Co-operatives Bill: hearings; Co-operatives Banks Bill: Treasury Amendments: discussion; Committee Report on Department Budget:

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
15 March 2005
CO-OPERATIVES BILL: HEARINGS; CO-OPERATIVES BANKS BILL: TREASURY AMENDMENTS: DISCUSSION; COMMITTEE REPORT ON DEPARTMENT BUDGET: ADOPTION
 

Committee Industry Report on Department budget 2005/06
NCT Forestry Co-operative Limited submission
NCT Forestry Co-operative Limited PowerPoint presentation
Institute of Certified Public Accountants of South Africa briefing
Treasury proposed amendments to the Co-operatives Banks Bill 2005
Submission from Mr. M. Ntombela
Co-operatives Bill [B4 – 2005]

SUMMARY
The Committee heard submissions on the Co-operatives Bill [B4 – 2005] from the Institute of Certified Public Accountants of South Africa and the NCT Forestry Co-operative Limited. Additionally, the National Treasury presented proposed amendments to the Co-operatives Banks Bill 2005. The Committee unanimously approved the amendments made to its budget vote report.

MINUTES
The Chairperson said the Committee would first finalise the voting process on its report on the Trade and Industry 2005/06 Budget, which had been amended following recommendations during the previous Committee meeting. The Committee unanimously accepted the report.

Institute of Certified Public Accountants briefing
The Institute of Certified Public Accountants of South Africa supported the Co-operatives Bill but advocated the adoption of a tiered system where only large public companies were required to conduct the traditional financial audit by a qualified auditor. They suggested that Small, Medium and Micro Enterprises (SMME’s) and co-operatives be required to submit less exhaustive ‘reviews’ performed by accounting officers and not auditors. The Institute argued that the management regimes in ‘closely held’ companies where the owners often acted as the management as well did not require the traditional audit unlike large public entities where the auditor was often the bulwark against management’s abuse of shareholders funds.

Discussion
Mr Martins said the public hearing process was important as the Committee wanted to ensure that an enabling environment was created for SMME’s and co-operatives. He said the Committee needed to hear from all relevant stakeholders to gain a comprehensive understanding of shareholder views.

Mr K Durr (ACDP) asked why the services of an accounting officer would be less expensive than a traditional audit conducted by a qualified auditor.

Mr N Van Wyk, Institute of Certified Public Accountants of South Africa, said it was not a matter of lower fees or a compromise on the standards of the report for that matter. The objective was to strike a balance between the less comprehensive reporting needs of SMME’s and the cost of an extensive traditional audit.
In large public corporations the auditor acted as a middleman between the shareholders and the management of a company and the auditor ensured that shareholders’ rights were protected against management abuse. In smaller businesses the owners often acted as the managers of their respective enterprises, thus the traditional role of the audit was not required.

He said the Institute was in ongoing discussion with the SARS regarding the application of a tiered system, but added that SARS was in the process of completing the Tax Practitioners’ standards. These standards were what SARS required to ensure the accuracy of business reporting. The traditional audit was primarily a business service as opposed to a tax requirement and therefore the Institute did not expect objections from SARS. In general revenue services had more stringent measures to counter fraud than relying on auditors’ reports.

Mr K Bapela (ANC) asked whether the shift from an audit to a review would have any negative impact on the sound corporate governance of companies.

Mr Van Wyk said ‘closely held‘ companies were exempted from traditional audits in the UK, Europe, New Zealand and Canada. In the UK, 80% of companies were exempted from the need to have traditional audits but other mechanisms were in place to ensure sound corporate governance. He added that the UK was currently researching the South African model of an Accounting Officer in this regard. He reiterated that the Accounting Officer was a lesser form of assurance but appropriate for the needs of an SMME or co-operative.

Ms D Ramodibe (ANC) said she appreciated the need to reduce costs incurred through the audit system, but inquired what risks were involved in accepting a less extensive reporting regime.

Mr Van Wyk said the Institute did not advocate a cessation of the reporting function but advocated an alternative, less comprehensive review. He reiterated that the traditional audit was appropriate for large companies such as De Beers, but said that it was an overly elaborate report for the needs of small business that would inhibit their development. He added that the Accounting Officer was not a perfect alternative and some adjustments to the regime may be required.

Mr S Rasmeni (ANC) asked to what extend the Institute supported the Bill and whether the language of the Bill was sufficiently accessible to the lay person.

Mr S Daniels, CEO, said they fully supported the Bill and agreed on the need for legislation that was accessible to the majority of South Africans. He added that the Labour Relations Act was a good example of legislation that was drafted with the lay person in mind.

Mr Ramodibe said the current legislation required government to be ‘interventionist and paternalistic’. He agreed that legislation was often difficult for the lay person to comprehend.

Mr Van Wyk said the focus on simplifying the language of the Bill was very evident but suggested that the numbering of the Bill should be simplified.

Mr Martin said it was important to create an enabling environment for SMMEs and co-operatives but added that investors in these organisations also needed clear and reliable financial records to protect their interests.

Mr L Labuschagne (DA) asked how the Institute defined an Accounting Officer, and what the requirements were to qualify for this position.

Mr Van Wyk referred to Paragraph 8 of their submission saying that the Accounting Officer was someone with a relevant degree, who obtained years of relevant working experiences and successfully completed the professional evaluation exam for Accounting Officers. An Accounting Officer was also required to be a member of a relevant professional body.

Mr Daniels said developing nations were crying out for assistance with regard to the financial reporting function of small businesses.

Ms Rasmeni asked many women the Institute employed.

Mr Daniels said 50% of the staff in the Institute’s secretariat was female.

