Auditing Profession Bill: finalisation

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Finance Standing Committee

03 November 2005
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Meeting Summary

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Meeting report

04 November 2005
Auditing Profession Bill: FINALISATION


Mr N Nene (ANC)

Documents handed out

Auditing Profession Bill [B31-2005]
Additional proposed amendment to the Auditing Profession Bill
Matrix of public comments to the Auditing Profession Bill

Treasury responded to submissions made on the Bill. The Committee adopted the Bill with amendments. It was agreed that the Bill should use the original definition of an audit as contained in the Bill that was put out for public comment. Treasury rejected the proposal that the definition should be aligned with the terminology used by the International Federation of Accountants. The issue of materiality in respect to reportable irregularity would only relate to a registered auditor's dealing with the entity that had been audited. Registered auditors would also sit in the disciplinary Committee of the Regulatory Board.

Mr F Nomvalo (Accountant General) and Ms J Ferreira (Legislation) represented the National Treasury. Mr Nomvalo presented the amendments. Treasury had received a legal opinion to the effect that Clause 41(1) was appropriate and did not violate the Constitution and also did not limit a person's right to trade.

Ms Ferreira said that the courts had allowed certain limitations on the right to contract. One could limit an area of trade by means of a contract. One of the important things raised in the legal opinion was that it was important to balance an individual's right to be involved in a specific profession and the right of government to ensure that public interests were protected. The limitation of the use of certain words or designations was critical in ensuring that the public knew the person who was providing a service to them.

Mr Nomvalo continued to present responses to the submissions on the Bill. He said that Treasury had already taken the Committee through some detailed amendments to the Bill. Some issues had remained unclear. There was an issue about partial accreditation of professional bodies. Treasury had indicated that there was a need to make some changes to the definition of an 'audit'. It proposed the use of a 'reasonable level' of assurance as opposed to a 'high' level of assurance. Treasury had engaged the Public Accountants and Auditors' Board (PAAB) on suggested changes. The changes were necessitated by the technical definitions in terms of the International Federation of Accountants. The question was what would happen after the end of the next six months should the technical definition in the Federation change. Would Treasury be expected to come back to Parliament and make some amendments to the definition? Treasury had asked what were the Board's objections to the original definition contained in the Bill that had been published for public comment. The Board had indicated that it had no objections to the original definitions but just wanted the definition to be aligned with international standards. Treasury had stated several times that it was putting together a legal document. Should the Bill be aligned with technical language of the Federation, there would be a need for amendments every time the language changed. The original definition of ‘audit’ read as follows: "audit means the examination of financial statements with the objective of expressing an opinion as to their fairness or compliance with an identified financial reporting framework and any applicable statutory requirements; or financial and other information, prepared in accordance with suitable criteria, with the objective of expressing an on the financial and other information". The definition was changed several times. Treasury argued that it was better to go back to the original definition because it was clear and there had been no objections to it. It would still define the work of an auditor even if the definition of the International Federation of Accountants should change. The words "in accordance with prescribed or applicable auditing standards" should be added after the words "examination of" in the original definition. This was to ensure that auditing would always be done within a certain framework.

There was an issue relating to ensuring that students knew which institutions were accredited. Treasury had taken the amendments that had been raised during the hearings. It had been argued that the definition of a reportable irregularity was open-ended. Treasury agreed that there was a need to tighten the definition and had done so by providing that the materiality should be looked at in relation to the auditor's dealings with the entity in question.

Mr Nomvalo said it was submitted that Clause 11 had given an impression that registered auditors would not be allowed to sit on the Regulatory Board. The clause had been amended to provide that the members of the Board must include registered auditors. Mr Bhamjee had felt that the Minister would have an unlimited time within which to appoint, in the event of the dismissal of all member of the Regulatory Board. Clause 12 had been amended to provide that the Minister should appoint people within three months of the dismissal of members of the Board.

Treasury had debated the issue of the disciplinary process at length and had decided that a delegation of powers would be allowed. The issue was that the process was cumbersome and did not allow for a simple disposition of minor cases. It required all matters to be taken through the disciplinary process. The principle was that there should be a consistent and transparent disciplinary process. It should not rely on arbitrary decisions of individuals. It was agreed that some cases might be better dealt with in a process that did not necessarily involve going through all steps of the disciplinary process. Such an alternative process should be consistent in its application. The disciplinary committee would be allowed to sub-delegate functions even to employees of the Board if the matters under consideration could be dealt with easily. This should be done within a certain framework. The amendment would allow the Board to put forward a framework that would allow for minor cases to be disposed of in other ways and not through the disciplinary process. If a person admitted to wrong doing, it should be possible to conduct a very simple investigation and proceed to impose sanctions. The registered auditor would still have the right plead mitigating circumstances to be taken into consideration during sentencing. Plea bargaining would not suffice. A person should first go through process and then plead mitigating circumstances.

