Follow up: IRBA annual update 2021/22 and challenges in executing mandate

Meeting report

The Chairperson welcomed the Select Committee on Finance to a briefing by the Independent Regulator Board for Auditors (IRBA) on its quarterly report and challenges experienced in executing its mandate.

IRBA update for 2021/22 financial year
Mr Fulvio Tonelli, Chairman, IRBA, said the panel would update the Committee on the work done by IRBA in the past financial year.

Mr Imre Nagy, Acting Chief Executive Officer (CEO), IRBA, thanked the Committee for its assistance in fast-tracking the Auditing Profession Act Amendments (APAA). IRBA monitored the Zondo Commission report on public sector state capture and noted 16 open cases against registered auditors (RAs).

IRBA also noted challenges experienced in relation to fragmented regulation. IRBA regulates approximately 3600 auditors, with the broader network of governance and accounting bodies remaining unregulated as per the 2013 Report on Standards and Codes (ROSC).

Mr Nagy said he believed this was a systemic issue and IRBA had embarked on numerous additional projects to create awareness and address systemic weaknesses.

The Financial Reporting Standards Council (FRSC) has not been operational in years. This meant there was no South African application for the international standards for accountants and this flowed into issues with the Department of Trade, Industry and Competition (DTIC).

Overview of Performance for the 2021/22 Financial Year
IRBA achieved its annual targets on standards, and adopting, developing, and issuing guidance on ethical issues based on the IRBA code.

Mr Nagy said the South African code of ethics is more onerous than the international standards. Going forward IRBA aimed to focus on restoring confidence through auditing standards projects and standard setting related activities, including supporting statutory committees to develop quality standards to address local issues in line with international developments.

On education and transformation, IRBA achieved all of its annual targets, which included monitoring the environment of the Audit Developmental Programme (ADP), monitoring programmes and institutional requirements of accredited professional bodies, contribution towards the transformation of the profession, and monitoring the Continuous Professional Development (CPD) of RAs and tax practitioners.

Mr Nagy noted above-target achievements in monitoring the environment of the ADP. This was because of some of the visits being conducted online under COVID-19 mandates. He also noted an above-target achievement related to the transformation initiatives completed annually.
This process strives to increase the number of registered candidates for entry level auditing development programmes and the various initiatives enabling this to be successful.

Mr Nagy felt it was also important to improve the quality of the programme through the increased focus on transformation of candidates, updating the quality of the branding, using CPD to monitor these programmes, and restoring confidence in the profession.  

On inspections, IRBA said it follows a risk-based approach, and through business intelligence, its team identified at which level the risks occurred. IRBA achieved the target number of inspections set for the year, as reported by the Independent Statutory Committee, also called the Inspections Committee.
IRBA said it was currently in the business review process where it was analysing the technology it used within IRBA to manage and perform these inspections. IRBA was also in the process of analysing its information and technology (IT) workflow, data collection analysis, and analysis processes to enhance effective operation and responsiveness relating to inspections. This was also inspired by its desire to be proactive in inspection processes through databases and trends.

It would also enable IRBA to optimally allocate the limited capacity in the inspections department towards high-risk areas which require feedback, to firms and audit committees. IRBA has looked at implementing enhanced stakeholder awareness and targeted socialising of inspection outcomes and reports, with an emphasis on the groups requiring the most support.

Mr Nagy said audit quality indicator reports and public inspection reports are shared with the relevant firms to inspect quality and for oversight purposes.

IRBA embarked on a process of thematic reports or inspections. Firms were selected based on specific themes, for which reports were generated. An example of a theme is how a firm monitors the success of its own implementation plans, as required by standards. These internal plans ensure firms manage quality effectively, assess risk, and address risks in their firms. This would allow firms to identify and address weaknesses in their own quality management system.

Regarding the grading of inspectors, IRBA is looking into succession planning within the department. It wants to ensure it can recruit experienced staff to perform complex inspections, especially since it was expecting the new quality management standards called International Standard on Quality Management (ISQM 1), which would come into effect in December 2022. IRBA planned to set inspections in line with the new standards.

IRBA had a number of vacancies following the lockdown, as well as a few resignations. This would impact meeting the targets for the 2022/23 financial year but it had robust recruitment strategies and drives in place to fill these vacancies as soon as possible.

IRBA exceeded its annual target for investigations completed. It was able to increase its capacity within the department allowing it to conduct more investigations. It worked steadfastly to open matters and reduce the backlog experienced in previous years.

Investigations into high profile or public interest matters would be finalised in the following year. This is in line with the Board’s strategy to reduce the backlog by dealing with investigations promptly.

IRBA said it continued to participate in relevant national initiatives and networks with structures from other audit regulators. This was to continuously develop, benchmark, and implement enhanced mechanisms of investigating and adjudicating alleged auditor misconduct in line with global trends. It hoped its own investigations would also serve as international benchmarks.

Concerning disciplinary targets, IRBA reported it achieved its annual target for implementing the disciplinary strategy, which was approved in 2021. In the 2022 financial year, IRBA implemented 26 out of 46 projects, and the remainder of these projects would be implemented within the financial year.
The strategy was aimed at redesigning its disciplinary processes to ensure it gave effect to the APAA. Mr Nagy said the finalisation and outcomes of disciplinary matters are positive indicators of the number of disciplinary matters closed last year.

