Implications of changes in IRBA over the past 6 months & implementation of Auditing Professions Amendment Act

NCOP Finance

18 May 2021
Chairperson: Mr Y Carrim (ANC, KZN)
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Meeting Summary

Video: Select Committee on Finance

In this virtual meeting, the Committee was briefed by the Independent Regulatory Board for Auditors (IRBA) on its quarterly report, the implications of changes within the organisation over the past 6 months, and the implementation of the amendments to the Auditing Profession Act (APA).

IRBA reported that the Minister of Finance dissolved IRBA’s previous board and appointed a Caretaker Board (CB) in February. The tenure of the CB expired at the end of April, and the Act prohibits extending the CB’s tenure beyond 3 months. IRBA is currently waiting for the Minister to appoint a new Board, who will then appoint a permanent CEO. The changes in leadership will lead to delays in the approval of the act amendments and the work of Board sub-committees. IRBA highlighted the key achievements of the CB in the past few months, such as the development of a new five-year strategy and the imposition of sanctions on investigations.

The entity elaborated on the status of implementing the amendments regarding governance and independence; registration and reportable irregularities; investigations and disciplinary matters; and general amendments. IRBA’s quarterly management accounts, Public Finance Management Act (PFMA) compliance checklists, quarterly performance reporting, bank account confirmation and quarterly allocations confirmation were submitted on time. Amongst the strategic focus areas for 2020/21, all the targets have been met for the following areas: auditing and ethics standards; education; and disciplinary. There were deviations from the targets for inspections and investigations due to the impact of the COVID-19 lockdown, however these are now being conducted virtually. Lastly, only 99% of the targets in operations were met. The work profile target was not met due to challenges in identifying suitable candidates for certain positions.

The Committee raised concerns about the effectiveness of virtual inspections and investigations, and IRBA’s skills capacity in handling the backlog of investigations. IRBA reassured Members that both inspections and investigations have adapted well to the remote-working scenario because it looks at the audit evidence on the auditor’s files, whether the files are hard copies or electronic, to assess if it supports the audit opinions. IRBA has made efforts to address the skills capacity issue after requests to expand the core of investigators to 8 full-time investigators. IRBA has also identified that a separate budget item for external specialist investigators is required. It has also expanded its panel of recruitment services. Members of the Committee also raised concerns about the impact and sustainability of the partnerships between larger audit firms and smaller black audit firms, as well as the effectiveness of the mandatory audit rotations. IRBA’s leadership stated that a joint audit guideline was published in August 2020, to ensure the partnerships are sustainable and meaningful. The guidelines cover how joint audits are to be conducted and the issue of fronting. IRBA also manages the rotation to ensure there is exposure to different types of clients, and supports the Advancement of Black Accountants of Southern Africa (ABASA), an instrumental organisation that forms transformation alliances across the profession.

Meeting report

The Chairperson welcomed everyone in attendance and remarked on the appearance of IRBA’s former CEO in the media. He expressed the Committee’s concern with the misdemeanour that auditors are either turning a blind eye to or complicit in. He noted apologies from Mr M Moletsane (EFF, Free State), who is on leave, and Mr S Du Toit (FF+, North West), who is speaking at the plenary.

Mr W Aucamp (DA, Northern Cape) noted an apology he received from Mr D Ryder (DA, Gauteng), who is fulfilling his obligations in the mayoral selection panel.  

The Chairperson asked why members of the IRBA Board are not present?

Mr Imre Nagy, Acting CEO, IRBA, replied that the Minister of Finance has dissolved the previous board, and a caretaker board was appointed in February, however, its tenure came to an end at the end of April. IRBA is
currently waiting for the Minister to announce a new board.  

The Chairperson proposed that the Committee write a letter to the Ministry of Finance to account for the delay with the IRBA board.

Briefing by the Independent Regulatory Board of Auditors (IRBA)
Mr Ngay stated that in the last six months, IRBA has gone through significant leadership changes. The Minister of Finance dissolved the IRBA board and appointed a Caretaker Board (CB) in February. He pointed out that the Act prohibits extending the CB’s tenure beyond 3 months. In the same month, the former CEO resigned and the Acting Chief CEO, Mr Imre Nagy, was appointed until the new Board appoints a CEO. He highlighted the key achievements of the CB, such as a new five-year strategy and the imposition of sanctions on 36 investigations. The implications of the changes are a delay in the work of the Board’s sub-committees, a delay in the appointment of a new CEO and a delay in the approval of the Auditing Professions Act amendments until the new Board is appointed. 

The APA Amendments came into effect on 26 April 2021 and IRBA is currently in the process of implementing the amendments. Mr Ngay elaborated on the status of implementing the amendments regarding governance and independence; registration and reportable irregularities; investigations and disciplinary matters; and general amendments.  A project is underway to develop IRBA’s draft regulatory strategy and for the reconstitution of the Board. The Board nominations to the Minister have been compliant. In assessing the compliance of current Registered Auditors (RAs), communication has been sent out to the relevant RAs. Regarding investigations and disciplinary matters, guidelines are being developed for referring non-audit complaints to accredited professional bodies, and for the subpoena and search and seizure procedures.

