Draft Auditing Profession Bill

NCOP Finance

14 November 2005
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Meeting report

Communications PORTFOLIO COMMITTEE

FINANCE SELECT COMMITTEE
15 November 2005
DRAFT AUDITING PROFESSION BILL

Chairperson: Mr T Ralane (ANC) [Free State]

Documents handed out
Presentation on draft Auditing Profession Bill
Auditing Profession Bill [B31-2005]
Presentation on the Special Pensions Amendment Bill
Special Pensions Amendment Bill [B268-2005]

SUMMARY
The Committee adopted the Auditing Profession Bill without amendments. The Bill would deal with issues like enhancing the integrity of the profession and the protection of the public interest. It would establish an independent Regulatory Board that would be responsible for the accreditation of professional bodies, registration of auditors and education, training and professional development. Auditors would be required to report reportable irregularities to the Board without delay.

Issues raised by the Committee included the following:
- whether there was any requirement for a company to comply with government policies in respect of empowerment and transformation before it could be registered.
- why a person had to be a South African citizen in order to be appointed as a member of the Board given the skills shortage in the country.
- whether a person who had been charge for a misconduct would be allowed to continue to practice pending disciplinary proceedings.

The Committee also adopted the Special Pensions Amendment Bill without amendments. The Bill provided for the lapsing of Part 1 of Chapter 1 of the Act on 31 December 2006. This would mean that the closing date for all new late applications would be 31 December 2006. No new late applications would be considered after this date. The Board and the Review Board would be dissolved 60 days and 90 days, respectively, after 31 December 2006. The Head of Pensions Administration in the National Treasury and the Minister would take over the responsibilities of the Boards.

MINUTES
Treasury was represented by Mr F Nomvalo (Accountant General), Mr D Jurgens (CEO: Special Pensions) and Ms J Ferreira (Director: Legal Services). Mr Nomvalo made the presentation. (See document attached). The role of the auditor was to express opinions on annual financial statements. The opinion expressed by auditors provided user of the financial statements with assurances in respect of the financial health of the audited entities. The Bill focused on the following:

-enhancing the integrity of the profession
-protection of the public interest
-enhancing the independence and effectiveness of the regulator
-enhancing the independence of auditors and
-ensuring equitable access to the profession.
The Bill would establish an independent Regulatory Board that would be responsible for the accreditation of professional bodies, registration of auditors and education, training and professional development. It would also be charged with the protection of public interest. To this end, it would investigate improper conduct and conduct disciplinary hearings and impose sanctions for transgressions. The Board would also prescribe standards for qualifications, competence, ethics and conduct of auditors.

The Board would deal with the accreditation of professional bodies and registration of auditors and firms. A professional body would have to comply with prescribed requirements for it to be accredited. It should be financially and operationally viable. The body should also be committed to ensuring continued professional development for its members. Accreditation would lapse should the body cease to exist or fail to pay its fees. The Board would be empowered to cancel accreditation on the basis of non-compliance with the requirements for accreditation. It would also be able to suspend accreditation in order to protect public interest or the profession. Termination of accreditation would not affect the registration of registered auditors. Individuals would have to meet certain requirements before they could be registered. The Board would only register firms in which all partners where registered as auditors.

A registered auditor would be required to report reportable irregularities without delay. The auditors should notify the management of the audited entity of the irregularity within three days in writing.


A judge or senior advocate would chair the Disciplinary Committee of the Board. It would consist of a majority of non-registered auditors. There would also be other suitably qualified persons not associated with the profession. The disciplinary Committee would be expected to deliver its decision or judgement within 30.

The Minister would play certain roles in relation to the affairs of the Board. The Minister would ensure that the Board complied with the Public Finance Management Act and other legislation. He would also be responsible for the proper and transparent management of the Board. The Minister would be empowered to instruct the Board to desist or stop acting against the interest of the profession.

Discussion
The Chairperson said that it was important to note that the Bill was about the protection of public interests. He said that he had heard of an institution that was training nurses even though it was not registered with the Council.

