A summary of this committee meeting is not yet available.
FINANCE PORTFOLIO COMMITTEE
14 October 2005
AUDITING PROFESSION BILL: HEARING
Acting Chairperson: Mr A Moloto
Documents handed out:
Submission by Ernst and Young
Comments by Ernst and Young
Submission Public Accountants and Auditors’ Board
PowerPoint presentation by the Public Accountants and Auditors’ Board
SAICA’s Comments on the Auditing Profession Bill
SAICA’s PowerPoint presentation on the Auditing Profession Bill
Auditing Profession Bill [B31-2005]
The Committee heard comments on the Auditing Profession Bill. All presenters supported the Bill but raised concerns around some of the provisions. Examples of these are:
• The Bill should allow for partial accreditation of professional bodies.
• It should be made clear that the regulator would only set examinations and fulfil the role of an institute if no other body was accredited.
• There might be a need for transitional arrangements to ensure accreditation did take place.
• The provisions that dealt with reportable irregularities should be amended.
• The disciplinary process should be structured in a way that it would be effective.
• Not all cases should be referred to the disciplinary committee.
• Non-registered auditors should be allowed to sit on the disciplinary committee.
Presentation by Public Accountants and Auditors’ Board (PAAB)
Mr K Hoosain (CEO), Mr R Benjamin-Swales (Chairperson), Prof. J Rowlands (Chairperson of Education Committee), Mr B Agulhas (Director: Auditing Standards) and Ms C Garbutt (Manager: Legal) represented the Board. Mr Hoosain made the presentation. (See document attached). He said that the PAAB welcomed the introduction of the Bill. He congratulated the National Treasury for getting the Bill to this stage. The Board supported the Bill and the move to independent regulation of the auditing profession. The comments were intended to enhance the practical implementation and improve the wording of the Bill.
Education and Training
Mr Hoosain said that the Board supported the education and training provision contained in the Bill. He proposed that Clause 7(1) (a) should be amended to allow partial accreditation of programmes of professional bodies by the Regulatory Board for Auditors (RBA). There was currently one accredited body: The South African Institute of Chartered Accountants (SAICA).
The RBA was charged with responsibility of protecting the public through the regulation of audit services. It should therefore determine whether or not a person met the requirements. He requested that Clause 37(2) (a) should be amended. The RBA should be allowed to recognise education and training programmes of professional bodies in full or part. He requested an introduction of a new Clause 7(b).
He said that some organisations had suggested that the RBA should not play specific role in relation to education and training. The PAAB did not support this suggestion. Education and training was a strategic imperative and key to achieving meaningful transformation. There was a need to effectively deal with the imbalances of the past. There was a need to deviate from international norms in order to achieve these goals. This had been done in many areas where transformation was required. The imbalances were clearly reflected in the current composition of the profession where less than 10% were black professionals. There was a need to do something drastic about this. It would be unwise and irresponsible for Regulator to take Euro centric hands off approach to this very important aspect.
The PAAB was not asking for exclusivity but for the ability and flexibility to intervene when necessary in order to improve access. He sought to also differ with SAICA’s view that there should be intervention only if there was no other service provider or professional body providing education and training facilities. The problem was that there was only one accredited body- SAICA. It was a risk to the audit profession that SAICA continued to dominate the profession in the way they were doing. In terms of the Bill, should SAICA not meet the accreditation requirements and the full accreditation model was to be supported, the only sanction would be to de-accredit them. This would be irresponsible because SAICA was the only accredited body in the country. Similarly, it would be irresponsible to allow SAICA or any other professional body to continue to not comply with the requirements of accreditation and still offer a full qualification. There was a need for flexibility in order to recognise specific programmes of accredited bodies.
Mr Hoosain said that the all or nothing approach adopted in the Bill would be a barrier to new entrants. There was a need for flexibility in order to improve access and to promote transformation. An outright refusal of accreditation would be punitive and not constructive. Partial recognition of certain programmes would allow the building of close working relationships with professional bodies that would like to seek accreditation.
He said that Parliament, through the Portfolio Committee, and government through the Minister, had oversight responsibility over the RBA and could always call the body to account or the Minister could intervene if national objectives were not being achieved. Parliament or the Minister could not exercise similar oversight functions over profession bodies because they were made up and controlled by their members. The members’ interests were not necessarily the same as those of the Board or government. Such bodies were often driven by commercial interest and transformation was not their main or primary responsibility. The Regulator would have to take a fundamental responsibility of ensuring transformation. Other international bodies like the Association of Chartered Certified Accountants (ACCA) had different priorities that were different from South African priorities and might be inflexible to South African requirements. Such bodies would not be able to access the South African profession should the Board be unable to offer alternatives to their members.
Mr Hoosain said that the question about referee and player was raised in a previous meeting. It was inevitable that this might happen. However, this was inherent to the structure of the Board. The Board was responsible for setting standards and the regulation of the implementation of such standards. There was a need to ensure that buck stopped somewhere. The current education and training process, and the examination process I particular, was very well developed. It involved a number of role players and checks and balances. The professional bodies, academic institutions, commerce and industry were all represented in the Board’s Education Committee and gave input to the examination process. They also played a part in monitoring the successful execution of the examination process.
He said that an issue had been raised about the cost of examination. The Board conducted the examinations on a cost recovery basis. Whether or not the Board or any other institute would run the examinations did not matter because the person writing the examination would still foot the bill at the end. They would simply pay their fee to a different body.
Mr Hoosain said that the disciplinary process was a necessary part of regulatory framework. The current process by the PAAB had been developed and refined over a number of years and was working reasonably well. The process contained in Bill was cumbersome and not practical to implement. It could be costly for the Board. The accountability of firms versus individual registered auditors should be clarified and better spelt out. The intention of the Bill was that both firms and individuals should be held accountable. The specific provisions that were aimed at improving this should be slightly improved.
There were no provisions for complaints to be discharged. In the current process an individual would be charged if a complaint had been referred to the investigation Committee. An investigation would be conducted and it might turn out that there was lack of sufficient evidence or that there was no misconduct. The Committee would then make a recommendation for the discharge of the matter. In terms of the Bill the issue would have to be referred to the full disciplinary process and this was time consuming and costly. There was also no provision for the settlement of a complaint by a consent order (plea-bargaining). There were a number of small contraventions for which members were guilty and would often admit. The Board would issue a consent order where a member had admitted guilt. There was also a lack of protection against self-incrimination for people who might want to testify. The Board was also concerned about the suspension provisions and the provisions relating to disqualification from registration and re-registration.
The Board fully supported the view that there should be a majority of non-registered auditors on the disciplinary Committee. The way the Bill was currently drafted implied that there would be no registered auditors on the Committee and this did not seem to have been the intention of legislature. The provision should be re-looked in order to facilitate participation by registered auditors even if they would be in the minority.
Reporting of irregularities
Mr Hoosain said that the Board supported the provisions relating to reportable irregularities but was concerned about their implementation and the potential for auditors’ liability. The definitions of "management board", "nominated registered auditor" and "reportable irregularity" should be looked at. The Bill also referred to an unlawful act. There was also a reference to "otherwise dishonest". There was a need for clarity on what this was intended to mean. Would a director who had cheated on his wife be considered to have been ‘otherwise dishonest’ and should therefore be reported?
Erosion of audit function
Mr Hoosain said that the Bill was about the protection of public interest and integrity of the profession. The Bill would subject registered auditors to very stringent regulation. It was necessary to protect of the identity of the designation used by auditors and all variations thereof that were commonly used and understood locally and internationally. Terminology like Chartered Accountant, Certified Public Accountant or Registered Auditor were de facto international trade marks with which auditors were known. People who wanted to be known as such and did their work as auditors should be subjected to the same stringent regulation and register with the RBA. This was not intended to deny people an opportunity to do their jobs. People should not be allowed to use designation that would confuse the public. Over the years Parliament had passed some laws that had given audit functions to non-registered auditors. The Bill presented an opportunity to repeal such legislation.
Mr Hoosain said that paragraph (f) should be added under Clause (2) to deal with co-operative relationships with other international regulators. There was an expectation in the Bill that the Regulator should do this but there was no specific empowering provision. Clause 4 expected the Board to conduct inspections but there was also no empowering provision. Clause 9(b) should include remuneration payable to members of the RBA or members of its Committees. This was an important aspect but was not allowed in the current set up or the Bill. A number of people volunteered their time and expertise to the Board at no cost. This placed an unfair burden on the resources within their own organisations. Such people should be compensated because they were doing work from which everybody benefited at the end of the day. This type of relationship impacted on the independence of the Board and could compromise the perception of the independence of the Board from the profession. Registered auditors mainly from the big four firms dominated the Committees of the Board. The absence of remuneration was a barrier to the participation of black small enterprise auditors. They could not afford the luxury of giving up their chargeable time in order to serve on the Board.
He said that Clauses 11 and 28 should be clarified. The two-year term in office provided in Clause 12(10) should be changed to three years. This would allow for better continuity and understanding of the profession. The penalties provided in Clause 50(3)(a)(ii) should be clarified and might not be enough. They should be left to the RBA to determine. The Board must have a sustainable financing model to enhance its independence and reduce the cost burden to small black entrepreneurs. The Bill would increase the regulatory requirements for the Board.
Mr B Mnguni (ANC) asked what type of relationship was envisaged with international regulators. The submissions provided that the RBA would be held accountable for the actions of persons it had registered as auditors. It would therefore be more appropriate to place the responsibility on the regulator to determine whether or not a person met the education, training and assessment requirements for registration purposes. He asked what was the difference between a registered auditor and an unregistered auditor.
Mr Agulhas replied that the Public Company Accounting Oversight Board (PCAOB), for instance, had its own criteria for determining which country and which auditors to subject under its inspection process. It was important for South Africa to meet the requirements or else there would be no such relationship. It had been mentioned that a few of South Africa auditors were auditing companies listed of the SCC in the US.
