ATC210316: Report of the Select Committee on Finance on the Auditing Profession Amendment Bill [B2B - 2020] (National Assembly- section 75), dated 16 March 2021
Report of the Select Committee on Finance on the Auditing Profession Amendment Bill [B2B - 2020] (National Assembly- section 75), dated 16 March 2021
1.Introduction and background
The Auditing Profession Amendment (APA) Bill seeks to strengthen governance of the Independent Regulatory Board for Auditors (IRBA) and to improve investigating and disciplinary processes. National Treasury (NT) explained that the Bill proposes amendments to the Auditing Profession Act No. 26 of 2005 (the Act), to address challenges and limitations that the IRBA faces in discharging its regulatory and oversight responsibilities, especially in light of the recent audit failures in both public and private institutions. The amendments proposed in the Bill as introduced, were also published for public comment in 2018 as part of the Financial Matters Amendment Bill.
The objective of the Act was to provide for the establishment of the IRBA; to provide for the education, training and professional development of registered auditors and registered candidate auditors; to provide for the accreditation of professional bodies; to provide for the registration of auditors and candidate auditors; to regulate the conduct of registered auditors and registered candidate auditors; to repeal an Act; and to provide for matters connected therewith.
The Standing Committee on Finance (SCoF) adopted the Bill, with amendments, on 18 November 2020. The National Assembly (NA) passed the Bill on 02 December 2020, the same day that the National Council of Provinces (NCOP) formally referred the Bill to the Select Committee on Finance (SeCoF), for consideration and reporting. The SeCoF received a briefing on the Bill from NT and IRBA on 02 February 2021.
The Committee held public hearings on 09 February 2021 and received a written and an oral submission from the Congress of South African Trade Unions (COSATU). On the same day NT and IRBA responded to COSATU’s submission. The Committee held a meeting on 12 and 16 February 2021 to further consider the Bill and to deliberate on the policy aspects of the Bill.
2.Overview of the proposed amendments to the Bill
The objective of the APA Bill is to amend the Auditing Profession Act, 2005, so as to insert a definition; to strengthen the governance of the Regulatory Board; to strengthen the investigating and disciplinary processes; to provide for the power to enter and search premises and to subpoena persons with information required for an investigation or disciplinary process; to provide for the power to issue a warrant for purposes of entering and searching of premises; to provide for processes to be followed after an investigation; to provide for sanctions in admission of guilt process and following a disciplinary hearing; to provide for offences relating to investigation and disciplinary process; to provide for the protection and sharing of information; to provide for transitional measures; and to provide for matters connected therewith.
The next section summarises the specific proposed amendments in the Bill, detailed by NT.
2.1Strengthening governance of the Board
The Bill proposes changes in clauses 2 and 3, respectively, to ensure that IRBA performs its functions within a defined strategy and that IRBA should determine, with ministerial approval, a regulatory strategy, which will be made public and to strengthen IRBA’s independence and address conflict of interest of board members. Clauses 4 and 5 of the Bill are amended to increase the term of Board members from two to three years.
2.2Strengthening of the investigating Committee
The Bill provides that the Committee investigating conduct by registered auditors and candidate auditors should be independent of the auditing profession. The Bill proposes that the Investigating Committee includes two formerly registered auditors and an Advocate or Attorney. The Bill further proposes the disqualification for members of the Investigating Committee as is the case with the members of the Board, regarding sharing in profits or interests of and receiving payments from registered auditors.
2.3Disciplinary and enforcement Committees
NT explained that, currently, the Disciplinary Committee is overburdened by the number of disciplinary cases. In order to alleviate this burden, the Bill proposes (1) to enable IRBA to appoint as many members of the Disciplinary Committee as it considers appropriate and from these members appoint a panel for every disciplinary hearing, (2) that the Disciplinary Committee should be chaired by a retired Judge or a member of the Senior Counsel and (3) that a panel should include at least three persons, the Chairperson being an Advocate or Attorney and one member being a formerly registered Auditor and (4) provides for an establishment of the Enforcement Committee with powers to deal with recommendations made by Investigating Committee.
The amendments further propose disqualification for members of the Disciplinary Committee as is the case for members of the Board, regarding sharing in profits of, and receiving payments from registered Auditors. The clause also prohibits members of the Committee from using their position to improperly benefit themselves or someone else or to impede the committee’s work.
