Auditing Profession Bill: Department response to Submissions

This premium content has been made freely available

Finance Standing Committee

17 October 2005
Share this page:

Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


17 October 2005

Acting Chairperson: Mr K Moloto (ANC)

Relevant documents


Auditing Profession Bill [B31-2005]
National Treasury Presentation on Issues raised during public hearings

National Treasury provided a background and history of the auditing profession and sketched the areas of disagreement between the submissions and National Treasury’s view. The major issues raised during the public hearings were the definition of ‘audit’ and ‘reportable irregularity’, the limitation of liability of auditors, the regulation of multi-disciplinary partnerships, the education and training of auditors, the character of the Regulatory Board, the viability of Clause 44 and the nature of the disciplinary procedure for auditors.

Members decided that the legal opinion of a senior counsel would be sought on the constitutionality of Clause 41. National Treasury was asked to explain how the multi-disciplinary partnerships would compromised the independence of auditors, and the untenable possibility that the widening of the relationship between the risks and rewards of the auditing profession would deter future entrants into the profession. The Committee questioned whether the views of auditees on the Bill were also canvassed, and expressed its grave concern that this was not truly truly the people’s Parliament but instead a Parliament for the elite as the views of those who did not have the means to appear in Parliament were not included in the drafting process.

Mr S Asiya (ANC) asked whether National Treasury would simply be highlighting the concerns raised by the submissions during the public hearings stage, or whether it would actually be responding to those concerns.

Mr I Davidson (DA) stated that he was under the impression that National Treasury would be presenting a document that reflected all the proposed amendments raised by the submissions per clause. He stated that that was the usual practice and was the most efficient approach. It would also avoid unnecessary discussions on matters.

Mr Moloto explained that Mr F Nomvalo, the Accountant General, was requested on Friday to extract the major issues raised by the submissions during the public hearings, which would have to be presented to the Committee at today’s meeting. The Committee would then discuss the issues at length and develop a consensus view on them during this meeting, and possible new formulations and amendments on those major issues would then be presented by National Treasury based on today’s discussions. At the meeting to be held on 4 November the Committee would be processing the Bill on a clause-by-clause basis.

Mr Nomvalo agreed with Mr Moloto’s synopsis. He stated that National Treasury had already effected some of the rewording, but it was felt that it would be important to first gain the views of the Committee on the major issues. The document referred to by Mr Davidson had been prepared by National Treasury, but it was not yet ready for presentation to the Committee and would be provided at the later meeting.

Mr Y Bhamjee (ANC) asked whether those who have already made submissions on the Bill during the public hearings would be allowed to address the Committee a second time to respond to the amendments effected by National Treasury.

Mr Moloto answered in the negative, as that was not standard parliamentary procedure. .

Briefing by National Treasury
Mr Nomvalo outlined the background and history of the auditing profession, the role of auditors, the position with regard to interested parties, the common issues raised during the public hearings and the National Treasury response to those issues and sketched the areas of disagreement between the submissions and National Treasury’s view. He made the following additional remarks:

Common issues raised in public hearings
An MORI report was issued in the United Kingdom around August and September 2002 in which directors of companies admitted that the erosion of the independence of auditors was a direct result of the drive to chase non-audit work. A total of 62% of the auditors surveyed in that study confirmed that their independence was at times compromised as a result of their quest to secure lucrative non-audit work. The firms then focused on their risk management practices and improving their standards. There were however cases in which those risk management practises were in fact used to ensure that the firm accepted as little liability as possible

Role of auditors
There was currently a misconception that auditors were accountable to management. This was however not the case as they would simply oversee the work done by management, but were in fact accountable to the shareholders. These shareholders included ordinary citizens of a country whose pensions were invested in the equity market. Government had an interest in insuring that every citizen paid the taxes they owed, and it was for that reason that the work done by auditors. It was important that auditors provided accurate information so that government could make economic policy and create employment etc. Auditors thus had an important role to play in the broader economy, and it was against that background that the intention of the Bill needed to be located.