IRBA said that it was actively endeavouring to restore confidence in the auditing profession by taking the appropriate action against registered auditors for improper conduct. It was confident these outcomes would act as a deterrent to RAs from neglecting its duty to protect the financial interests of investors and the public at large.

This would ultimately improve the audit quality, restore confidence in the profession, and in its regulatory bodies. Regarding development and implementing the rest of the strategy, IRBA said it has successfully benchmarked processes against local and other regulators in a bid to ensure best practices.

IRBA reported a realistic review of the current processes was undertaken. The disciplinary process and strategy and implementation plan were improved to aid in the redesign of the current processes to be more effective.

On operational effectiveness, IRBA noted its target of producing a clean audit was not achieved for 2021. This was due to a material finding raised regarding non-compliance in irregular expenditure. The issue of irregular expenditure was extensively addressed in a previous meeting concerning the 2020 and 2021 financial years. Following an investigation by the Board and IRBA management, no fraud or loss was identified. It was found the money was appropriately spent and the value was received.

IRBA said the irregular expenditure related mostly to a technical interpretation of single source procurement of expert, external investigators and witnesses. This was in relation to a large exercise conducted in 2021 to identify potential irregular expenditure which IRBA prepared and reported to National Treasury (NT). It was also disclosed in the audited 2021 statements. This self-disclosure resulted in the non-compliance outcome in the audit report.

Regarding irregular expenditure frameworks, the Board has subsequently approved the removal of irregular expenditure. After careful consideration of the investigation outcome, the Board resolved to remove any action in the disclosure.

IRBA said in the future it would apply for a deviation from NT if it had no choice but to appoint a particular person with a particular skillset to assist with investigations. IRBA also said it was in the process of appointing a panel of external investigators and experts who meet the procurement and management requirements.

IRBA has already received deviation approval from NT and it appreciated the support. It also enhanced controls to avoid another incident of irregular expenditure and remained hopeful to maintain its clean audit status this year.

IRBA marginally missed its target of paying Small and Medium Enterprises (SMMEs) within 30 days, because of a few invoices which were not processed in time. It increased its controls to process the payments timeously.

Continuing with operational effectiveness, IRBA exceeded the annual target of effecting payments to SMMEs within 30 days. IRBA failed to achieve its target of achieving the desired management control score, calculated according to Broad-based Black Economic Empowerment (B-BBEE). This was attributed to the current Chief Executive Officer (CEO) and direct operation vacancies which were in the process of being filled.

IRBA achieved its Employment Equity plan targets. There was a further subset of targets, including gender and disability, which were reflected in its workforce. The previous Board set a target of conducting an employee survey in alignment with IRBAs goals and values. The current Board resolved this indicator would be suspended until the following financial year, because of direct operations vacancies. It was a critical element in setting the culture, which could not be conducted prematurely. After six months of permanent employment in those positions, IRBA said it would conduct the survey.

Governance Update
Mr Tonelli said the previous Minister of Finance appointed ten board members in June 2021. He felt this brought the necessary levels of stability to the Board, given the recent history IRBA inherited. The resignation of a board member was related to the person joining a board of registered auditors, which was in contravention of the Act governing IRBA.

Regarding transformation, 78 board members were African, Coloured and Indian, with 67% of the Board being female. IRBA said the Board has functioned through a period of stability since its appointment. The Board subcommittees and statutory committees were fully constituted and underway with work.

Regarding the CEO recruitment process, IRBA said the Board continued to follow a rigorous headhunting process to fill this position. It has yet to find an individual who qualified with a strategic vision to bring to IRBA.

Mr Tonelli felt, despite this, the two acting executives had provided leadership stability, with each executive delivering on its statutory mandates fully during its time of service. IRBA said there had been virtually no disruptions with delivering on functions of the Board, especially statutory functions of the Board.

Mr Tonelli recognised the urgent need to fill the acting vacancies and hoped to do so within a short space of time.

Auditing Profession Amendment Act 5 of 2021
Ms Rebecca Motsepe, Legal Director, IRBA, said following the presidential sentiment, APAA was enacted. The Act aimed at strengthening governance as well as ensuring the independence of enforcement powers. The Board adopted an 11-point implementation plan to APAA to ensure it gave effect to its obligations.

Of the 11 deliverables, it was able to successfully deliver ten of the deliverables, which included the promulgation of its delivery strategy, amendment of the disciplinary rules, including detailed procedures of conduct on seizure processes and referral of non-audit matters to registered accredited professional bodies.

Ms Motsepe said IRBA reconstituted its Board, Enforcement Committee, Disciplinary Committee, and Investigation Committees. This would ensure these committees were independent of the profession. It was necessary to ensure RAs had the requisite qualifications to carry out their functions.

IRBA said the only outstanding deliverable was the Board recommendation to the Minister in relation to the upper limits of fines, which the Minister was supposed to gazette according to Section 51 and Section 51(b) of the APAA.

Ms Motsepe said significant progress had been made regarding this research. Benchmark research had been conducted, input was collated from internal stakeholders, and the document was reviewed by management with the intention of being tabled by the Board Committee in the upcoming two weeks.