Mr Durr asked whether any other similar accounting bodies existed in South Africa.

Mr Daniels said there were at least 13 similar accounting bodies in the country, of which the South African Institute of Charted Accountants was the biggest, with 23 000 registered members.

NCT Forest Co-operative briefing
The NCT Forest Co-operative Limited advocated two amendments to the Bill: the adoption of a similar disclosure of information clause as found in the Companies Act and that the patronage voting system where the strength of members of a co-operative’s vote was proportional to the volume of the product contribution be allowed to continue in co-operatives. The NCT Forest Co-operative argued that due to the nature of any co-operative much of their marketing strategy would be reflected in the minutes of the board meetings and that would potentially not be covered by the protection provided to ‘current business transactions’ as stipulated in the Bill. This would prejudice their business in juxtaposition with the less stringent disclosure requirement contained in Company law. The patronage voting system they argued allowed small emerging farmers to benefit from economies of scale and financial support of the more established farmers and should be maintained.

Ms Ramodibe asked how the Bill affected the emerging members of the NCT Forest Co-operative.

Dr M Sefularo (ANC) asked for more clarity surrounding the co-operative’s business model as well as a picture of the representation of the various race and gender groups in South Africa.

Mr Dladla said the co-operative was a home for all independent farmers. Previously disadvantaged farmers constituted 24% of the overall membership. He added that due to the predominantly male pattern of land ownership in traditional societies women were still under represented in the co-operative.

Dr Sefularo said the co-operative seemed to consist of predominantly white members. He asked what the maximum votes a member could have were and whether a black person had attained this level of patronage.

Mr Dladla said that currently 20% of the members contributed 66% of the product volume. This volume was necessary to ensure access to large contracts in export markets and added that this 20% of members carried the majority of the financial burden in the co-operative thus subsidising emerging farmers. The smallest emerging farmers owned one hectare of forestry farmland while the more established black farmers owned up to 2000 hectares. White farmers often owned 6000 hectares of forestry farmland.

Mr Labuschagne raised a point of order and said the Committee should not assess whether presentations were made by black or white organisations, but simply listen to the submissions on its own merits.

Mr Martin said all stakeholders were welcome to present their submission on this enabling legislation. He added that the Committee was entitled to inquire about the management model of presenters and the bona fides of their organisations. He said it was part of the Chairperson’s function to protect presenters before the Committee but when they required more information the Committee should be frank in their questioning.

Mr Kime, General Manager, said 2 of the 10 board members were from previously disadvantaged backgrounds, but added that the co-operative as a whole enjoyed membership from all races. The primary issue they wanted to raise was the disclosure of information clause in the Bill. The NCT Forestry Co-operative feared this clause would allow competitors to gain valuable insight regarding their marketing strategies, and as such this clause could be very damaging to the sustainability of their co-operative. He requested that the Company law provision on disclosure of information be mirrored in the Co-operatives Bill.

Mr Bapela said Clauses 21 and 22 of the Bill contained a number of safeguards to prevent sensitive business information from falling within the disclosure of information requirement contained in the Bill and asked whether this was insufficient.

Mr Dladla said the fortunes of emerging farmers were linked to the more established farmers, as the latter had larger production capacity. This was necessary to ensure access to the lucrative export markets for both small scale and established farmers. If established farmers left the co-operative, the smaller emerging farmers would suffer most, as big producers were better equipped to act in their individual capacities.
In the past most co-operatives converted to companies only to be consumed by big companies. The remaining co-operatives had to sell to the export market to avoid the low purchase prices offered by the big processing companies in South Africa. He added that while the co-operative’s members were all South African the bigger companies had a large proportion of foreign shareholders.

Mr Kime said their co-operative was advocating for the Bill to mirror the disclosure requirement as contained in Companies law.

Mr Dladla said the nature of the NCT Forest Co-operative required them to discuss much of their marketing strategies in the board meeting, which had to be made publicly available by virtue of this Bill.

Mr J Strydom, Senior Law Advisor, said it was very possible that a marketing strategy discussed in a board meeting would not be defined as a commercial transaction and therefore a co-operative could unintentionally be compelled to disclose sensitive business information. He said that appeared to be the co-operative's main concern.

National Treasury briefing
The National Treasury presented an overview of the proposed amendments to the new Co-operatives Bill, 2005. It was pointed out that the Co-operatives Banks Bill should not be confused with the Bill presently before the Committee. That Bill was an attempt to reform the Co-operatives’ banking sector. Co-operative banks were described as providing basic banking services in areas where no similar services were currently offered.

Discussion
Mr N Mashiya, Director: Banking Development, said with regards to the presentations of the Institute of Certified Public Accountants of South Africa and the NCT Forestry Co-operative Limited that an audit was often the only form of financial oversight available to government. He said if auditing fees were an issue that could be addressed separately. He recommended a three tier approach be applied with a full audit applicable to large publicly held companies and alternative third party reviews applicable to smaller enterprises to ensure that at least a minimum standard of reporting was adhered to by SMME’s and co-operatives.

Mr Rasmene asked for more clarity on the reporting structure of village banks.

Mr Mashiya said co-operative banks would report to one central supervisor who in turn would report to the relevant Minister. He reiterated that the supervisor would be very dependent on village bank audit reports and this he said underscored the need for an independent auditing function.

Dr Sefularo asked whether the tier system Mr Mashiya suggested would include the accounting officer / auditor distinction referred to earlier.

Mr Mashiya said the Treasury was working on the Auditing Professions Bill but that this Bill focussed more on auditing standards. He was unsure that new auditing regulations would increase auditing costs by 40% as mentioned by the ICPASA.

The meeting was adjourned.