Common issues
– ‘reportable irregularity’
Mr Nomvalo stated that National Treasury did not share the view raised during the public hearings that the reporting process was too cumbersome. National Treasury however believed that because it did not require anything to be done with the irregular information but merely created a control measure for the reporting of irregularity, which was currently a huge risk within the profession. The term ‘materiality’ and its scope was familiar to auditors, and they would not report any matters that fell short of that well-known standard.

He conceded that the phrase "otherwise dishonest" in the definition might be "a little bit over the top", but the types of examples raised during the public hearings did not provide a strong argument in favour of its retention. The phrase could thus be deleted..

The submissions also requested that S20(5) of the PAAA be reverted to. Auditors were by their nature meant to be conservative yet the previous dispensation, of which S20(5) was part, required change. The proposal could thus not be entertained.

Concern was raised during the public hearings that the penalty imposed for failing to report such an irregularity was harsh. The Bill however stipulated that the penalty imposed would be up to 10 years, and the seriousness of the offence would determine the term of each penalty. These penalties were in order because auditors who actually assisted management to do the wrong thing, then "they deserved to get a very big whack for that", because their duty as auditors was to protect the public interest.

The concern raised that this definition created overlapping reporting with other pieces of legislation was merely a fishing expedition. The reality was the various pieces of legislation regulated the different aspects, and the implementers of the various pieces of legislation would take cogniscence of the areas of overlap. Government could not afford to run the risk of not regulating this area for the sole reason that there were currently other pieces of legislation that dealt with the issue, as that could create a loophole and untold problems.

The concern raised that the Bill violated the privacy requirements in the Promotion of Access to Information Act (PAIA) were unfounded, as the Bill would not be conflicting with that piece of legislation.

– education and training
Concerns were raised that the Regulatory Board would be both a player and referee in the auditing industry. Government was mindful of the fact that an ideal situation would be the separation of those functions, but the Bill merely created a dispensation that had the flexibility to allow the Regulatory Board to grant access to the industry to those professional bodies when that access would otherwise not exist.

He stated that the proposal that alternative supervisory arrangements be made on training contracts could not be entertained, because auditors can only be trained under the supervision of an auditor. The recommendation that partial accreditation be introduced was a valid point and would be taken on board by National Treasury, as it improved access to the auditing profession.

It was proposed during the public hearings that accreditation be conducted every five years, but National Treasury was not in favour of that lengthy period as the auditing industry was very dynamic. The call for the current syllabus to be updated was misplaced, as it was robust and comparable with the syllabus employed by international institutions.

– composition of Regulatory Board
Some submissions expressed the concern that the Bill did not expressly stipulate that registered auditors would be on the Regulatory Board, but there was "no Minister of Finance in his right mind who would not appoint registered auditors". He stated that there was no way that registered auditors would not be allowed to sit on the Regulatory Board.

The concern was raised that the Regulatory Board had the power to issue regulations. That was however a misreading of the Bill as only the Minister was be able to issue regulations.

– Clause 44
Mr Nomvalo indicated that nearly all the major auditing firms raised concern with the use of the phrase "fairly represents" in the provision. He conceded that it was a typographical error and would be amended to read "fairly presents". Concerns were raised that the provision was archaic, but those concerns seemed to expect the Bill to rewrite the current auditing standards. That was however not the case as the Bill merely referred to the standards.

The proposal that a materiality standard for the testing of the existence of assets and liability be introduced could not be entertained, as they either did exist or did not. There could be no partial asset or partial liability. The remainder of the proposals on this provision were aimed at a rewriting of the current auditing standards, and could thus not be entertained.

– Limitation of liability.
He stated that this issue was very strongly contested during the public hearings. Government was of the view that an auditor could not be allowed to use a contract to limit his liability for audit work. That could however be allowed for non-audit work, to counteract the disadvantage at which audit firms found themselves in that non-audit services sector.

With regard to the concerns regarding proportionate liability, Mr Nomvalo indicated that directors of companies were regulated through other legislation, whereas the Bill was focused on the liability of auditors. National Treasury was however making proposals to the corporate law review, and it would also be making proposals to the Companies Act Amendment Bill on this very matter. That Bill would be considered by Parliament’s Trade and Industry Portfolio Committee in 2006 and would deal with the management of companies, whereas the Bill would deal with the liability of auditors.

