract people back into the profession. IRBA was reviewing the Audit Profession Code and would hopefully be concluding the process to transform the profession across the pipeline leading into the profession.

Adv Empie van Schoor, Chief Director of Legislation, National Treasury, explained that in terms of S34 of the Constitution, any decision made by IRBA in terms of the current or future Act would allow for recourse to courts. Adv Van Schoor noted the possibility of an internal appeals process.  

Ms Budricks welcomed engagement on appeal processes for processes taking place via IRBA. Deloitte would be happy to engage on these aspects. Ms Budricks also proposed retaining the 40% composition of registered auditors in IRBA, possibly including non-attesting auditors to deal with the issue of independence. Deloitte was also happy to engage on the issue of comprehensive regulation.

Mr Marchant agreed with the point of SAICA that retired or independent auditors could provide requisite experience for IRBA. Lack of independence and conflict of interest was a key issue in audit regulation across the world. Having people making regulatory decisions about former colleagues was problematic. Open Secrets disagreed with the maximum limit of fines for audit firms, which was currently R200 000, an inadequate amount. In the United Kingdom, recent fines had reached over R300 million. This was in recognition that there was a need to impose harsh fines where wrongdoing was present rather than treat it with slaps on the wrist. Open Secrets argued that there was an “accountability gap” for auditors, not an “expectations gap”, as the legitimate demands from the public on auditors were not being met. Mr Marchant noted that, in a number of places in the Bill, there was a deficiency in requiring disclosure and transparency.

The Chairperson noted that the vote on the report would be held on the 17th of November. This report would then be submitted to the Speaker for tabling in the National Assembly.

 

The Chairperson highlighted the Minister’s request to the Speaker to table the Medium-Term Budget Policy Statement a week later than initially planned. This may have an impact on the Committee’s programme. The Committee would adjust the programme to accommodate this.

The meeting was adjourned.
 

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