With regard to the distinction between a registered and unregistered auditor, he said that in terms of legislation a person who wanted to be called an auditor had to be registered with the Board. Registration with the Board allowed a person to use the designation Registered Auditor (RA). It was important for the public to understand that a person with the designation RA was qualified to give a certain level of assurance to the public. Accountants could perform all kinds of functions but the kind of assurance they could give should be understood. It was only a RA who could give a reasonable level of assurance.
Mr Mnguni asked if a person who was not registered as an auditor could practise as a Chartered Accountant without writing any competency test.
The Chairperson thought that the Companies Act forbade a person from practising as a registered auditor if he or she was not registered with the Board.
Mr Hussein replied that the issue was not just about the competency test. The Chartered Accountant would have gone through same competency test as the registered auditor. They would have written part one of the SAICA examination and part two of the Board’s examination. The question was about the level of accountability and the license to issue audit reports on which the public could rely. It was a matter of the credibility that the public would put on the opinion of a registered auditor. The registered auditor was subject to legislation and there was recourse through legislation should the auditor conduct himself or herself inappropriately.
Mr I Davidson (DA) said that certain bold statements were made under the topic ‘Education and Training’. For instance, the presenter had said that the all or nothing approach would be a barrier to new entrants. He asked what the statement meant. What was the barrier? The presenter had also called for flexibility in order to improve access and promote transformation. What was meant by flexibility and did it entail the dropping standards, which would be unacceptable. It was also said that Parliament could call the RBA to account if national objectives were not being met. He asked what was meant by national objectives in relation to education and training and what kind of intervention would be needed?
Professor Rowlands replied that the underlying principle of the Bill was that the RBA should be entitled to accredit a professional body. Accreditation implied that the professional body could indicate if a person was professionally competent. It seemed like the Bill envisaged a full accreditation model and therefore a body would only be fully accredited if all its programmes were recognised. The Board was suggesting that the full accreditation model might not be appropriate for South Africa. A body should be accredited even if not all of its education and training met the required standards. The Board should be able to accredit a body which did not meet some of the standards and make up for the shortfall by way of training or specialist training. For instance, all education, training and assessment programmes of SAICA, except final test of professional competence, were recognised. The final test was not recognised because the Board was of the opinion that it could best be undertaken by it. The all or nothing approach would not allow the Board to accredit SAICA. However, if the Board’s suggestion was accepted, SAICA would receive partial accreditation. Full accreditation would be ideal but accreditation should not be refused simply because a body did not meet some of the standards. There would be a barrier to entry if the Board was constrained by full the accreditation model.
Mr Davidson said that he did not understand the issue in the context of promoting transformation.
Mr Hoosain replied that professional bodies that were representative of the demographics of the population might want to bodies seek accreditation. In terms of the full accreditation model the Board would be compelled to reject accreditation of such a body should it not meet the accreditation requirements. The Board would not be able to form a partnership with such a body and ensure that the reached they required standard. The national objectives were not different from those in the Bill. Parliament and government did not have a direct accountability relationship with professional bodies but had such a relationship with the Board.
Dr N van Dyk (DA) asked the presenter to elaborate on the statement that SAICA would dominate the profession and the concern about suspension regulations under the disciplinary process.
Mr Hoosain replied that 99% of registered auditors were from SAICA. It would take time for other institutions to come up to speed and to have the level of maturity that SAICA had. The full accreditation model would make it impossible for the Board to work closely with other bodies and bring them to the desired level of maturity. This would mean that SAICA would continue to dominate the profession. This was not healthy in a growing economy.
Ms Garbutt replied that the difficulty was the Bill referred suspension from registration and suspension from practice. Suspension from registration meant that a person’s name was removed from the register for a specific period. Suspension from practice meant that the name remained on the register but the person’s right to practice was suspended. The convention was for the right to practice to be suspended and not for one’s registration to be suspended. All that was needed was for the provisions of the Bill to be aligned with each other and to refer to the suspension of the right to practice and not registration.
Mr Moloto said that it had been recommended that other regulatory bodies should be permitted to report unprofessional conduct of RAAs to the PAAB notwithstanding provisions of confidentiality relating to that information (a precedent for such a provision is section 105A of the Income Tax Act 1962). He asked the PAAB to comment on this especially in relation to the Income Tax Act. The Board was of the view that although there might be situations of sufficient gravity where immediate reporting may be warranted, the requirement that the auditor report directly to the RBA without first reporting to the management board of the client was ill-advised. He asked if the Board had a proposal on how to deal with the matter. He also asked if it was common practice in other professions that evidence adduced during disciplinary proceeding would not be used in criminal or civil proceedings outside the disciplinary proceedings.
Ms Garbutt replied that most professional bodies provided that evidence adduced during disciplinary proceedings could not be used in other forums. In some cases the hearing could be postponed until the proceedings in the other forum had been completed. Such testimony was heard in camera in the United States in order to avoid the evidence becoming available to the public.