– Disciplinary procedure
Mr Nomvulo stated that National Treasury was currently considering effecting the proposal that this procedure be governed by regulation. National Treasury was very uncomfortable with the proposal that consent orders be introduced, but the remainder of the concerns raised with the disciplinary procedure were being evaluated by National Treasury.

– Multi-disciplinary practice
This issue was currently being debated internationally. It was a practice that had resulted in the independence of the auditing profession being compromised. National Treasury decided not to pronounce itself on the multi-disciplinary practice but would instead retain the status quo in the old legislation, which prohibits a sharing of the profits. National Treasury was thus of the view that the international debate be allowed to run its course before government decided on a specific route to follow, in order to avoid any unintended consequences..

Other issues
– Consent to employ people refused registration
Mr Nomvulo indicated this issue required clarity. It was however important that a person who was refused registration on the grounds of misconduct not be employed.

– Clause 41: potentially confusing terms
He stated that very lengthy and convoluted statements were made on this issue during the public hearings which, quite frankly, missed the point completely. The point was simple: government did not want any company creating any doubt in the eyes of investors regarding their identity. However the use of words that were associated in other jurisdictions with certain kinds of people resulted in confusion. He emphasised that National Treasury was not saying that accounting services cannot be provided by people who were properly qualified to provide that service. Its view was simply that a company cannot employ a name that was likely to result in it being seen as that which it was not. Accounting firms would thus not be allowed to use a name which would create the impression that they were also auditors.

Mr Nomvalo informed Members that the remainder of the concerns raised under this heading were primarily issues of clarity that would be addressed by National Treasury.

Mr Moloto proposed that the legal opinion of a senior counsel be sought on the Clause 41 issue before the Committee proceeded with its deliberations on the matter, as it was raised by several submissions.

Mr Davidson agreed with the proposal.

Ms J Ferreira, National Treasury Director: Legal Services, asked whether National Treasury would be tasked with choosing the legal advisor. She informed the Committee that the matter was currently sub judice, and National Treasury believed that its approach to the matter would pass constitutional muster. National Treasury would secure the legal opinion before the end of the month.

Mr Moloto stated that the matter would be discussed further.

Mr B Mnguni (ANC) stated that one of the concerns raised during the public hearings was the potential conflict of interest should an auditor audit a financial institution in which it itself had shares. He sought National Treasury’s comment on the matter.

Mr Moloto stated that there appeared to be convincing arguments both in favour of and against the two year looking-back. The Committee needed to consider the issue further before it could make an informed decision

Mr Nomvalo replied to the two questions by stating that National Treasury agreed that some of the aspects needed to be deferred to the Code of Ethics, because it provided extensive definitions and covered various instances of conflict of interest. The bank account scenario referred to by Mr Mnguni was potentially problematic, and needed to be looked into.

Mr Mnguni sought further clarity on how exactly the multi-disciplinary approach followed by auditors compromised their independence.

Mr Moloto asked National Treasury to explain the risk that the multi-disciplinary approach posed to the regulatory authority. Clarity was needed on the precise nature of those risks before the Committee could defer to National Treasury’s request that the international debate on the matter run its course before a decision was reached.

Mr Davidson asked National Treasury to explain how other jurisdictions had dealt with the multi-disciplinary matter, especially the United Kingdom and United States.

Mr Nomvalo responded to the three questions by stating that the key factor was the identification of the issues that would compromise the independence of the auditor, and they needed consideration. The US was effectively the banning multi-disciplinary practices, and went so far as to list specific practices that were prohibited. National Treasury was however against that option because it was too prescriptive. The issue was currently being debated internationally and National Treasury thus proposed that the status quo with South Africa be retained, so that the international debate could be examined and the risks could first be assessed.

One of the risks in the culture and character of the profession that have already been identified was the association of organisations that were providing auditing services who were associating themselves with services that fell outside the auditing profession. National Treasury recognised the risk that the resulting multi-disciplinary practice would then result in a conflict of interests, and it would be providing the checks and balances to guard against the conflict arising. The UK has followed the same approach in deciding not to take a stance on the matter until the international debate had run its course.