Afterwards, the recommendations would be submitted to the Minister for consideration, before gazetting the upper limit fines. It was hoped the entire process would be completed by October 2022. IRBA said there were no significant challenges as a result of the delayed attention to Parliament fines, because these fines were only applicable to improper conduct, which was investigated and reported to the Disciplinary Committee after promulgation of the Act.

As a result of the backlog experienced by IRBA, it predicted these matters would only be dealt with in the next 12 to 18 months to come. In relation to old sanctions, the delay did not prejudice current matters dealt with by the Investigation, Enforcement and Disciplinary committees, either because of the parties or processes.

IRBA faced further challenges when implementing amendments, especially the interpretation of Section 23. It reconstituted a Disciplinary Committee to comply with Section 24(a) which required a pool of disciplinary committees be introduced as well as a panel, without registered auditors.

According to the previous Act, there were registered auditors in the Disciplinary Committee. The transitional provision suggested auditors charged prior to 26 April 2021 must be heard according to the old Act. This meant the Committee constituted prior to the amendments should hear these matters. As this Committee comprised of registered auditors, this was in contradiction with APAA and the newly constituted Committee.

IRBA consulted NT and agreed it would move for the amendment of the relevant provisions, including Section 23. NT amended the Act and was put forward for public comment. It was in motion to be published on the relevant parliamentary platforms during the second quarter. IRBA said although it affected auditors charged prior to the amendments, matters related to auditors charged after 26 April 2021 were unaffected.

Registry Information
IRBA noted an overall decline in the number of registered auditors over the past five years amounting to 12% since 2017. This was attributed to the availability of work, risks associated with the profession, and emigration of certain registered auditors. IRBA noted auditors registered with assurance status and auditors registered with non-assurance status remained consistent. Auditors exiting the register were predominantly those performing non-assurance work.

Ms Motsepe noted a 24% decline regarding auditors not signing audits in any event, while assurance workers were only sitting at eight percent. IRBA felt it still had a significant and sufficient number of auditors to do the available audit work.

Registry Information
IRBA reported that race and gender percentages remained consistent over the past five years with RAs being mostly white and male. There was a slight improvement related to females, which were approaching 30% of the cohort. IRBA noted dissatisfaction with this rate, although it felt the transformative measures to redesign the audit brand would ensure the profession is more appealing to accountants and expand the pipeline.

This involved bringing in more professional bodies. IRBA said the Association for Chartered Certified Accountants (ACCA) was in the process of accreditation, having made significant progress. It hoped once accreditation was processed there would be more movement in relation to the pipeline, and auditors entering the register.

The Audit Development Programme (ADP) was recently adopted and showed significant changes and progress numbers. Despite COVID-19 and emigration in the accounting profession, IRBA did not notice any deregistration of Registered Chartered Accountants (RCAs) over the past two years. IRBA highlighted a 95% retention over the past five years with a 27% increase in registrations in the past financial year.

Status of Mandatory Audit Firm Rotations (MAFR)
Mr Nagy said IRBA conducted an exercise in February where it looked at listed entities and found 61% of listed companies already rotated, and were due for compliance with Mandatory Audit Firm Rotation (MAFR) by 1 April 2023. Mr Nagy said he wrote to the ten firms comprising the 39%, not in compliance, saying it had one year to get out of or rotate audits.

IRBA wrote to the five licensed stock exchanges and received letters back from all, noting awareness of this and saying it was on track with compliance. IRBA said there were mid-sized firms which were positioned to take on big audits and joint audits to address diversity. There were no immediate concerns regarding non-compliance in the year to come.

High profile cases
Regarding EOH and BOSASA, IRBA would take up an investigation before the Investigations Committee in May. IRBA anticipated the Tongaat Hulett investigation would be finalised by the end of 2022. Mr Nagy noted this involved the civil arrest of an auditor, which was unprecedented. This required cooperation with the Commercial Crimes Unit in the investigation, alongside its own independent investigation, although it would require IRBA to wait for the civil outcome on the matter first.

IRBA said, regarding the Steinhoff investigation, it was very complex and multi-jurisdictional, with delays in accessing key information. The investigation was still in progress. A number of other cases, such as Eskom, Transnet, and South African Airways, were in the process of disciplinary hearings and were set to be concluded in 2022.

On high profile cases investigations, IRBA said the capacity for investigations had increased from four to nine investigators. It hoped to have tackled the backlog in the next 18 months and looked forward to resuming real-time investigations by September 2023. IRBA said disciplinary processes were handled distinctly by the Disciplinary Committee and the Disciplinary Hearing panel.

Key litigation
Ms Motsepe said there were two main litigations ongoing. One concerned the MAFR, filed by the East Rand Member District of Chartered Accountants (ERMDA), in the high court. IRBA received a vague and ambiguous decision from the Court concerning the application to review the MAFR. An application for an appeal was made before later being dismissed and opposed by the High Court with costs.

The matter then went to the Supreme Court of Appeal on 22 February 2022, which was referred for oral argument. The parties were given three months to file certain documentation. The matter was still ongoing and did not affect the implementation of the MAFR.

The second matter concerned the financial stability of IRBA. The application was issued to the Board in 2019 and 2020, aimed at reviewing the IRBA fees related to the charges on auditors. In April, a judgement was received by the High Court which found in favour of the applicants and set aside a number of significant fees charged by IRBA. These included insurance fees, increases in registration fees, reinstatement fees, and other administrative fees which were gazetted.

The Board took the decision to take the matter on appeal because of significant errors made by the judge in relation to some of the fees set aside. The leave for appeal was filed on 6 May 2022 and IRBA was in the process of waiting for a date of appeal from the Registrar of the Court. The Board wrote to NT to initiate some engagement on what happens if the Court does not find in favour of the order.

The final review application related to the previous auditors of Sharemax. The Disciplinary Committee made a ruling refusing the recusal of some of its members. The auditors then decided to take the matter to the High Court for review in the hopes the entire disciplinary process and charges would be set aside. The application was opposed by IRBA and it was anticipated the matter would be heard around October 2022.

Restoring Confidence
Mr Nagy said the Board, in line with its five year strategy and Annual Performance Plan (APP), embarked on a confidence restoration project. The project consisted of three spheres related to reforms in the auditing profession to improve audit quality and address the broader ecosystem gaps. Broader stakeholders were engaged to provide recommendations on strengthening the ecosystem.

This involved comprehensive regulation such as looking into the systems of IRBA, its capacity, and funding model internally to ensure it remains stable. The new standards project was required to be implemented by firms before year end. IRBA said it was important for it to inspect and regulate according to the new quality management standards. IRBA engaged with the Association for Certified Fraud Examiners (ACFE) regularly to talk about how fraud examiners could be incorporated into the auditing process to make it easier for auditors to identify fraud related risks during auditing processes. IRBA annually issued an Audit Quality Indicators (AQI) report with comparative information to help audit committees engage on audit quality with audit firms.

Change at a high level, as envisaged by the Act, required IRBA to be recognised as an internationally recognised independent audit regulator. This was to ensure international standards and enforcement against auditors were upheld in South Africa. IRBA participated, incorporated, and influenced important international organisations, standards, and centres. The international forum of independent regulators re-elected IRBA as board members representing Africa in 2021. IRBA served and contributed on numerous other local and international boards.

For more complete details, see attached presentation.

Current issues
It was not sustainable to fund the core mandate and expansion of IRBA with its funding model. There is growth, a risk of failure in the system, and an expectation IRBA can do more as a regulator. The budget cut of R30 million for 2022, because of lack of funding, has a large impact on sustainability.
IRBA receives 70% of its funding from the auditing profession, which sees growth every year in line with the Consumer Price Index (CPI), although NT contributions did not see growth in line with the CPI. This placed a large financial strain on auditors. It was problematic, as over time it created perceptions related to independence. IRBA planned to embark on an alternate fee model. It said it would research the matter and provide recommendations within the next 12 to 18 months.

Mr Tonelli said IRBA was in urgent and ongoing discussions with NT around matters related to executive remuneration. IRBA was trying to prevent losing senior and highly experienced executive staff, to continue with regulatory tasks without disruptions.

Discussion
Mr D Ryder (DA, Gauteng) noted the Minister and Deputy Minister of Finance did not issue apologies for not attending the meeting.

The Chairperson interjected and said the Minister and Deputy Minister of Finance were not invited to the meeting as it was a briefing from a public entity. He questioned who would have invited them.

Mr Ryder said the National Council of Provinces (NCOP) has oversight over the Executive. Following the actions of the Minister of Finance in January, where the entire Board was fired and the CEO was replaced, he felt certain political questions had to be answered by IRBA in front of the entire Committee. A member from NT should have provided an update.

The Chairperson agreed it was NT’s responsibility. The Minister and Deputy Minister of Finance were not invited to the meeting, so an apology was not necessary to be issued. It should have been brought up on another platform, such as WhatsApp, and if the majority felt the Minister and Deputy Minister should have been present, the Committee would invite them to the following meeting.

The Chairperson said an official from NT is meant to be in committee meetings for every public entity falling within its purview. He asked Ms Karen Maree, Acting Accountant General, NT, to address any issues or concerns raised by the members. Members are able hold the Minister and Deputy Minister to account for the current status of IRBA.

 The Chairperson explained a question could be taken before the Houses of Parliament, or the Secretary or Chairperson of the Committee could write for a follow-up response from the Minister. The Chairperson asked the Committee Secretary to investigate if any position or practical action was taken to have the Minister present at the meeting.
 
Mr Ryder asked IRBA how the new Board was fitting in and settling down as well as if the stability the Minister had hoped for had been obtained. On finding a new CEO, he said it has been a revolving door process. He commended the work of the Acting CEO, although he felt the position should be stabilised as a year has passed since the last Acting appointment.

Regarding fragmented regulation, Mr Ryder asked for the details of the World Bank report recommendations for deeper regulation. Once this written report has been submitted to the Committee, Members can establish how these regulations will be implemented as a country and foster an understanding of the plan ahead. He asked NT if there were further intentions to broaden the regulations of other players in the accounting industry.

On the functionality of the Financial Reporting Standards Council, Mr Ryder said as a statutory body formed in light of the Companies Act of 2008, it is an important body to keep alive and functioning, and although it falls under the Department of Trade, Industry and Competition, he felt the Committee should be involved as well.
 
On environmental, social and governance (ESG) issues and greenwashing reporting, he said because of its increase in popularity, a number of banks have placed conditions on advances of ESG requirements, going forward. In light of the many entities accused of greenwashing, he asked if this reporting could be audited, even though it is a relatively new trend.