Mr Hoosain replied that the issue of other regulatory bodies being permitted to report unprofessional conduct of RAAs to the Board notwithstanding the provision of confidentiality relating to the information came from the Nell Commission recommendations made in 1998. In essence this meant that if a person had committed a wrong and the regulatory body had picked it up by a regulatory body, he or she could not rely on confidentiality provisions for the information not to be disclosed to the regulator. The PAAB supported the contention.
Mr Agulhas added that the comment should be read in the context of the introduction to Clause 6. At the moment the Board could respond to complaints from members of the public or to something that had been picked up in the media. It should also be able to receive complaints from other regulators notwithstanding the confidentiality provisions relating to the information. The Board’s submission was that the auditor should be given an opportunity to discuss a potential reportable irregularity with the client first before reporting it. However, matters of sufficient gravity should be reported immediately. The question was when would an auditor know that a matter was of sufficient gravity. The auditor would have to use professional judgement to come to a decision and this was what they did all the time. The Board might give some guide on this. It was difficult to give examples that should be incorporated into the Bill.
Mr Mnguni said that some presenters had argued that the Board could not be the referee and player at the same time. He asked the Board to comment on this view.
Professor Rowlands replied that universities, for instance, acted as both a referee and player. They determined the curricula and taught and examine on them. The RBA was charged with a serious charge relating to the protection of the public and regulation of the audit profession. With regard to education and training, this implied identifying appropriate standards of competency. It was up to RBA to identify the appropriate standards of competency and test on those standards. The determination and enforcement of standards by the RBA was not necessarily a problem. It was more appropriate for the situation to be like this.
Mr Johnson said that detailed comments by the Board provided that Clause 49(4) was fraught with difficulties in that a registered auditor was required to plead guilty in a vacuum without any knowledge of the penalty which the Board would be inclined to impose. He asked the Board to enlighten the Committee on the current set up and the independence of the disciplinary Committee. The submission provided that ‘the definition of nominated registered auditor read in the context of Clause 45 implied that any registered auditor should report an irregularity which met the definition of a reportable irregularity, whether the registered auditor was appointed to perform a statutory audit, or any other assurance. Thus the auditor appointed to provide assurance might detect a reportable irregularity that was not detected by the procedures performed by the auditor performing the statutory financial statement audit, while acting in good faith, due to the different scope of the engagement. The Board was not certain as to whether the other auditor had a duty to report and whether this had any implications for the main auditor who did not pick up and report the irregularity. This was a very valid concern’. The PAAB believed that due to the serious implications following from non-reporting, this should be made perfectly clear. He asked if the Board had any suggestion in this regard. The hearings process was aimed at coming with pointed proposals.
Mr Hoosain replied that there was a perception that disciplinary committee might not be independent because it was dominated by registered auditors. However, the Committee was chaired by a retired judge or a Senior Counsel. Registered auditors were used as experts during the deliberations of the Committee. Usually both the Board and the party charged had legal representation. The Bill sought to address the perceived independence by providing that the Committee should have a majority of non-registered auditors. This would go a long way in addressing the perception of the ‘mice looking after the cheese" scenario. There would be real independence in terns of the number of people who would seat on the Committee. The way the Bill was drafted gave the impression that there would be no registered auditors at all on the Committee
The Chairperson asked what was the distinction between a statutory audit and a general assurance.
Mr Agulhas replied that the current material irregularity provisions referred to the auditor’s duty to report if he or she had performed a duty in the capacity of an auditor. This meant that it was concerned with an auditor who had been appointed in terms of a statute. For instance, the companies Act required a company to appoint an auditor and such an auditor was referred to as a statutory auditor. There could be a situation wherein a company would require the services of an auditor for a different purpose like performing a review of the company. This would not be a statutory auditor. In terms of the legislation it was only the statutory auditor who was required to report a material irregularity to the Board. The Bill seemed to imply that both the statutory auditor and the general auditor would be expected to report any material irregularity. The PAAB had not drafted a proposal because it was not quite sure as to what was intended in the Bill.
Mr Mnguni said that there was an argument against an auditor directly reporting to the regulatory body should he or she discover some irregularity. It had been suggested that the auditor must first meet with the management before reporting to the regulatory body unless the irregularity was very substantive. He asked if the PAAB could give examples of substantive irregularities that could be reported directly to the regulatory board. He was of the view that in terms of Companies Act a director who was aware that a fellow director of the same company was engaged in reckless trading could also be charged for reckless trading should he or she fail to report the reckless trading. Some presenter had strongly argued against an audit firm being subjected to financial liability should its auditor conduct an audit in an unbecoming manner. He asked the Board to comment on this.
Mr Agulhas replied that an auditor would have to use professional judgement to decide which irregularity was reportable. He imagined that an auditor who had become aware of money laundering would be expected to report such conduct. An auditor had certain responsibilities in terms of the Financial Intelligence Centre Act. Terrorist and corrupt activities would also have to be reported immediately.