Mr Moloto noted that many of the submissions contended that the requirement that irregularities be reported to the Regulatory Board would result in an influx of trivial irregularities, and they proposed that this be remedied by requiring that only "material irregularities" be reported.

Mr Nomvalo replied that National Treasury did not share the views expressed by some of the submissions that the reporting process was cumbersome. There were ways in which the concept could be accommodated without it becoming ridiculous. He conceded that the rather nebulous concepts such as "otherwise dishonest" needed to be tightened up.

Mr Moloto indicated that the submissions claimed that the issue of limitation of liability of auditors was already covered by the Apportionment of Damages Act. The matter needed to be considered in greater detail.

Mr Davidson stated that the presentation highlighted the fact that the relationship between the risks and rewards of being involved in the auditing profession was widening, and cautioned that that would deter future entrants into the auditing profession. He agreed with the principle enshrined in the Bill that the auditing professionals be made more accountable, but believed that the principle must be very clearly defined in the Bill in order to ensure that the profession grew.

Mr Nomvalo replied that submissions contended that if corporate financial institutions who provided audit services were not made subject to the same conditions of service as the audit professionals, then the auditors who tendered for the same job would then carry more risk. Consequently, the auditors might have to charge a higher rate, which would result in anti-competitive behaviour. The balancing of the risks was a serious issue that needed to be considered.

Mr Bhamjee asked National Treasury to explain who would be responsible for drafting the regulations on the Bill, and whether those regulations would be presented to Parliament.

Mr Moloto replied that this Committee would decide whether the regulations would have to be presented to Parliament or not. In the Municipal Finance Management Act, for example, this Committee decided that the regulations would have to be tabled in Parliament 30 days before they were promulgated..

Mr Nomvalo agreed with Mr Moloto.

Mr Bhamjee sought clarity on who would monitor the accounting standards referred to in the Bill.

Mr Nomvalo responded that he would not want to comment on the accounting standards as they fell outside the scope of the Bill, which dealt exclusively with auditing standards.

Mr Bhamjee cautioned against simply deferring to international debates on matters, because those decisions would not necessarily be appropriate for the South African economy and society.

Mr Nomvalo replied that this was an intricate issue. He believed that South Africa had really made strides in this area and its auditing profession ranked with the best in the world. The provisions in the Bill would take the country forward. National Treasury recognised that a balance would have to be struck between the objectives of the South African government and the practice that was generally accepted internationally.

Mr Asiya asked whether the views of auditees on the Bill were also canvassed, as the impression he gained from the public hearings was that their views were not sufficiently canvassed.

Mr Nomvalo responded that the Ministerial Review Panel was established in 2002 and it went through an extensive consultation process in which the views of the public were gained and were taken on board. The most disappointing thing was that the consultation process was not as wide as it should be. The views of the workers should also have been secured because they were involved with the practicalities on a daily basis. A total of 36 submissions were first received on the Bill, which included the big four auditing firms, a few large firms and wealthy people and one or two interested parties. A much better response was however expected. It was difficult to draw everyone but National Treasury followed a process that aimed to be as broad and far-reaching as possible, and the redraft of the Bill took into account much of the input gained as a result of that consultative process.

Mr Asiya asked whether the 30 day period within the irregularity must be reported was in line with the PFMA reporting timeframe for the Auditor-General...

Mr Nomvalo replied that the provision attempted to strike a balance and sift out the frivolous irregularities.

Mr B Johnson (ANC) expressed his grave concern with the chronic lack of proper consultation on draft legislation. The problem was that there was not a vibrant South African consumer organisation that was consulted on the Bill. It was a sad indictment on efforts to make this truly the people’s Parliament, as it became increasingly aware from the types of submissions received on this Bill, that this was "a Parliament for those who have" and for those who had the means to present to Parliament. Yet the views of those who were lacking the necessary resources were never heard.

Mr Asiya agreed fully with Mr Johnson and called on the Committee to map out a way forward on the role of the Committee, as it could not be seen simply to defend the elite.

Mr Moloto stated that this was a very important issue that needed to be attended to by Parliament.

The meeting was adjourned



No related


No related documents


  • We don't have attendance info for this committee meeting

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: