Auditing Profession Amendment Bill: hearings

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Finance Standing Committee

12 October 2005
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Meeting report

FINANCE PORTFOLIO COMMITTEE
13 October 2005
AUDITING PROFESSION AMENDMENT BILL: HEARINGS

Acting Chairperson:
Mr K Moloto (ANC)

Documents handed out:
Institute of Certified Public Accountants of SA submission: PowerPoint presentation
Institute of Certified Public Accountants of SA submission [.pdf file]
Institute of Certified Public Accountants of SA submission
Deloitte & Touche submission: PowerPoint presentation
Deloitte & Touche written submission (see Appendix)
Deloitte & Touche submission - Appendix
KPMG submission
Association of Chartered Certified Accountants submission [document available here shortly]

SUMMARY
The Institute of Certified Public Accountants of SA (ICPA) felt that the drafters of the Bill had made a great step forward from previous pieces of legislation. However, the definition of the term ‘public accountant’ in section 41 was confusing. The Bill sought to regulate the external auditing profession, but auditing was only one part of the accounting discipline. To facilitate legitimate business activity while reducing stakeholder abuse; the Bill had to distinguish between auditors and accountants; require strict adherence to auditing standards; ensure the independence of the new regulator, and determine accreditation criteria.

Deloitte and Touche reported that the complexity of financial reporting necessitated multi-disciplinary firms with specialist skills. It was impossible to finalise financial reports with staff that were trained only in accounting or auditing. The definition of ‘reportable irregularities’ had to be changed as there had to be a level of materiality relative to the entity being audited. The ability of auditors to operate within limited liability partnerships had been excluded from the Bill, while this form of protection could be achieved if operating in a company incorporated in terms of the Companies Act.

KPMG felt clarity was needed on whether the legislature intended to regulate the auditing profession or audits. The composition of the Regulatory Board was worrying. A maximum of 40% had to be registered auditors, but there was not a minimum number. This was different from what other boards looked like internationally. The Board had to be seen to be independent, and so it was worrying that it was funded by those firms it intended to regulate. KPMG also supported Deloitte’s submission regarding the impracticality of the conflict of interest provisions. The Bill did not limit the amount of liability to which auditors were exposed.

The Association of Chartered Certified Accountants (ACCA) said that some of the terms in the Bill confused the roles of the Regulator and the professional bodies. The use of the term ‘training contract’ made completion of education under a registered training contract an absolute requirement for registration as an auditor. This should not be the case. The Board should not set examinations but instead accredit organisations that did set them.

Members asked if the Bill really prohibited unregistered people from providing accountancy services. What would constitute a conflict of interest, and how should it be identified and regulated?

MINUTES

Institute of Certified Public Accountants of SA submission

Mr S Kharwa, ICPA President, said that the Bill drafters had made a great step forward from previous pieces of legislation. It was however unfortunate that some provisions from the Public Accountants and Auditors Act had been included, as it gave the impression that the Bill regulated all financial and non-financial opinions and assurance providers, whereas this was not the intention of the drafters. It was contrary to the stated intention to promote economic growth to ignore the different forms of assurance. A ‘one-size fits all’ approach would hamper small business development.

He said that the definition of the term ‘public accountant’ in section 41 was confusing. The Bill sought to regulate the external auditing profession, but auditing was only one part of the accounting discipline. The Bill did not regulate the non-audit services and functions. The Bill would be enhanced if this confusing clause were removed. This confusion was exacerbated by the definition of ‘public practice.’ If it were retained in the current form, it would extend the reach of the Bill beyond what was intended. To facilitate legitimate business activity while reducing stakeholder abuse, the Bill had to distinguish between auditors and accountants; require strict adherence to auditing standards; ensure the independence of the new regulator, and determine accreditation criteria.

The ICPA supported the Bills objectives to affirm the independence of auditors; improve public protection; raise investor confidence; encourage corporate governance, and differentiate between the roles of auditors and other accountancy providers.

Discussion
The Chairperson asked if the Bill really prohibited unregistered people from providing accountancy services. He also asked what barriers hindered entry into the profession.

Mr J Bothma, ICPA Vice President, said that as the Bill stood, accountants were prohibited from offering services other than auditing for a fee. Mr Kharwa replied that there had been several moves to increase the number of accountants. For example, the University of Potchefstroom had two training streams: one for auditing, and one for accountants.

Deloitte and Touche submission
Mr G Pinnock, National Audit and Financial Services Leader, said that the Bill affected Deloitte’s in five ways. The complexity of financial reporting necessitated the existence of multi-disciplinary firms where specialist skills were needed. It was impossible to finalise financial reports with staff trained only in accounting or auditing. Deloitte employed specialists in tax; forensics; auditing; actuaries and corporate finance. Audit firms had to be allowed to have some partners or directors on their boards who were not registered auditors, provided that all of the partners subscribed to the Code of Ethics and other compliance systems.

The definition of ‘reportable irregularities’ should be changed as there had to be a level of materiality relative to the entity being audited. The Bill was unfairly harsh on auditors as it held them liable for failing to report a reportable irregularity. A reportable event should only occur if the matter was material in the context of the financial information.

The Bill said that new auditors were expected to be ‘free of a conflict of interest’ for two years prior to their appointment. This constrained the ability of firms to select appropriate auditors and this would impact the capital markets. Deloittes recommended that this provision be deleted, and the Committee for Ethics be left to determine standards in this regard.

Deloittes also took had issue with the accountability and responsibilities of others involved in the audit process. Auditors depended on open, transparent and honest disclosures by management of entities being audited. These parties had to be accountable in law for their actions and the impact they had on the audit process.