Regarding the impact of the amendments to the Act, he asked for an update on how this has been processed. He also asked for enlightenment on the further amendments required by Parliament, so shortly after the initial amendments and the timeline for this.

Mr Ryder noted that IRBA was appealing the various court cases. He felt it was surprising, especially considering the second, scathing judgement relating to fees. He asked what the impact of the second judgement on the financial sustainability of IRBA was, and asked if the fee contributions expected from NT had been quantified yet.

On the R10.8 million in irregular expenditure in 2021, he felt sympathy for the situation as it was related to procurement. He felt, with the backdrop of the NCOPs role in examining the impact on legislation, the process of establishing a panel of experts should be straightforward and the regulatory body for auditors should not have irregular expenditure.

He asked if there was a large flaw in the legislation at the moment IRBA had to apply for a deviation, or if there were ways to comply with the law, but it was not followed.

On the mandatory regulation of auditors, he asked what the impact would be on competition for the ten listed entities which are out of compliance. He said auditors of a certain size were guaranteed business, and asked what this would do for the standards of auditing and the levels of compatibility of the businesses audited. He asked IRBA if it had seen a downturn resulting from this mandatory rotation.

Mr Z Mkiva (ANC, Eastern Cape) said he had not heard of IRBA before, and he would not be surprised if it did not have much of a footprint in the country. This was of importance as auditors were linked to the middle and upper class because of the expensive rates of access to its services.
People in impoverished areas with registered cooperatives, non-governmental organisations (NGO), and non-profit organisations (NPO) have difficulty trying to access grants. This is because it requires audited statements which are effectively inaccessible, as it is expensive.

This was an important issue to address as it would balance the scales in the country by providing businesses in poor areas with access to statements required of them by NT. Auditors should consider adjusting fees, in efforts to assist poor individuals. He suggested, to accommodate these poor areas, a measure must be in place to avoid exorbitant fees. He felt this would aid in growing awareness for IRBA.

Mr Mkiva noted the importance institutions established by Parliament have in finding resonance with poor communities. This was relevant to IRBAs goals of transformation, by placing the needs of ordinary South Africans as priority.

He appreciated there was a body to regulate auditors, because markets often favour capital, allowing exploitation to occur and resulting in money disappearing from the fiscus without being noticed. He felt it was an important responsibility to look at audit statements and practices meticulously, to avoid this. He felt the R1.3 trillion was an undercut, because of the size of the South African economy. The culture of exploitation was longstanding in South Africa and required attention.

He would have been interested in hearing about the Steinhoff issue, which was a prime example of the state of auditing and related to criminality in the country. He asked what IRBA has done about this matter, and said as these companies are sustained off the interests of South African rands, it makes it of interest to the people to understand the accountability measures in place.

There must be accountability for the gross non-disclosures and dishonesty occurring in the private sector. He acknowledged, as a leader in the Congress of Traditional Leaders of South Africa (CONTRALESA), the expenses for auditing are substantial even for big and well-established entities. He looked forward to IRBA's response showing the realistic expectations of the auditing transformative landscape.

The Chairperson said IRBA and NT worked closely to process and pass the Auditing Professions Amendment Act. He asked why IRBA was not able to foresee the practical issues and gaps in the legislation, in spite of its large contribution to the legislation.

He said the MAFR was supported, but Members felt there should have been further negotiations, with the auditors and IRBA vigorously opposed to it. This was out of fear big corporations would take IRBA to court, creating large expenses for IRBA and the state. He acknowledged the threats following the call for transformation were not as widespread and strong as was claimed.

He noted 39% were not ready yet, or at risk of affecting MAFR, and asked what the consequences would be if IRBA failed to implement this by 1 April 2023. The Chairperson felt the clean audit was important to maintain credibility, even though the status was based on a technical misunderstanding.

The Chairperson said in the last term the Committee argued Steinhoff and VBS should be investigated. He asked what some of the hindrances were in the way of proceeding more effectively on this matter. On the increased capacity from four to nine investigators, he asked how many investigators were needed in relation to the new powers provided by Parliament.

On the Zondo Commission report, based on a comment from the IRBA Chairman, the Chairperson asked if state-owned entities did not have private sector auditors.

He asked for clarity regarding systemic issues impacting audit quality. He also asked for clarity on what was meant by the term ‘professional scepticism’. Related to Sharemax, the Chairperson said it was a longstanding issue; and said the Department of Trade, Industry and Competition financial standards reporting council accounting standards were not implemented correctly. He asked what the problem was with this Department’s involvement in the matter.

On extending the set of regulations, the Chairperson felt it could not include registered auditors.

Concerning the Employment Equity Act, he said IRBA was doing reasonably well given the White and Indian domination in the sector; and asked if the one percent referred to as “others” adequately represented the Coloured population. The Chairperson said the Coloured population were frequently under-represented in these terms; and asked why there was a lack of Coloured representation in these structures.

On the fee model, the Chairperson noted the increased fees resulting from budget cuts from NT. He said IRBA should continue to do it job with these resources, and noted the focus was predominantly on public sector corruption. He agreed with many of the issues raised by Mr Mkiva, although he felt Members were responsible for effecting many of the transformational issues. He said the role of IRBA would serve as a legal or regulatory framework, and these issues were more relevant to the Minister and the Department. He encouraged Parliament to effect these changes.