Mr B Mkhaliphi (ANC) [Mpumalanga] asked what was the relationship between the Board and Public Accountants and Auditors Board (PAAB). Would the Regulatory Board replace the PAAB? He said that he had some ideas as to why there had been a decision to do away with Minister's powers to issue directives. Such powers would have impacted on the independence of the Board and were not in line with today's approach to governance. There were certain disturbing occurrences in the profession. He asked what measures were in place to protect public interest.

Mr Nomvalo replied the relationship between the Regulatory Board and the PAAB was dealt in clause 59(1)(a). The clause provided that RB would succeed PAAB from the date of the commencement this legislation.

Mr D Botha (ANC) [Limpopo] asked for how long would the registration of auditor be valid. In relation to reported irregularities, he asked if a company would be allowed to continue with its business until the disciplinary hearing had been concluded.

Mr Nomvalo replied that the Board might prescribe a term for which a registration would remain valid. He was of the view that the term would not exceed a year. The Board would have to check if people were still complying with the requirements on an annual basis. The Bill that was introduced in Parliament last year had defined an 'audit' in a particular manner. The public had submitted that the definition should be aligned with international standards and this was done. The Portfolio Committee on Finance was briefed on the Bill in June 2005 and the Committee called for hearings on the Bill. The very same institutions that had made a proposal in relation to the definition of an 'audit' came back to say that the definition was no longer in line with international standards. The profession changed quickly and registration could not be life. It was sensible to review if people were still following the requirements on an annual basis. The renewal and validity of membership would be determined by changes that were taking place. Clause 6 empowered the Board to prescribe minimum qualifications, competency standards and requirements for registration of auditors. The Board also had the power to prescribe the period of validity of the registration.

With respect to the issue whether one would continue to practice pending disciplinary proceedings, he said that a lot would depend on nature of misconduct. A disciplinary hearing might be about a person who had not submitted a tax return. There was no provision for the suspensions of the person. The person might be suspended should he or she be charged with a conduct that had brought the profession into disrepute. In essence a person would still continue to practice whilst the disciplinary proceeding were taking place. The basic point was that a person was innocent until proven guilty. It was important to uphold this constitutional principle. However, there might be cases wherein the Board might have to consider suspending the person summarily. Such powers were not included in the Bill but the Board had the powers to act in the public interest.

Mr Botha said that there might be legal challenges should the Board suspend a person in the absence of a provision that empowered it to do so.

Mr Nomvalo said that in most cases the Board would not act in such a manner. This was due to the application of the principle that a person was innocent until proven guilty. Any legislation that would contain a provision that was against this principle would be in violation of the Constitution.

Mr E Sogoni (ANC) [Gauteng] said it was unclear if there was any requirement for a company to comply with government policies in respect of empowerment and transformation before it could be registered. He noted that the Bill provided that a person had to be a South African citizen in order to be appointed as a member of the Board. He was of the view that Treasury was aware of the shortage of skills in the country. There was a law that was aimed at ensuring that skills were imported into the country. Was this clause not in contradiction with the principle of importing scarce skills? Clause 43 (c) would empower the Auditor General to appoint a person who was not registered as an auditor to carry out on his or her behalf any auditing services which were required in terms of the Public Audit Act. He thought that the requirement was that auditors had to be registered. He asked if this clause did not contradict other provisions of the Bill. It was important to know how the Bill would ensure that the public was protected against unregistered structures. He wondered if the Bill should not make if compulsory for people in the profession to be registered as auditors. The Bill contained some guidelines on the issues of the disciplinary proceedings but did not provide how soon a person should be disciplined. The country had seen many cases wherein teachers who had abused children but had continued to teach without any disciplinary proceedings having been taken against them. He noted that the Board would received funding and asked if the funding would be in the form of membership fees. The Bill had initially contained a clause that empowered the Minister to issue directives. He asked why the clause had been deleted.