He said that another question had been raised around the termination of membership of the Committee in the event of a member not performing his or her duties. The feeling was that the wording of the Bill was insufficient in terms of providing guidance as to under which circumstance a person would be considered as not having performed his or her duties. Clause 20 had been amendment to specify circumstances under which membership could be terminated.

Mr Nomvalo said that a number of people had raised the issue of the representation of registered auditors in the disciplinary Committee. An amendment had been made to ensure that registered auditors would also be represented in the Committee. Treasury had removed the reference to the Minister having to issue directives from clause 30. The rationale was that the Minister had the right to dismiss everybody in the Board if they were not functioning properly. The amendment would allow the Board to operate without being influenced by the Minister but it would still be accountable to him or her. Clause 41(3)(a) had been amended by the deletion of the words "employed exclusively at a salary by an entity and not carrying on business on his or her own account".

There was a letter from the PAAB that referred to the audi alteram partum rule. Having argued why it was necessary for a report to be made immediately, Treasury was not completely excluding interaction between an auditor and management. The interaction would still take place but after the report had been sent to the Board. There was no obligation for the Board to take the report any further unless it had received confirmation that what had been reported was indeed taking place. Clause 45 should be read with the definition of ‘reportable irregularity’. The Definition referred to unlawful acts. The clause was motivated by what had been happening in the country.

The Chairperson took the Committee through the Bill clause by clause.

Clause 5 Functions with regard to accreditation of professional bodies
Mr Johnson asked what was decided in relation to clause 5(c).

Mr Nomvalo replied that it had been suggested that accreditation should be valid for five years. The Bill provided that the Board would review the accreditation annually. One was dealing with a profession that changed regularly. There was a need for the Board to ascertain on an annual basis that anybody who had been accredited was still up to speed with everything. Annual accreditation would not necessarily affect professional bodies because there would be partial accreditation.

Mr Johnson asked if the Bill was not necessarily going to be prescriptive.

Mr Nomvalo replied the Bill was calling for an annual accreditation and was prescriptive in a sense.

The Chairperson asked which clause prescribed the period.

Ms Ferreira replied that clause 34 prescribed the period.

Clause 39 Renewal of registration
Mr Nomvalo proposed that the removal of the words "at least three months prior to the prescribed expiry date of his or her registration" in clause 39(1). The Committee agreed to the amendment.

Clause 47 Inspections
Mr Nomvalo said that the PAAB had requested a clause that would make it possible for them to ask for annual returns of whatever kind so that they could conduct inspections. He proposed sub-clause (6) to provide that "a registered auditor must annually supply such information or returns as may be required by the Regulatory board". The Committee agreed to the amendment.

Clause 51 Proceedings after hearing
Ms Fubbs said that clause 51(1)(a) should read "guilty as charged".

Mr Nomvalo and the Committee agreed.

Clause 52 Reportable irregularities and false statements in connection with audits
Ms Fubbs said that the issue was whether the Board had jurisdiction to imprison people. Was the clause assuming that a person would have been convicted in a court of law? Did the Board have power to specify statutory the penalty to a judge?

Mr Nomvalo said that the Board would not imprison people. People would be imprisoned through a court of law. It was the Minister and not the Board prescribing the penalty.

Ms Ferreira replied that only the courts of law could convict a person for a criminal offence. The chapter did not empower Board to convict a person of a criminal offence. However, the Board could lay a charge.

Ms Fubbs said that even the Minister could not exercise the power to tell a court what sentence to impose.

Ms Ferreira replied that it was customary for legislation to provide guidance to the courts in terms of how serious the offence was viewed. There was general agreement in the Committee that the Bill did not empower the Minister to imprison people.

The Chairperson read the motion of desirability of the Bill. The Committee agreed that the Bill was desirability. He proceeded to read the Committee’s report on the Bill. The Committee reported the Bill with amendments.

The meeting was adjourned.




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