The Chairperson agreed with Mr Mkiva concerning fees, and said because of the capitalistic system, market relations cannot be determined by IRBA. He directed the issues of Mr Mkiva towards the Committee rather than NT or IRBA. He agreed in principle that rural non-government organisations (NGOs) would not be able to cover the auditing fees. He asked IRBA if it had any role in this regard or if the responsibility fell solely on government.

Continuing on transformation, the Chairperson appreciated the increased number of females in the profession, but said it was not where it should be. He expressed disappointment on IRBA taking so long to replace the Chief Executive Officer (CEO) position within the company, and appreciated the new CEO for his work. The team was well suited for the tasks ahead.

The Chairperson corrected Mr Mkiva, saying IRBA appeared before the Committee numerous times. He said he was disappointed as a person who advocated for IRBA and pushed for the APAA to be processed before the end of the term. The Bill was issued too late for the NCOP to pass the Bill in the last quarter and he was disappointed to see soon after the Act was enacted, it had to be subjected to amendments. IRBA should become more proactive when working with the National Assembly.

IRBA Response
Mr Tonelli replied to comments related to the Board, saying IRBA inherited a Board which was problematic and dysfunctional. This included issues relating to the departure of the previous CEO, which created instability within IRBA. The period following this was used to create stability and provide the necessary support to the Executive in relation to reducing the turbulence it created. The earlier part of the appointment focused on stability and dealing with the backlog which had accumulated.

He said he felt the Board functioned very well since then, and matters brought to the Board had all been decided unanimously. The united front of the Board created an environment for the Executive and staff to work and discharge their statutory responsibilities. This was a notable achievement over the past year.

Regarding the appointment of a new CEO, he said the process had been a delayed one for IRBA as it wanted to avoid repeating previous mistakes. IRBA agreed the position must be filled and hoped to be in a position to make the Committee proud with this appointment.

Mr Tonelli assured the Committee that IRBA had done a good job in fostering stability and clearing the backlog associated with the process.

Mr Nagy said IRBA was committed to the success and stability of the company and he showed support for the new Board in its role.

On the impact of the judgement on fees, Mr Tonelli said if the appeal was lost, the need for IRBA to rely on NT for future support would be critical. IRBA felt strongly the judgement was wrong in certain respects, which formed the basis for the appeal. If IRBA were to have to comply with the order of refunds set out in the judgement, it would have a serious impact on its ability to operate.

Mr Nagy said the court order for IRBA to pass credits was suspended until the final outcome. The budget for IRBA was between R150 million annually, making it a small organisation. If IRBA were to lose the appeal, it would have to pay R60 million which amounts to almost half its annual budget. There would be further implications because the refund only pertains to the 2019 and 2020 financial years. He feared it could have far reaching implications if there were to be an extrapolation of the judgement into the latter financial years.

IRBA said the World Bank Report on Standards and Codes of the accounting and auditing profession was adopted by the previous Minister of Finance, and it spoke to the independence of the regulator and its funding. The report was public, although he would share a copy with the Committee.

Mr Nagy said without an oversight body in the Department of Trade, Industry and Competition there could be risks of self-regulation in the country where the interpretation of accounting standards could be done within the private sector itself. Along with the South African Institute of Chartered Accountants (SAICA), IRBA planned to set up a meeting to bring this concern to the Department of Trade, Industry and Competition.

On ESG, IRBA said it was aware of the international developments surrounding ESG frameworks. There was some tug of war surrounding who would set the auditing standards and reporting frameworks. IRBA said this was already in its standard workplan and it was already engaging locally and internationally on development around ESG. It recognised going green and safeguarding world resources could play a large role in future investor decisions.

On the new regulations, IRBA said since APAA was promulgated last year, IRBA went out on consultations and gazetted a new set of disciplinary rules which includes rules on how to conduct a search and seizure. It had been completed and any transgression after 26 April would be prosecuted according to the new disciplinary rules of the new Act. IRBA said the new fines by the Minister would also be applicable after this date.

Regarding further amendments to APAA, IRBA said it was a legal implementation issue. The way the Act could be written includes an interpretation suggesting two disciplinary committees; one according to the old Act and one according to the new Act.

Mr Nagy said it was more of a technical issue because it would not make sense to have a new, independent committee while constituting an old committee according to the old Act for older transgressions.

The legal team from NT took the approach to make the amendments to APAA through the current omnibus.

On mandatory firm rotation, IRBA said the rule was not effective yet. A lead time of five years was given for firms and companies to position themselves. It would only come into full effect in 2023. IRBA said it would conduct a post-implementation exercise to see what the impact of the rule is, including secondary objectives. It would have to consider if it successfully opened up the market to address market concentration among the big firms.

IRBA felt it saw signs related to primary objectives of independence. It noted a few cases of restatements, from auditors to management, which gave rise to investigations into the previous auditors.

Concerning MAFR, IRBA said based on feedback from the stock exchange, from 1 April 2023, there were no concerns of non-compliance. The exercise conducted in February was to pre-empt possible non-compliance in the future.

IRBA said it was important mid-sized firms position themselves to conduct bigger audits and public interest audits. It saw some positive signs of this happening.