Mr Nomvalo replied that the Portfolio Committee on Finance was not comfortable with the issuing of directives by the Minister. It had felt that such powers went against certain values and should not be contained in the Bill. There were issues of the balancing act and the effectiveness of the Board. The Minister had certain powers in terms of the Bill. The Board would no longer be self-regulatory. It would carry out a function on behalf of the government and would be accountable to the Minister. The Minister would monitor and review the performance of the Board and could dismiss any members of the Board. This was the balancing act. There was no need for directives since the Minister already had the powers to do certain things. Removing the power to issue directives had not watered down the effectiveness of the Bill. The Board would receive funding from government. It would also collect fees for certain issues.

With regard to furthering the government's policies, he said that the Bill referred to issues of representivity. Professional bodies would have to meet certain specific requirements in order to be registered. On of the most important issue for registration as an auditor was professional competence. The Board might establish a Fund aimed at influencing transformation. There were problems in places like the Mpumalanga and Free State provinces in the sense that clerks often migrated to other provinces upon receiving their qualifications.

The Chairperson said that the Committee should to monitor the performance of the Board in order to see how it had moved in terms of balancing the skills in the country.

Mr Nomvalo continued to say that a person should be a South African citizens and resident in the country in order to be a member of the Regulatory Board. A person who wanted to be registered as an auditor in the country only had to be resident in the country. This was to ensure that there would be proper regulation. It would be difficult to regulate somebody who was not in the country. The Auditor General was a statutory/constitutional office and, technically, there was only one registered auditor there. There other officers in the Office might or might not be registered as auditors. The Auditor General (AG) was answerable for all actions by the other officers. This was the difference between the AG and other auditors in the private sector.

He said that the Bill did not provide for a period within which a person would have to be disciplined following a charge of misconduct. The Bill outlined a process that had to be followed. One would have to conduct an investigation and proceed with the matter. It was important not to lay down a specific timeframe. There might be problems especially when dealing with complex cases. In some cases one might find that there was a pending legal case. Consequently, people would not want to come up with information due to fear of implicating themselves.

Ms Ferreira replied that the Minister would be responsible for ensuring that the Board performed its duties as expected. Individuals would be protected through the Promotion of Administrative Justice Act. The Act covered issues like undue delays proceeding with a disciplinary matter. The institution of disciplinary proceedings by the Board would constitute administrative action and would have to comply with the Act.

Mr Sogoni said that clause 28 did not provide for what Mr Nomvalo had just said. He asked why the Bill did not explicitly provide that the Minister might dissolve the Board.

Mr Nomvalo referred the Committee to clauses 11 and 12. The Minister could terminate membership of the Board.

Ms Mchunu (IFP) [KwaZulu-Natal] said that there was no mention of protection of service providers in the Bill. This was a very sensitive profession because it dealt with all sorts of people who were "hunting for money in odd ways".

The Chairperson said that the objects of the Bill were clear: the protection of the public against auditors. He wondered if the member was suggesting the Bill should protect auditors against the public. Registration as an auditor would ensure protection and compliance with set standards. The Bill would strengthen the integrity of the profession. Auditors would be protected for as long as they conducted their work properly.

Mr Nomvalo replied that the issue of the auditor's liability was addressed in clause 46. The clause was very specific in terms of the auditor's liability. It did not expose auditors to abuse by management of companies and the public. There was no need for more protection beyond what was already contained therein.

Mr Z Kolweni (ANC) [North West] said that the profession was important especially when it came to determining whether a company would have a good life span. He asked if the Bill was aimed at servicing the public sector. He was of the view that it should also cover the private sector because this was where most of the big problems were occurring. Employees in the private sector were the last people to know about the pending closure of companies. Clause 45 contained an interesting element in terms of which auditors would be able to engage organisations should they discover some elements that would lead to material loss to the company.

Mr Nomvalo replied that the Bill was not focusing on public entities. Public entities were covered under the Public Audit Ac. It was intended to regulate auditors who were auditing private entities.

Ms Ferreira replied the Bill should be read together with the Companies Act Amendment Bill that would be introduced early next year. The Company Act Amendment Bill would regulate the appointment of auditors. The Department of Justice was conducting an investigation into liquidations and sequestration that would provide for a compulsory process of trying to save a company before liquidating it.