IRBA’s quarterly reporting outcomes show compliance with National Treasury’s deadline requirements. The quarterly management accounts, PFMA compliance checklists, quarterly performance reporting, bank account confirmation and quarterly allocations confirmation were submitted on time. IRBA has adapted and continued to deliver on its mandates, despite the COVID-19 lockdown and remote working policy. Amongst the strategic focus areas for 2020/21, all the targets have been met for the following areas: auditing and ethics standards; education; and disciplinary. The target for 128 inspections was not met due to the impact of the COVID-19 lockdown. Even so, it achieved 125 inspections out of the target of 128. The actual number of investigations also deviated from the target due to insufficient resources, as a result of the reprioritisation of available resources. Lastly, only 99% of the targets in operations were met. The work profile target was not met due to challenges in identifying suitable candidates for certain positions.

(See Presentation)

Discussion
The Chairperson apologised to IRBA for the absence of most Committee Members due to a plenary session. He noted that the plenary time was changed last minute. He added that the Committee will bring up the issue of double-booking sessions with the relevant authorities.  

Mr W Aucamp (DA, Northern Cape) asked if a permanent board and new CEO have been appointed. 

Ms D Mahlangu (ANC, Mpumalanga) asked if IRBA can contribute, in any way, towards ensuring the partnership programme between bigger and smaller firms is sustained? How will it ensure it is impactful and not done as a front? What are IRBA’s consequence management plans, especially when it comes to partnering with other institutions, like the South African Institute for Chartered Accountants (SAICA), to enforce accountability and assist the state in tackling tax avoidance?

Mr Nagy replied that IRBA plays an indirect role through its stakeholders like the Association for the Advancement of Black Accountants of Southern Africa (ABASA). It engages with ABASA regularly to support its work. There is no direct expectation from ABASA to protect smaller partners. However, as an institution, IRBA focuses on protecting the quality of audits. To ensure there is no fronting in partnerships between a large firm and a small black firm, IRBA issued a joint audit guide in August 2020. The guide elaborates on how joint audits must be done, including audits between larger and smaller firms. Additionally, IRBA does joint audit inspections to address issues that impact audit quality. It also engages with audit committee forums on risks and reported issues within joint audits.

Ms Nadine Kater, Education & Transformation Director, IRBA, said IRBA is mandated to manage SAICA closely through annual monitoring processes and following a risk assessment methodology. IRBA is working to expand collaborations across various professional bodies to enhance audit performance in the accounting community.

Mr Nagy said IRBA has a host of projects and initiatives with various stakeholders to address the issue of consequence management. The country desperately needs comprehensive regulation of accounting bodies. This was recommended by the World Bank in 2013. In 2019, IRBA submitted proposals on this matter to the Minister. Last year he announced that an independent panel of experts would look into broadening the regulatory umbrella to include accountants.

Ms Kater explained that the purpose of the partnership between big firms and smaller black firms is for the smaller firms to get exposure to the JSE-type clients. This process is currently unfolding and was announced 4 weeks ago. To ensure the partnerships are sustainable and meaningful, IRBA published the joint audit guidelines, which cover the issue of fronting. IRBA is also managing the rotation to ensure there is exposure to different clients. It also supports ABASA, which is instrumental in forming transformation alliances across the profession.

The Chairperson asked for progress on ongoing investigations, without sharing information on the outcomes so as to not compromise the investigations. What are some of the large controversial cases? Have those been finalised, and if so, what are the outcomes? What has been the most serious penalty applied thus far and for what action? Will IRBA be obliged to apply the less severe sanctions for cases that were started before the amendments to the Act? Can it apply the more severe penalties instead, even though the cases were started prior to the submission of the amendments?

He noted the presentation’s overview of staff and skills issues. Does IRBA have the necessary skills to secure more convictions for those in wrongdoing? If not, what skills are missing given that wrongdoings become more and more sophisticated? He questioned whether the ‘element of surprise’ and its effectiveness, are not missing with the remote electronic inspections.

Ms Jillian Bailey, Investigations Director, IRBA, said that there are 237 cases that are open and under investigation. This makes up 6.5% of IRBA’s registered population. Investigations are categorised as ‘high-profile or public interest entity’ or ‘not high-profile or public interest entity’. Out of the total cases, 31% fall into the high-profile or public interest entity category, and 69% into other matters. The chart sheets on VBS were concluded years ago, however, the respondents are no longer working for the firm and requires access to review the audit files. In following due process, IRBA has to accommodate for the respondents to gain access, review the files and then respond. The respondents have delayed coming back to IRBA.  The Steinhoff case has now made good progress despite a 14-month delay. There has also been good progress in the investigation with Tongaat Hulett.

IRBA has not dealt with cases since the amendments came into effect due to the current backlog of cases and complaints. It is in the process of recruiting additional capacity to attend to these issues under the new dispensation. The Act states that if charges have not been issued by 26 April, the case will be dealt with in terms of the Amended Act. However, there is a transitional provision that says the sanction is applicable at the time the improper conduct took place. It will take time before the sanctions in the new act are implemented. Despite that, there are various sanctions in the previous Act that warrant for severe penalties such as removal from the register by the disciplinary committee.