2.4Registration requirements for auditors
The proposed amendment seeks to ensure that the membership of accredited professional body is a prerequisite for registration as an Auditor or Candidate Auditor.
2.5Reporting of irregularities
The Bill proposes prohibition on removal of a registered Auditor before such an Auditor completes the process of reporting irregularities to IRBA and that where the individual registered Auditor has reported irregularity and resigns from the firm before complying with relevant section, that Auditor must do the necessary handover to the incoming Auditor regardless of when resignation takes effect. NT said that these proposed amendments will address the risk of the relevant Auditor being removed after reporting irregularities to IRBA.
2.6Referral of non-audit matters
The proposed amendment seeks to enable the Enforcement Committee to refer non-audit matters brought against a registered Auditor to the relevant professional body for investigation and disciplinary proceedings. Such non-audit matters must fall within the Constitution and the rules of the professional body.
2.7Enhancing investigative processes
The proposed amendment in this clause will empower the Investigating Committee to subpoena an Auditor or any other person to submit to the Committee, documents concerning the investigation. NT said that expanding powers of the Investigating Committee would assist in ensuring that the investigation into alleged improper conduct by the Auditors is thorough and effective and that the power to subpoena documents is an important and necessary mechanism required to obtain evidence.
2.8Enhancing disciplinary processes
The Bill proposes that if investigation indicates sufficient grounds that an Auditor should be charged for improper conduct by (1) following admission of guilt process by the Enforcement Committee or (2) referring the matter to the Disciplinary Committee for a hearing, where the matter is referred to the Disciplinary Committee, a panel will be appointed for each case, instead of the Disciplinary Committee having to deal with all the cases. Currently, once the investigation into alleged improper conduct has been completed, different processes are proposed to expedite the disciplinary process.
2.9Sanctions following guilty findings
Currently, the Act empowers the Disciplinary Committee to impose a fine not exceeding an amount calculated according to a ratio for five year’s imprisonment, prescribed in terms of the Adjustment of Fines Act, 1991 on a registered Auditor found guilty following disciplinary hearing. NT is of the view that fines which have been so determined, are too low and do not serve as an adequate deterrent. The Bill proposes that where an admission of guilt process is followed, the Enforcement Committee may impose sanctions such as caution or reprimand, imposition of a fine not exceeding an amount determined by the Minister of Finance on recommendation of the IRBA, training and/or cancellation of registration or disqualification from registration on temporary or permanent basis.
2.10Offences and protection of information
The Bill proposes amendments which make it an offence to fail to comply with subpoena or to interfere with or hinder conduct of investigation. NT believes that, this will demonstrate that improper conduct by an Auditor will not be tolerated. A person found guilty of this offence may be liable on conviction to fine or imprisonment for a period not exceeding five years or to both such fine and imprisonment.
The Bill further proposes prohibition on disclosing information, except where, among others, it is so required by other legislation or it is for purposes of referring a non-audit matter. This will safeguard information obtained during performance of functions in terms of the Act.
3.Key issues raised by COSATU during the public participation process
COSATU said that it supports the objectives and the provisions of the APA Bill. It believes that the Bill will be a welcome tool in the fight against corruption in both the public and private sector and that it will help assert the rule of law over the auditing sector. In particular, COSATU supports the provisions for the Board and Committee membership criteria, the Board and Committee investigative and disciplinary procedures and the Board and Committee search and seizure powers.
The main concern raised by COSATU in the Bill as amended, is failure to formalize the industry rule requiring the Mandatory Rotation of Auditing Firms (MRAF) and auditors after set times. COSATU submits that there should be an insertion of a new clause in the Bill, that would ensure MRAF and Auditors after every five years instead of 10 years proposed in the Bill. The federation is keen that the “internal rule” of rotating auditors and audit firms must be elevated to an “Act”.