Mr Sogoni said that the Bill provided for sanctions but did not provide the period within which proceedings had to take place. It might be important not to suspend a person indefinitely even in cases that involved serious transgressions. He was not convinced that the Bill would facilitate a speedy disciplinary process.

The Chairperson said that there was a principle that maintained that justice denied was justice denied. He was of the view that people who would be appointed to the disciplinary Committee or Board would be credible professionals who understood this principle. It was not necessary to tie the Board's hands to a particular time period.

Legal opinion
The Chairperson said that the Committee had received an unsolicited legal opinion from the Institute of Certified Public Accountants. The Institute claimed that the legal opinion was not part of its submission to the Portfolio Committee on Finance and that it contained new evidence. The Institute believed that it was important to bring to the attention of the Committee certain provisions that might lead to a constitutional challenge, confusion in the market or misalignment to the international market.

Mr Nomvalo said that clause 41 of the Bill was at the heart of the submission by the Institute.

Ms Ferreira said that the Portfolio Committee on Finance had dealt with the issue in detail. A number of legal opinions had been sourced in relation to the clause. There was nothing new in the submission.

Mr Botha wondered if it was fair for the Committee to be expected to pass the Bill within a very short period of time. The Committee had only been briefed on the Bill today. The Portfolio Committee had had a very long time to consider the subject matter of the Bill. He wondered if the Committee had to pass the Bill immediately.

The Chairperson said this was not a section 76 Bill. The Committee could not effect any amendments to the Bill even if it had views different from those of the Portfolio Committee. It still had to pass it in order to be effective. He asked if the member was suggesting that the meeting should be postponed so that members could go and read the legal opinion.

Mr Botha said that the Bill was being discussed before the Committee for the first time. It might be preferable to postpone passing it if it was not urgent.

The Chairperson asked why the Committee should postpone passing the Bill. There was no need for provincial negotiating mandates for the Committee to pass the Bill.

Mr M Goeieman (ANC) [Northern Cape] said that the issue was very important and should be discussed between the PC and SC Finance. The Committee should proceed to deal with the Bill since it had already spent the whole morning on it.

The Chairperson said that the National Assembly would pass the Revenue Laws Amendment Bill today and the Committee would be expected to pass it tomorrow. It was a matter that was beyond any body’s control. The Bill would be referred to the Committee later today and there would be a briefing on it tomorrow. Members of the Committee had had copies of the Auditing Profession Bill in their offices for some time. The only problem was that it had not yet been referred to the Committee.

Mr Botha agreed that the Committee should continue with its discussions on the Bill. It was important to avoid "Bill dumping" in future.

The Chairperson said that some institutions had the tendency of smuggling issues through the Select Committees especially if the issues had lost the battle before the Portfolio Committees. He said that he had tried to comply with the Constitution by not simply throwing the submission away.

Mr Nomvalo said that the submission dealt with clause 41 of the Bill. It had been alleged that the clause would cause confusion in the market. Clause 41 was there to ensure that there would be no confusion. The dispute dated back to the time when the Ministerial Review Panel was instituted. The letter by the Institute provided that this was new evidence. This was not the case because it had already been dealt with in other submissions. The issue contained in the submission had led to some discomfort in the Portfolio Committee. The Committee then took a decision to get some legal advice on the matter. He said that the Institute had sent him an e-mail advising that it was not necessary to get the legal opinion that the Committee had agreed on. He wondered why the Institute itself had gone out and sought legal opinion.

The Institute claimed that it had over the past few months spent many hours trying to convince Treasury, the PAAB and the South African Institute of Chartered Accountants (SAICA) of the validity of its concerns. It said that although it had unequivocally resolved not to use the legal route to address its concerns, its individual members might take the issue to court. The Minister was a respondent to a matter that was to be heard on 30 November 2004. He wondered what the case was if it was not a legal challenge. There was a letter that indicated the intention to withdraw the matter. He had no knowledge of the matter being actually withdrawn. Treasury had taken submissions from anybody and had engaged in bilateral discussions with the Institute except on issues raised in clause 41 because they were sub judice. It was unfortunate that Treasury did not agree with the Institute on issues addressed under clause 41. The opinion was misleading the Committee because it raised nothing new. Their proposal would create confusion in the market. There was a need for clarity on who was an auditor and who was not. Clause 41 was intended to prohibit the use of certain descriptions if such use was likely to create confusion in the market. Treasury had sought legal opinion on the constitutionality of the clause. Section 22 of the Constitution allowed for the regulation of professions in a manner that did not exclude certain people in the profession. Some of issues raised in the opinion were contradictory. The opinion seemed to suggest that Bill would prohibit non-audit professional services.