With regard to the issue of reckless trading, Mr Hoosain replied that it would be a question of law. The most important element would be whether the other directors were aware of reckless behaviour of their partner. It would make sense to isolate partners who had no knowledge of the reckless trading.
Mr Johnson said that there very few blacks that were in the auditing profession. He asked what the Board was doing about this and what timeline it had in terms of addressing this.
Ms Garbutt replied that transformation was a challenging one and the Board had been addressing it for some years. The Board acted as a regulatory body and not as access promoting body and this made the task of transforming the profession more vexing. There were very females who would choose to become partners in auditing firms. Part of the reasons was that it was a very challenging position and it required one to balance different responsibilities. The Board had set huge standards for people who had chosen to be auditors. It was important to promote other avenues of access to the profession other than through the chartered accountant route.
Mr Moloto asked the Board to comment on the issue of multi-disciplinary firms. It had been suggested that the Bill should accommodate multi disciplinary firms. The RBA would be a public body and the public would be allowed to have access to information in its possession within the parameters of the Promotion of Access to Information Act (PAIA). Some submissions had raised the issue of confidentiality of information.
Mr Hoosain replied that there was no problem with having a multi-disciplinary firm as long as the members would register with the Board and subscribe to its regulations and code of conduct. One could not have a situation wherein only the auditing aspect of the firm had been ring fenced. With regard to access to information, he said that the risk would come from the method in which tasks were executed and information was collected and stored. The Board would not necessarily take away information from companies. It would review the information at the company’s premises and only take with it its final report and conclusion. This would exclude details of sensitive information. In essence the Board would not necessarily keep copies of third party information. This would be a way of preventing people from using the Board as a means of accessing confidential information about companies. There Act clearly provided for instances where access to information had to be granted and also contained defences that could be raised against request to access to third party information. Presentation by ICSA (Chartered Secretaries- Southern Africa
Mr H Knight and Mr P Stassen (Member of Legislative and Practise Committee: ICSA) represented ICSA. Mr Knight said that ICSA’s concern had to some extent been addressed by the Board’s submission in relation to the erosion of auditing standards. No mention was made of the Close Corporation Act under the erosion of auditing standards. This was logical because the Act did not require an audit. He drew attention to what was called a voluntary audit. The audit profession did not follow the example of the legal profession by doing pro deo work and also did not like small audits. The simplest way of discouraging them was to quote a very high fee which the institution could not afford. This was something that was not addressed in the Bill. There were a lot of people who would like to have an audit but could simply not afford the high fees that were being charged. He was not suggesting that the auditing profession should do pro deo work but issue was worth looking at.
Mr P Stassen said that company secretaries looked after the directors and ensured that directors knew their legal responsibilities. They also dealt with auditors and corporate governance. It had become very clear that the position of auditors was very important. The position should be seen to be important and directors should feel comfortable when dealing with auditors.
He said that the Constitution was the highest law of the country and provided for certain rights. It took into consideration that there might be conflicts of interest and provided a way of dealing with conflicts. It also provided that national legislation would be drafted to deal affirmative action. The Broad-Based Black Economic Empowerment Act flew from the Constitution and this Act, apart from the Constitution, was the highest authority on matters of affirmative action. Section 32 of the Constitution provided for matters of promotion of access to information to be dealt with by national legislation: PAIA. This Act had had been misunderstood to a great degree and a lot of attention had been given to its manuals. People seemed to have been under the impression that it was all about manuals whilst manuals were a small part of it. It was ironic that the Act referred to access to information but had sections 62 to 70 which provided for instances access might or had to be denied. The Act also took into account the conflict of interests.
Mr Stassen said that Clauses 47, 48 and 50 of the Bill infringed certain rights protected by PAIA in that it would be an offence for an auditor who was being reviewed to withhold confidential information of a client. The auditor would be expected to hand over the information to the Board. There were several problems with this. The first problem was that a person could only take a right into consideration if he or she was aware of the right that was being potentially infringed. Secondly, the auditor would be put in a very precarious position because the perception was that an auditor had to deal with a client with integrity. The Bill would force an auditor, without consideration, to pass information that might be confidential. The solution to the problem would be to increase public interest in auditing and to provide for a seven-day clause. If an auditor who was being reviewed, believed that there was confidential information to which a legal right existed; that auditor must have an opportunity to inform the client. The client would then decide if the information was protected and whether to raise a defence against the disclosure of the information. This would not affect the review of the auditor and seven days was not a very long time. It would also make sure that clause 47, 48 and 50 would not be taken to the Constitutional Court.
He said that a lot of comments by the PAAB on the disciplinary process were based on Nell Commission. The comments provided that that other regulatory bodies should be permitted to report unprofessional conduct of RAAs to the PAAB notwithstanding provisions of confidentiality relating to that information. It was important to note that this comment was made in 1998 (two years before PAIA was passed). The situation had since changed.
Mr Johnson said that he was taken aback by the submission. The submission seemed to suggest that companies needed protection from anybody seeking access to information. The issue was really about the cause of the problems and not infringing anybody’s rights.