The ability of auditors to operate within limited liability partnerships had been excluded from the Bill, while this form of protection could be achieved if operating in the form of a company incorporated in terms of the Companies Act. The Bill should be amended to allow for the registration of Limited Liability Partnerships.

Discussion
Mr B Mnguni (ANC) asked why auditing firms should not be held financially liable for using inaccurate information.

Mr Pinnock said that auditors had to be held liable where they were negligent. It was unfair holding all the partners liable where only one partner was guilty. Limited Liability Partnerships were common in Europe and the United States.

The Chairperson asked what would constitute a conflict of interest and how it should be identified and regulated.

Mr Pinnock replied that the current global position was that if the firm held shares in the client company, they could not do the audit. However, the Bill now precluded the firm from performing the audit until two years had passed since the firm disposed of its interests. This would prevent organisations such as banks from employing auditors and force others to change their auditors. This was unnecessarily onerous.

KPMG submission
Mr D Duffield, KPMG Managing Director: Professional Practice, said clarity was needed on whether the legislature intended to regulate the auditing profession or audits. The establishment of the Auditing Regulatory Board was a welcome step. There were some logistical issues that had to be sorted out with regards to the accreditation of academic institutions that taught auditing. This was necessary to prevent a situation where students would find out three years into a five-year course that their institution was not accredited, or its accreditation had been revoked.

The composition of the Regulatory Board was worrying. A maximum of 40% had to be registered auditors, but there was not a minimum number. This was different from what other boards looked like internationally. Section 25 of the Bill dealt with the finding of the Board. The Board should be seen to be independent, and so it was worrying that it was funded by those firms it intended to regulate. The majority of its funds had to come from independent sources to ensure that the Board had the same standing as other international Boards.

Mr Duffield was also concerned about section 44. It was the auditor’s responsibility to ensure that the client had complied with all the laws that dealt with the audit. This was impractical and virtually impossible to ascertain. Such poor drafting could have serious consequences. KPMG also supported Deloitte’s submission regarding the impracticality of the conflict of interest provisions. There was a concern that since reportable irregularities had to be reported to the Regulator first without going to the client, many ‘false starts’ could occur. The Bill did not limit the amount of liability to which auditors were exposed. It was unfair that assets of the guilt-free partners were also so vulnerable. Such aspects made the profession unattractive to potential auditors.

Discussion
Mr Mnguni asked why it was such an issue that the Board was funded by the firms it intended to regulate, even when this was the case in England and Australia for example.

Mr Duffield replied that this was a developing area. It was important that these Boards be seen to be independent. Having them funded by the firms they regulated could create an impression of not being independent.

Dr Van Dyk said that the Bill prescribed that only the laws that related to the financial services had to be complied with. How could they decide what was significant in determining which laws to comply with?

Mr Duffield replied that it was obvious that the clause only related to the financial aspects of the audit. However, lawyers would take advantage of such ambiguities, so the legislation had to be clear. To determine what was significant, materiality was important. They were never 100% sure about the accuracy of the audit report. This was impossible. Based on certain information at their disposal, they had to make conclusions.

Mr M Johnson (ANC) asked about the international norms regarding how long firms had to ‘dispose’ of any conflicts of interest.

Mr Duffield replied that there were no set international norms. Other countries used terms like ‘threat of independence.’ The formulation in this Bill seemed to be too wide as it was unclear if the prohibition covered the firm or the auditor.

Association of Chartered Certified Accountants submission
Mr S Burdett, ACCA Head of Corporate Development (Southern Africa), said that they were pleased that this process was nearing completion. The duties and powers of the Regulator were extensive. Were all the matters to be delegated to the Regulator appropriate? Some of the terms in the Bill confused the roles of the Regulator and the professional bodies, such as that regarding education.

The use of the term ‘training contract’ made completion of education under a registered training contract an absolute requirement for registration as an auditor. This should not be the case. The Regulatory Board had to be concerned with the quality of practical experience gained, rather than just the legal form. The Board should be explicit about the professional competencies that should be gained during the training period, and allow flexible training contracts to ensure that they were actually delivered.

Mr Burdett said that the Board should not set examinations but instead accredit organisations that did set exams. There would be a serious conflict of interest if the Board also acted as an educator, as it would in effect be regulating itself. The most worrisome aspect about the accreditation of professional bodies was the part that dealt with the education standards required of prospective auditors. These clauses should be refined. ACCA also advocated for a system of proportional liability.

Discussion
Mr Mnguni agreed with ACCA’s concerns about the Regulator also being an educator.

The meeting was adjourned.

 

 

Appendix
DELOITTE & TOUCHE
30 September 2005


Dear Sir

WRITTEN SUBMISSIONS ON THE AUDITING PROFESSION BILL, 2005

We thank you for the opportunity of providing comment on the Auditing Profession Bill, 2005 (the Bill).

In general, we support the contents of the Bill which we consider is well constructed and broadly addresses the major issues which the Ministerial Review Panel considered and advised on. Nevertheless, we have certain concerns on elements of the Bill and we comment on these in the attached appendix.

The appendix sets out our comments in the order of the sections of the Bill on which we comment and are not in order of importance.

We consider that our comments set out in paragraphs 1 and 13.3 under "Comments on Specific Sections of the Bill" and paragraph 4 under "Aspects of Broad Principle" are of the uttermost importance. A failure to properly address these issues could result in significant and adverse unintended consequences that could cause unnecessary and serious damage.

Should you require any explanation or further information in relation to any of the comments made above, please contact Phillip Austin (011 806 5815) or Costa Qually (011 806 5889).

Yours faithfully

 

Deloitte & Touche

 

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