Mr Tonelli said at the moment no entity or company was in breach of the rule. It had until 1 April to be compliant.

Mr Nagy said joint audits were a strong mechanism where big firms can partner with smaller firms and help smaller firms build capacity. There was a trend where smaller and medium firms took on the subsidiaries of listed audits. IRBA said it would continue to do quarterly research and six-monthly research to track the successful implementation and also if MAFR makes the envisaged impact from the outset.

Replying to Mr Mkiva, Mr Nagy said as a regulator IRBA does not get involved in the commercial side of the audit product, as it is more of a supply and demand process. IRBA would take his comments and process them, although IRBA believed it would be up to firms to do voluntary work or charge rural communities less for its services. He suggested government could look into sister programmes and sponsorships to make it possible for those smaller entities in rural communities to get high quality audits. He understood it would not be possible for auditors to do free audits as auditors have to sustain themselves and stay up to date with the latest standards.

On audit quality, Mr Nagy agreed no country can afford a poor audit quality. Investors and poor communities rely on companies to pay taxes and be honest in declarations and tax calculations. IRBA recognised poor communities as part of the public benefiting from audits.

The IRBA Board embarked on a specific process around restoring confidence through the improvement of audit quality. This would be to ensure fewer audit failures, such as Steinhoff, to prevent investors from being exposed to this risk in any way. IRBA said this was a top priority for it and one of the reasons why it had requested the Act be improved was to ensure stronger accountability could be brought in to hold auditors with alleged improper conduct to account.

Mr Tonelli said regarding awareness in rural communities and the awareness of the accounting profession in rural communities that he attributed excellent outreach programmes to the South African Institute of Chartered Accountants (SAICA) and many firms for attracting many people to the profession. Some of SAICAs programmes have been successful in bringing individuals from rural communities into tertiary education to facilitate opportunities to study, become members of the profession, and to stay on as registered auditors.

Mr Nagy clarified the systemic issues within the Zondo report. The people responsible for running everyday businesses are primarily responsible for the governance and financial reporting of those companies. Auditing often comes in quite late in the process, after many frontline defences have ensured corruption, fraud, and maladministration do not occur or are identified early enough.

Auditors only come into play after companies have conducted business. Auditors have a secondary role regarding identifying errors and detecting fraud in financial statements. IRBA said it often grapples with the expectation gap between what is expected from it and what it is mandated to do.

Mr Nagy used the example of investigations by a registered auditor into improper conduct, only focusing on its non-compliance with auditing, its accounting standards, and its ethical codes. It was often unlikely and difficult to use its investigations to criminally prosecute a person, from a regulation perspective.

A lot of people go to auditors first for a remedy, although it is important to question who committed the fraud or corruption in the first place. This is where the systemic risk lies. It was important the ecosystem be strengthened and there be a comprehensive regulation of accountants.

IRBAs strategy involved finding the gaps to start conversations with the relevant stakeholders in the ecosystem. This would allow it to make recommendations to the powers that be to bring in regulatory controls for the benefit of the country.

On mandatory firm rotation, IRBA identified by end February, if it took all the auditors from listed companies and pulled it forward to April 2023, there would be over 100 entities in breach of the mandatory firm rotation rule. This high percentage inspired IRBA to write to the CEOs of the largest ten firms and stock exchanges. The feedback received was it was aware and positioning itself with clients to rotate and not be in breach.

If someone were found guilty or in breach, it would result in a referral for investigation as it is a fundamental failure according to the rule. The investigation according to the new disciplinary rules and new fines would apply to auditors found to be in breach.

Regarding high profile cases such as Steinhoff, IRBA could not share the happenings of the investigations. It did confirm investigations were in progress and attributed delays in the process to two opposing legal teams. Especially if a registered auditor does not accept the sanction, then it would have to go through a disciplinary hearing, further prolonging the process.

Mr Nagy said Steinhoff had an extremely complex structure to it, which goes across a number of jurisdictions, including Europe. Collaborating and acquiring information across jurisdictions was described as very challenging and served as another contributor to the delays. IRBA said it had more resources now and was hard at work trying to bring those investigations to a close speedily.

IRBA claimed it conducted a detailed exercise on the nine investigators and with the help of external investigators, it envisioned it would clear the backlog on investigations within 18 months. It was cautious not to over-capacitate the unit, as when investigations returned to a real-time pace, IRBA did not want to retrench investigators. It was cautiously and responsibly growing the team as needed and believed nine investigators would suffice to clear the backlog.

IRBA was constantly evaluating if its plan would work out. It noted gratitude towards NT for its support regarding budget and increasing its capacity for investigations. IRBA was in the process of restructuring the unit to ensure more layers and reporting lines were more effective in bringing cases to a close, faster.

On the Zondo report, Mr Nagy said it was public knowledge the report did not only concern public companies, state-owned companies (SOEs), and auditors. It implicated the broader system of the accounting and auditing profession and in some cases involving private sector auditors, it was tracked and lifted from the Zondo report. IRBA collaborated with Zondo to provide information on some of the topics.

Where IRBA deemed it necessary to investigate a registered auditor because of outcomes of the report, it would do so. This resulted in 16 open cases stemming from the Zondo report, where auditors implicated were to be investigated.