Mr Stassen replied that the principle of the Bill was very good. It was important for the Bill not to have unintended consequences. The solution would be the seven-day proposal. The proposal would not change much in the clauses identified above.
The Chairperson asked under which circumstances should the Board release information to other regulatory authorities.
Mr Stassen replied that answer to the question was very much of a policy decision and he could not decide policy issues. He thought that the Financial Intelligence Centre Act (FICA) and other Acts were potentially infringing some provisions of the Constitution. FICA had been misunderstood and it was only section 36 or 37 that had been excluded from the Schedule to PAIA.
Mr Davidson said that Mr Stassen’s proposal sounded perfectly reasonable. He asked how big the problem was. It would be helpful if the next presenter could comment of the suggestion.
Mr Johnson said that the statement in the submission that "the right of a company to confidential information seems to be taking a beating with new laws focusing on specific areas and not so much the wider context in which those laws need to operate" was very negative. He wondered if other countries did not have similar regulations.
Mr Stassen replied that the submission was part of an article and he did not know that it was going to be submitted to Parliament like that. Articles had to be sensational for people for read them. He apologised for the statement.
Presentation by SAICA
Mr G Terry (Vice President) and Ms T Pather (Project Director: Standards) represented SAICA. Mr Terry made the presentation. (See document attached). He congratulated the National Treasury for drafting the Bill. He said that SAICA supported the Bill. The Institute would like to see legislation in place as soon as possible so that the playing field could be levelled to a greater degree. He urged that the Bill should go forward as soon as possible.
He said that there were lots of role players in the governance framework. They included the management of a company, directors, audit committees and regulators. The Portfolio Committee also had a role t play. The role of the auditor was extremely important. The auditor could not play all roles that existed in the profession and it was important to understand what the auditor would do. It was difficult for auditors to play their role if other people were not playing theirs. The Bill put in place a number of governance roles including the regulator. The role of the regulator should be clearly understood.
Education and Training
Mr Terry supported the concept of accreditation. The regulator had a very important role to play in the education and training of accountants. The roles of the regulator included prescribing minimum competency requirements at entry level, accrediting and monitoring professional bodies and prescribing continuing development requirements. It was important for somebody else to play the roles of a referee. The roles of professional bodies were to prescribe their own requirements taking into account the requirements of the regulator and to run education programmes. In terms of the Bill there would be a situation wherein professional bodies would be accredited and the regulator would be able to compete with an institute. It would be fundamentally wrong for regulator to compete with SAICA. Standards had to be set and monitored. However, nobody would monitor the regulator should it compete with institutes.
He said that SAICA had strong relationships with other bodies across the world. It was constantly working with them through the International Federation of Accountants and other groups in relation to education and training requirements so that they met international requirements. South Africa was living in an ever-changing environment which required rapid changes. It was important for institutes to have the freedom to be able to go beyond minimum requirements in the interest of the country and the public. It had been said that it was necessary for the regulatory body to give assistance to other bodies in order to achieve the objectives of the Bill and transformation. SAICA believed that assistance should be offered if it was needed. There was no intention for it to be the dominant player. It would be happy to assist other bodies achieve accreditation but the question was whether those bodies would accept or request assistance from SAICA. What was needed was a set of transparent and open standards so that people could understand the requirements for accreditation. There was enough room in the playing field for other bodies to participate. South Africa was a growing economy and there was a need for skills development. The principle should be that the regulator should oversee what was happening, accredit and monitor what the institutes where doing. It should be made clear that the regulator would only set examinations and fulfil the role of an institute if no other body was accredited. There might be a need for transitional arrangements to ensure that accreditation did take place. SAICA was partially accredited but in terms of the current legislation it could not set part two of the qualifying examination.
Mr Terry said that the disciplinary process was vital for the country, confidence in the capital market and the image of the profession. It was important that the disciplinary process operated speedily and in a fair manner. The process that was written into the Bill required all cases to follow through the same route. This included trivial cases that could be dealt with differently by a way of admission of guilt. Only public interest cases should go through the disciplinary process. The composition of the disciplinary committee should include registered auditors. Some of the details contained in the Bill could be relegated to regulations. People were living in an ever-changing environment and it was difficult to change legislation. Evidence led in disciplinary proceedings should not be used in civil and criminal cases outside the disciplinary process.
Mr Terry said that the wording of clause that dealt with reportable irregularities had improved since the earlier draft. However, certain elements around materiality should be improved. An auditor who had failed to report irregularity could find himself or herself having committed an offence. It should be understood that it was not easy to say if an irregularity was reportable at first glance. In most cases managers would try and hide irregularities from auditors. The auditor might have to consult lawyers and he or she might not have all the necessary evidence in possession. He or she might take a particular view only to be proved wrong later. It was extremely harsh to make failure to report an irregularity an offence. All players had roles to play. An auditor was not a criminal but a person who performed a task in the public interest. 99% of them acted in the public interest and it was unfair to visit them with a penalty. He appealed to the Committee to re-look the provision.