Mr Nagy explained that IRBA’s focus is document-based and so it can conduct both inspections and investigations remotely. IRBA inspects completed audit documents by assessing that the document is in line with audit standards. Currently, firms provide access to their electronic working processes, which has been effective. During the pandemic, IRBA has seen effective and qualitative inspections and reports being done.

Ms Bailey reassured the Committee that investigations have adapted well to the remote-working scenario under COVID-19. This is because the investigations look at the audit evidence on the auditor’s files, whether the files are hard copies or electronic, to assess if it supports the audit opinions. The investigations rely on evidence that is submitted to the institution. The additional powers of ‘search and seizure’ and subpoena are appreciated and useful in addressing the challenges with cooperation. IRBA has not had to use these additional powers under the new scenario.

Ms Natasha Naicker, Operations Director, IRBA, said IRBA’s budget is R165 million and R111milion was spent on staff expenses. There has been a request to expand the core of investigators to 8 full-time investigators. IRBA has also identified that a separate budget item for external specialist investigators is required. She acknowledged that the recruitment of investigators is challenging. However, efforts are being made to address this, such as the expansion of IRBA’s panel of recruitment services.

The Chairperson asked if audit rotations are working effectively and if there is a court case challenging the mandatory firm rotations.

Mr Ngay replied that the effective date of mandatory firm rotations is in 2023, to give firms and companies time to position themselves for the change. However, since the rule was announced in 2017, 40% of JSE companies that changed auditors cited firm rotations. IRBA is part of the International Forum of Independent Audit Regulators (IFIAR), that includes bodies from 54 countries. IRBA has been re-elected to serve on its board as the audit committee chair. Majority of the independent regulators in IFIAR recognise the benefits of firm rotations. The rotations address the issue of familiarity and its negative impact on independence. Amongst the JSE companies, IRBA has identified that a new auditor tends to be a set of fresh eyes that picks up on issues that the previous auditor did not. He said there is an ongoing court case from a small group of RAs

Ms Rebecca Motsepe, Legal Director, IRBA, elaborated on the court case. The group of RAs has submitted an interlocutory application to strike off IRBA’s defence. A sit down date for the interlocutory application is estimated to be in August, however IRBA does not think the strike off will process and anticipates it will have to approach the court again for a hearing date on the actual matter.

Ms Mahlangu asked whether IRBA is comfortable with its unqualified audit findings in the past few years? Is it working towards having an improved audit outcome?

Ms Naicker said IRBA is aware that the Auditor-General (AG) has found the institution to have strong internal financial control and compliance in the past 10 years. However, this has not made IRBA complacent. IRBA has engaged with National Treasury’s (NT) audit section to plan for areas of improvement, such as supply chain management and governance. She reassured the Committee that the institution is working to maintain its clean audit, and is also working constructively and proactively to improve.

Mr E Njadu (ANC, Western Cape) asked what the strategy to restore confidence entails?

Mr Nagy explained that the new focused strategy has 3 key elements. The first element entails the 3 focus areas: to ensure the sustainability and relevance of IRBA; to enhance audit quality through audit reforms; to drive broader reforms through comprehensive stakeholder engagements (looks at strengthening the quality of information in the governance ecosystem). The 3 focus areas for strengthening the regulatory framework, are part of a ‘restoring confidence 2.0’ project. The second element looks at finding the gaps and the relevant resolutions to fill the gaps. The third element involves enabling risk projections from data and technology use. This is to ensure IRBA’s work becomes more proactive instead of the reactive approach until now,

The Chairperson stated that IRBA is not where it should be and things are moving too slowly.  It does not seem like there is adequate progress with the VBS Mutual Bank and Steinhoff cases.

Mr Nagoy replied that even though things seem to be moving slowly, there has been progress with some high profile cases. For instance, IRBA has concluded the African Bank investigation disciplinary hearing.

Ms Bailey explained that in the African Bank case, the primary respondent faced 10 charges and was found guilty of 5. The secondary respondent faced 1 charge and was not found guilty. Even though the respondent was only found guilty for 5 out 10 charges, the issues pertaining to these charges are critical to the South African auditing realm. On the remaining charges where the respondent was not found guilty, the disciplinary committee felt that the onus of proving the charges was not met. Going forward, IRBA has learned several lessons from the case.

Ms Motsepe added that IRBA had to apply sanctions before the APA Amendments and so it could only charge R200 000 for each charge. With 2 of the charges, the maximum sanction that could be imposed was R100 000. The total fine against the second respondent was R800 000. There was also a cost order of over R31 million. The respondent was also suspended from being an RA for a year.

Mr Nagoy pointed out to Members that the comprehensive regulation of the country’s entire financial reporting and governance ecosystem is lacking. It requires addressing company decision makers and overseers to play their part to improve the quality of audit reporting. 

Closing remarks
The Chairperson, in closing, thanked everyone in attendance.

The meeting was adjourned.
 

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