Concerning Sharemax, Mr Nagy agreed the case has been ongoing for many years. When he started as acting CEO he had to sign court papers for Sharemax in an incident where IRBA's disciplinary processes were halted as a result of being taken to court by Sharemax. The company demanded members of IRBAs Disciplinary Committee were not objective and requested these members recuse themselves. The Disciplinary Committee opposed this view which resulted in court proceedings.  IRBA hoped the court process would be concluded quickly, to reignite the disciplinary process and bring the auditors to respond to the charges.

Regarding IRBAs performance information on measures in relation to the Employment Equity Plan, the one percent referred to foreign nationals appointed, rather than other races. IRBA has a detailed Employment Equity Plan which is submitted to the Department of Labour annually. It was reported Coloured males comprised four percent of the workforce, while the target was two percent, while Coloured females amounted to nine percent, while the target was eight percent.

IRBAs performance targets looked good across all races, gender, and were inclusive of disabilities across the board. The increase of female representation in the RA database was a slow uptake. The hope was the new uptake of RA entrants would increase representation to a 45% female population, and through transformation initiatives and mechanisms, it could retain females in the profession to aid growth in this area. These sentiments were shared with regards to race as well.

IRBA agreed to be more proactive in its approach to addressing matters with the Committee. On irregular expenditure, in 2019 IRBA said the Auditor General (AG) flagged a few payments for single source experts, questioning if IRBA followed due process. IRBA said it was following the single source process for expert external investigators dating back to 2012.

NT issued a technical memorandum around 2016 which did not affect the procurement of single source expert investigators. This created difficulties as IRBA could not recruit investigators from other audit firms, because it would go against its independence, which in turn severely limited the pool of applicable candidates.

In 2019, the AG interpreted the technical memo to indicate it is no longer appropriate to want to use single source in this manner, and one would have to apply to NT for deviation. IRBA was successful in applying for deviation before, and it demonstrated it could deal with unique skill sets which needed to be prosecuted in a technical manner.

The AG went on to say it would be more appropriate to have a panel of expert investigators and witnesses who are followed in the process alongside a panel where appointments could be made in rotation. IRBA said it was currently in the process of establishing a panel and was also no longer making appointments according to single source procurement.

IRBA acknowledged between the issuing of the memo in 2016 and interpretation in 2019, single source procurement was used as it was seen to be appropriate. IRBA recognised the importance of taking responsibility for public interest. In a self-investigation dating back to 2012, IRBA noted R10 million in single source procurement. This was disclosed in financial statements and reported to NT in previous financial years.

NT Response
Ms Maree said IRBA had a very credible Board at this stage. NT took its time during appointments as it had definite requirements to fulfil regarding professionals. The Board was made up of an experienced team that worked well as a collective.

The subcommittees were working well and most of the backlog was cleared by this Board. All documents and standard issues were dealt with. NT acknowledged it was a tough time considering board cases, although the Board had been proactive in this manner. The Minister of Finance was well aware of issues so information flowed consistently to NT. It had a good relationship with the IRBA Board and acknowledged the work still to be addressed. The Board planned to meet up with the Minister many times in the future alongside the collective process mentioned earlier.

NT opted not to comment on political issues, although it said it had created a list of issues to address to the Minister of Finance and Deputy Minister of Finance. It planned to work intimately with legal to avoid bringing future amendments where unnecessary.

On the new CEO, it had worked on the appointment process and acknowledged the urgency of this matter. The role would have to be filled by the right person.

The Chairperson asked NT to comment on the practical problems which arose from APAA.

NT said it would refer the matter to its legal team, and agreed it was a long process. There were other amendments which were agreed not be addressed in a previous meeting, and it would serve a purpose to take a new holistic route.

The Chairperson said the Committee would prefer better quality legislation from NT. Regarding the omnibus legislation, he asked where in the process it was; and asked if it was tabled in Parliament or if it was still in the Cabinet pipeline.

NT said it was still with the Minister and not in the hands of Cabinet yet.

Ms Motsepe said the Bill is finalised and it was hoped it would be sent to the Office of the Chief State Legal Advisor for certification in the previous week.

Mr Ryder said he appreciated the feedback. On the Financial Reporting Standards Council, he asked if the entity has been functioning lately and why it stopped functioning.

Mr Nagy said the Financial Reporting Council (FRC) fell under the Department of Trade, Industry and Competition. IRBA has no jurisdiction over accounting standards set in the country. IRBA identified this body, the FRC, as not functioning as a risk to the greater ecosystem. When guidance is needed on a particular accounting standard there is no regulatory body to issue guidance, and this places the risk of leaving interpretation up to professionals without oversight.

IRBA said it was a concern for it. It was not in a position to comment on why the body was not functioning, other than it was aware the body has not been functioning for over two years.

Mr Nagy, alongside the SAICA CEO, planned to write a letter to the Minister regarding these risks and hoped to engage with the Department on these concerns. This was planned to be discussed in the following months during stakeholder engagements with the Department of Trade, Industry and Competition.

NT said two or three years ago it had provided the Department with recommendations, although no action was taken. NT agreed the matter should be brought up again before the new Minister.
The Chairperson asked the Committee Secretary to write a list of outstanding issues to be addressed by IRBA and NT for a progress report in the future.

The meeting was adjourned.