Mr Terry said that the provision that dealt with multi-disciplinary practices should be opened. Auditors needed other professionals like lawyers and actuaries. It would not be difficult to include other professionals within the framework of the Bill. In partnerships, for instance, one could require that a minimum of 75% should be composed of registered auditors. The other professionals would have to be registered with the Board and should also follow the Board’s ethical code. Auditors exercised professional judgment in areas of law, engineering and other fields. There were times when they had to rely on opinions of other professionals.
Mr Terry said that SAICA had always maintained that the legislation should be robust enough to be able to go forward. Some of the details like the compositions of the disciplinary committee should be able to be put in regulations.
He said that a member had requested for a comment on the issue of transformation. SAICA had a number of transformation projects helping to develop black accountants from school level. Transformation was vital to the profession. There were black Chartered Accountants but this was not enough because the number did not reflect the demographics of the country. It would take some time to have the desired level of representivity.
Mr Mnguni said that it was a pity that Professor Rowlands had already left them meeting. It would have been nice to hear how he would respond to the view that it would be wrong for the Board to be a player and referee at the same time. He noted that SAICA had serious concerns with the disciplinary process contained in the Bill. He asked if SAICA had a simpler process that could be followed. He also asked the presenter to elaborate on the statement that ‘to accommodate legal, actuarial, forensic and other skills, multi-disciplinary practices should be allowed with the necessary safeguards. What would be the appropriate safeguards? SAICA had questioned why the Bill had been prescriptive in relation to the composition of the disciplinary committee for auditing standards. He asked what the problem was.
Mr Terry replied that in terms of the current process there was an investigations committee that looked at the less serious cases. The committee was able to impose penalties on people who had been unprofessional. The Institute was saying that there should be other committees to fast track certain cases or that an admission of guilt should be possible. Not all cases should flow through the disciplinary process. With respect to multi-disciplinary practices and safeguards, not more than a certain percentage of the partners should be from other professions so that registered auditors could still maintain control. The other factor was that the other partners should be registered and controlled by the board. The Institute had no problem with the board of the Regulator being composed of a majority of non-registered auditors. It was important that committees and the Board be representative of existing structures at any point in time.
Mr Johnson said that SAICA was currently the only accredited body. He asked what ideas the institute have in so far as creating other institutes was concerned. With regard to the issue of multi-disciplinary practices, he asked what profession thought was the problem that the Bill was trying to address apart from regulating auditors and ensuring that they took full responsibility for their actions.
Mr Terry replied that the main problem was to recognise the changing environment of auditing. It was not only registered auditors who participated in audits. Another issue was getting those professionals to recognise their responsibilities in relation to what they did in the very important role of being an auditor. The auditor played a very specific role in a society and such a role was different from roles played by other professionals. It was true that SAICA was the only accredited body but the Institute would like to see other bodies coming through.
Mr Davidson recognised the problem that the institute had outlined in relation to reportable irregularities. He asked what it was that section 25 of the current Act provided that PriceWaterhouseCoopers felt accommodated the whole question of reporting irregularities.
Mr Terry replied that the sanctions that would come from the disciplinary process would be able to deal with the problems should the regulatory body be properly constituted and the disciplinary process appropriately put together.
With respect to section 25 of the current Act, Ms Pather replied that the predominant concern revolved the immediate report of any suspected reportable irregularity. This was different from a position where the auditor was allowed to consult with management before reporting to the Board. The non-reporting of a suspected irregularity would now be a criminal offence.
Presentation by Ernst and Young
Mr M Bourne (Professional Practice Director) made the presentation. (See document attached). He expressed his gratitude for being given an opportunity to present some views on the Auditing Profession Bill. Ernst and Young strongly endorsed the objectives of introducing a new and revised legislation with the intention of making constructive improvements to the auditing profession in South Africa.
Mr Bourne was disappointed that the Bill excluded the possibility of establishing multi-disciplinary practices. South Africa’s business and legal landscape had become significantly more complex over the years along with concomitant increases in the standard and complexity of financial reporting and related auditing standards. A need had evolved for the recruitment and retention of a diverse range of skills to enable auditing firms to audit entities effectively. Multi-disciplinary practices were permitted in many other countries. He submitted that such practices should be allowed subject to the inclusion of certain possible additional safeguards to deal with the legislature's concerns. Safeguards could include a requirement that the majority of the partners should be registered auditors.
Mr Bourne agreed with the intention of the legislature to have registered auditors assisting in dealing with the full spectrum of corporate crime in South Africa. He was concerned that clause 45 would require auditors to report fraudulent and dishonest matters. There was no requirement that such acts should be material and this meant that an auditor would be required to report even the most minor of matters should they fall within the ambit of the Bill. He was of the opinion that it was not the legislature’s intention that all matters should be reported to the Board. He suggested that an auditor should only be required to report irregularities which were considered material. A monetary parameter would be determined with reference to the size of the audited entity or its profits or on another basis which would be capable of objective determination.