COSATU’s concern is that because it is a regulation in terms of the powers that IRBA has, a new IRBA Board could remove the regulation, whereas if it is in legislation it is more secure. In response to NT’s argument that, in principle, it supports an appropriate clause in legislation but needs to negotiate this with the stakeholders, including IRBA, COSATU argues that there is no guarantee when such an amendment Bill will be tabled in Parliament and that it can take on average five years for a Bill to move from departmental drafting phase to passage into law. COSATU is concerned about the current long relationships, some over 100 years, between some auditors and their clients, which necessitates implementation of the MRAF rule to force a break and transform the sector.
COSATU believes that the mandatory rotation clause once implemented will, amongst other things, contribute towards accelerating transformation and competition in the auditing sector and assist in preventing corruption in the auditing industry. COSATU is of the view that setting the rule lower than 10 years can be done and that this is a fair compromise, which will have no disruptions or administrative burden to the sector. In terms of the process, COSATU believes that it can take at most three months, to allow greater scrutiny of IRBA by Parliament and the general public during the public participation process, causing relatively minor delays, instead of five years, on average.
The Federation is of the view that if the sector opposes or contests the Act, it can take it to Court, adding that a similar provision in the Companies Act had never been challenged in court. It stated that the legal precedence for this already exists, referring to Section 92 of the Companies Act of 2008. Section 92 of the Companies Act requires the rotation of the individual auditor or designated auditor after tenure of five consecutive financial years for companies that are required by the Companies Act or the Companies Regulations to have their annual financial statements audited, or who have incorporated the audit requirement in their Memorandums of Incorporation. The IRBA Code calls for rotation of key audit partners after seven years while public interest entities other than companies are subject to the seven-year key audit partner rotation rule.
COSATU indicated that it is still not satisfied with the NT’s response to its submission, which includes that reducing the rotation years falls outside the scope of the Bill currently before the Committee; that the objective of the proposed amendments was mainly for IRBA to prevent corruption; that the power to change the rules lies with IRBA and that going through the formalities of changing the rules might delay the implementation of the current Act. COSATU recommended that the SeCoF should consider amending the Bill accordingly and tabling the proposed amendment to the SCoF, even if it means an additional public participation process.
In response to COSATU’s concerns, NT indicated that it sees no problem with the current MRAF and auditors as a rule. It stated that the number of rotation years are set by international standards and that the problem of elevating the “rule” to a harder “Act” is that once its implemented, it can be very difficult to reverse or change. NT further said that the rigidity of the Act can be contested by the auditing sector arguing that mandatory rotation of firms will not necessarily translate into transformation of the sector. NT indicated that the reality is that most companies rotate amongst the big four auditing firms, namely, KPMG, Deloitte, PricewaterhouseCoopers (PwC) and Ernst and Young, despite the corruption and other scandals. It said that there is a need for a more comprehensive approach to transformation and competition in the audit sector. It acknowledges that there might be initial teething problems with implementation of the proposed amendments, which IRBA should be afforded the discretion to address. NT opposes the hard rule. It sees the high probability that the audit firms will contest it if it’s made an Act. In terms of the process, NT believes that the public participation process would be imperative to allow the auditing industry to provide input. It said that this will delay the implementation of the Bill, whose purpose is to prevent corruption. Contrary to COSATU’s view, the NT sees the process taking more than three months.
On other related matters, COSATU believes that it is important for the Minister for Finance and NT to significantly increase the monetary level of fines provided for in regulations for offending auditors. The Federation appreciates the need for government to address the budget deficit and public debt crises and recommends that government should guard against any reckless reductions in financial allocations to IRBA given the critical role that the IRBA plays. It is of the view that the cost to the fiscus and the economy would be greater if IRBA is not adequately capacitated and fails to hold auditors accountable. COSATU further recommended that the NT should consider developing measures to provide for oversight of Auditing Committees in the public and private sector in future.
4.Observations and recommendations
The Committee welcomes the proposed amendments to the APA Bill. We believe that these amendments will assist the IRBA to prevent corruption in the sector.
The Committee notes COSATU’s submission that the existing MAFR currently forming part of the rules of the IRBA, should be included in the legislation; and that the ten-year requirement should be reduced to five years. We have noted COSATU’s concerns, justification for its submission and the recommendations it made to both the NT and IRBA and the Committee. We have also noted the IRBA and the NT’s responses to COSATU’s submission, mentioned in the previous section.