Mr Nomvalo said that the Institute also had a problem with the definition of an 'audit'. However, it had accepted the first part of the definition (paragraph (a)). It had suggested that the definition should refer to 'external audit'. The legislation would be ineffective should the suggestion be allowed. In terms of the Bill, people would still be allowed to perform their services but should not call such services audits if they were not registered as auditor. There were many stakeholders who had made their submissions but Treasury could not accept some of them from a policy perspective. The objects of the Bill referred to effective regulation of the profession. The regulation would not be effective should the definition be mutilated. The opinion had contradicted itself. Both legal advice to Treasury and the Committee had come from Senior Counsel. He wondered if the Institute’s advice also came from a Senior Counsel. He was of the view that the Institute was using the Committee to serve its own interests.

Ms Ferreira said that only a court of law could pronounce on the constitutionality of the clause. The provision was justifiable from the auditing, legal and constitutional perspective.

Mr Nomvalo said the fourth issue raised was whether only registered auditors might issue "accounting officer reports". The Institute had indicated that the answer depended on whether "accounting officer reports" were an ‘audit service’. "If the answer was yes, then only registered auditors as defined in the Bill would be allowed to issue such reports." He said that people should register as auditors if they were of the view that accounting officer reports were audit reports. An accounting officer report was not mentioned in the Bill. He said that his interaction with the Department of Trade and Industry had revealed that the name "Institute of Certified Public Accountants of South Africa" had not yet been registered with the Department.

Ms X Mdludlu (State Law Advisor) agreed with the comments by National Treasury. The submission had been made in the Portfolio Committee hearings and there was nothing unconstitutional about the clause. The Chairperson of the Portfolio Committee had asked the Institute if it was satisfied with the clause and the Institute had indicated its satisfaction. She said that the Institute had indicated that it was not satisfied outside the Committee. She had told its officials that they could take their issue to the Select Committee because she did not want to dismiss them lightly. She had also indicated that the period for public comments had already closed.

Mr Mkhaliphi questioned the ethical grounds of the submission. He wondered if an Institute that put up such kind of an opinion was worthy of the membership that it had.

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

Mr Mkhaliphi asked if the Office of the Auditor General did not find it necessary to comment on the Bill.

Mr Nomvalo replied that the AG had been consulted and was part of the initial drafting of the Bill.

The Chairperson put the whole Bill before the Committee. The Committee adopted the Bill without amendments.

Special Pensions Amendment Bill
Mr D Jurgens (CEO: Special Pensions) made the presentation (see document attached). He said that Part 1 of Chapter 1 of the Act provided for pensions and survivor lump sums. Part 1 of Chapter 1 of the Act would lapse on 31 December 2006. This would mean that the closing date for all new late applications would be 31 December 2006. No new late applications would be considered after this date. Monthly pension for surviving spouses or orphans would be paid retrospectively from 1 December 1996. The Fund would pay funeral benefits for pensioners, surviving spouses and orphans and this would not be retrospective. Additional benefits under the Fund were intended to facilitate better alignment with benefits afforded under other pension schemes.

The Board and the Review Board would be dissolved 60 days and 90 days, respectively, after 31 December 2006. The Head of pensions administration in the National Treasury and the Minister would take over the responsibilities of the Boards.

Mr Goeieman asked if the amounts referred to in clause 19 would be paid on annual or monthly basis.

Mr Jurgens replied the clause referred to annual payments in Rands.

The Committee adopted the Bill without amendments.

The meeting was adjourned.

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