Furthermore the Bill included terms like "dishonesty" and "breach of fiduciary duty". These terms were capable of very wide interpretation in practice. An auditor would be inclined to report many more matters which could fall into these circumstances to the Board, where it was not the original intention of the legislation to do so. He submitted that the meaning of clause 45 should be should be made crystal clear because of the potentially extremely serious consequences for both auditors and entities in South Africa.
Mr Bourne said that the Bill defined an "audit" as "the examination of financial statements with the objective of expressing an opinion with a high level of assurance as to their fairness and as to their compliance with an identified financial reporting framework and any applicable statutory requirements". Insofar as it referred to high assurance, the definition differed materially from the definition provided by the International Federation of Accountants (IFAC). IFAC's definition referred to "reasonable assurance". The concern was that these were materially different definitions, particularly in so far as "high" implied a much higher level of assurance and would mean that international standards would not necessarily meet the definition set out in the Bill. He suggested that the definition should be changed to IFAC's definition.
Two-year "lookback" independence requirement
Clause 44(5) stated that a registered auditor might not become an auditor of an entity if in the two years prior to the commencement of the financial period to be audited, that auditor had a "conflict of interest" in respect of that entity, as prescribed by the Regulatory Board. It was not yet clear as to what was entailed in the words "conflict of interest". However given what these words were normally understood to mean, the requirements of the clause would be not be practical and should not be included in the Bill. The Bill was concerned with addressing the issue of the independence of auditors. This matter should be dealt with in terms of rules to be prescribed by the Board. This clause would restrict the choice of audit firms where there might be a few which had the resource capacity and the expertise required for conducting the audit. It would also provide complications for companies embarking on merger and acquisition activities where their group auditors were conflicted on a "lookback" basis from conducting the audit of the organisation to be acquired. He proposed that it would be more practical to require an auditor to dispose of any financial interest he or she had in an entity or to cease any other activity which could affect his or her independence before being able to accept the appointment as auditor of that entity. This would be adequate to ensure that the auditor acted independently in conducting the audit.
Offences: clause 52 of the Bill
Mr Bourne said that clause provided that an auditor who had failed a reportable irregularity would be guilty of an offence. The auditor would be liable to a fine or imprisonment for a term not exceeding 10 years or both a fine and such imprisonment. He was of the opinion that the sanction was too harsh.
Mr Davidson said that the whole idea was about improving accountability by focusing registered auditors. He agreed that the role of accounting firms had evolved beyond pure auditing. He asked how the presenter would react to the view that a firm could be segmented into division one of which would fit squarely within the ambit of the Bill. For instance there would be a legal division and an auditing division in one firm. This would still allow the firm as a whole to get inter-disciplinary input and still maintain auditing accountability at the same time. The problem might be that this kind of approach might impose two classes of partners with registered auditors having a high level of accountability compared to the other professionals.
Mr Bourne replied that one would normally have groupings of individuals with different skills within multi-disciplinary practices around the world. A multi-disciplinary practice afforded an opportunity for skills sets to be led in a specific manner. A registered auditor could not be an expert in all fields. Multi-disciplinary practices worked extremely well. Auditing firms would lose valuable leaders should multi-disciplinary practices no longer be allowed. Most practices operated in the manner outlined by Mr Davidson.
Mr Mnguni said that clause 47(1) (b) provided that the Board should at least annually inspect or review the practice of a firm registered as a public interest company. Ernst and Young felt that this did not make sense because audit firms could be public interest companies. He was of the view that the Bill was referring to audit firms that audited public companies. He asked for a comment on this.
Mr Bourne replied that audit firms could not be public interest firms in terms of the proposed Companies Amendment Bill. The question was whether the legislature had intended to refer to audit firms because the suspicion was that this was not the intention.
Mr van Dyk said that all presentations had not referred to clause 49(4) (a). This clause provided that "if a registered auditor charged admits that he or she is guilty of the charge, he or she is considered to have been found guilty of improper conduct as charged". Clause 50 referred to a disciplinary hearing but did not necessarily provide that a case should be referred to a disciplinary hearing. He wondered if clause 49(4) (b) should not be amended to make it possible to refer a case to a disciplinary committee. The Institute for Public Finance Auditing was not part of the hearing process. He asked if the Committee should not ask for their written comments.
Mr Moloto said that the issues raised by Mr van Dyk should be discussed during the deliberation stage.
Mr Davidson said that most firms would argue that not just registered auditors should be members of the firm. It seemed like Mr Bourne was saying that one could have a multi-discipline practice but only one component would be accountable in terms of the Bill. What was the argument against this?
Mr Bourne replied that the question was not so much one of technical accountability. A registered auditor was responsible for his or her opinion or report. The question of equity partnership was perhaps at the heart of this. There was a need to understand that any modern practice required multiple sets of skills and experiences. The question was whether one could build the service capability without being able to offer the equity partnership stake to advocates and other professionals.
Mr Moloto said that it seemed that the issue revolved around equity and the Committee would have work on how to resolve it.
The meeting was adjourned.
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