The Committee considered (1) some international trends regarding the MAFR, (2) the advantages and disadvantages of changing IRBA’s internal rule into legislation and reduction of the tenure thereof and (3) the process that should be followed to make the amendments.
Internationally, there is no one-size fits all strategy on the MAFR. The mandatory rotation period ranges between five years and ten years, which makes IRBA’s requirements somewhat comparable. COSATU’s proposal has the advantages of contributing towards enhanced accountability in the auditing profession, accelerating transformation and competition in the audit industry, strengthening audit independence and audit quality and preventing corruption. The disadvantages, however, include possible compromised audit quality, high incidence of audit failures and disruptions and the unintended consequences of continued lack of transformation and competition in the audit industry. As NT also indicated, despite changing the rule, rotation will most likely continue to happen amongst the big four audit firms, which will continue to create a barrier to entry for small and medium-tier audit firms. Also, COSATU’s proposal will not on its own restore the auditing profession and address the weaknesses in the auditing processes. NT believes that the solution to transformation requires a “comprehensive approach” and complementary measures to be implemented.
Regarding the process, the Committee noted that acceding to COSATU’s submission would mean that the NCOP would have to restart the public participation process and allow other stakeholders and those in the auditing industry to make input. The Committee will also have to liaise with the NA, regarding the recommendation to amend the Bill. We noted the NT’s concern that should the “rule” be part of legislation, it might be challenged and contested in Court, although COSATU hold a different view. We have noted from IRBA that a litigation had been started in 2018 in the Pretoria High Court, seeking to set aside IRBA’s rule on mandatory rotation and that the case would probably only be finalised late in 2022. We also note that the changes proposed will most likely delay the implementation of the other provisions in the Bill, which are more urgent and need to help prevent corruption in the sector.
The Committee supports the objectives of the Bill and believes that the proposed amendments are a step in the right direction for restoring public confidence in the audit sector and are expected to strengthen the governance of the Board and the investigating and disciplinary committees to better execute IRBA’s legislative mandate. The latest corruption scandals of auditing firms, the recent high-profile accounting scandals and investigations into major auditing firms both in South Africa and around the world, attaches much more importance on the proposed amendments of the legislation. We are concerned about the impact that such corruption scandals might have on the audit profession reputation in general and the industry’s ability to redeem itself and to provide investors with reliable and credible financial information, on which to base decisions. We are also concerned about failure of the IRBA and the auditing industry to identify and report auditing irregularities on time to prevent corruption. We noted the latest developments regarding the disbandment of the IRBA, by the Minister of Finance.
The Committee sought advice from Parliament’s Legal Services Unit on the processing of a new clause in a Section 75 bill by an NCOP Committee as proposed by COSATU. The response from the Unit is included as an Annexure to this report.
NT notes: “The MAFR is strongly supported as an effective measure in addressing the risk of long audit tenure that might adversely impact audit independence and ultimately audit quality. In 2017 the IRBA introduced the 10 year-MAFR rule under its rule-making powers under the Auditing Profession Act to take effect 1 April 2023. More than 40 per cent of the JSE-main Board listed entities have already implemented this rule. Entrenching MAFR in the Act is desirable. However, acknowledging that the amendments in the Bill should become law as soon as possible to enable IRBA to deliver more effectively on its mandate and to restore credibility in the auditing profession, the Bill should be processed further without including this amendment now. NT must include MAFR in the next omnibus Bill it introduces in Parliament, and not delay it until the planned second tranche of amendments to the Auditing Profession Act.”
Overall, the majority in the Committee supports the inclusion of the MAFR in legislation, but decided, after careful consideration of all the relevant issues, not to go ahead with processing a new clause, and strongly recommends that NT undertakes the necessary consultation with the stakeholders and brings a bill to Parliament with a clause on the MAFR within 24 months.
The DA proposed that parliamentary oversight over the Minister’s appointment of the Board be included in a future amendment Bill. At this stage, the majority in the Committee does not agree with this proposal, but will consider this further, if appropriate, when a new amendment Bill is introduced.
The Economic Freedom Fighters rejects the bill.
The Select Committee on Finance, having considered and examined the Auditing Profession Amendment Bill [B2B - 2020] (National Assembly – section 75), referred to it, and classified by the JTM as a section 75 Bill, accepts the Bill.
Report to be considered
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