Draft Auditing Profession Bill: Treasury briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
16 August 2005
DRAFT AUDITING PROFESSION BILL: TREASURY BRIEFING
 

National Treasury briefing
Draft Auditing Profession Bill (as of 24 May 2005)

SUMMARY
National Treasury presented an overview of the Draft Auditing Profession Bill’s goals and implications. The presentation primarily focused on the functions and powers of the proposed Independent Regulatory Board for Auditors (IRBA) that aimed to ensure the ethical standards of the profession were upheld.

During the discussion, Members raised the following issues:
- The Bill’s implications for industry structure in terms of separating corporate entities into auditing and non-auditing branches.
- Whether the IRBA's independence would be compromised by clauses allowing government intervention.
- The composition of the IRBA board was lacking input from registered auditors.
- The process of alignment for educational institutions’ adoption of international best practices

MINUTES

National Treasury briefing
Mr F Nomvalo (Deputy Director-General: Office of the Accountant General) presented on the Draft Auditing Profession Bill. The Bill allowed for the creation of an Independent Regulatory Board for Auditors (IRBA). General functions of the IRBA included promoting the integrity of the profession, prescribing standards for qualifications and ethics, and encouraging education development for the profession. The IRBA aimed to regulate the industry by accrediting and monitoring auditors through the creation of a professional body. The Bill required the IRBA to maintain internationally recognised standards within the current educational structure and to assist in developing capacity at previously disadvantaged institutions. The powers of the IRBA included the determination of staffing issues, determination of reimbursable fees to the Board, and the collection of fees. The Bill empowered the IRBA to terminate registration to the professional body in certain instances. The proposed rights and duties of accredited auditors, as well as the Minister’s executive powers, were then outlined. The disciplinary process for improper conduct was also summarised.

Discussion
Mr M Stephen (UDM) said that auditing was a wide field and asked if the Bill dealt only with financial auditing and excluded other wider definitions.

Mr Nomvalo replied that the legislation related to the narrow financial auditing definition and excluded other auditing fields.

Mr M Stephen (UDM) asked if a double jeopardy scenario would arise if different accreditation bodies across financial professions could discipline an offender simultaneously.

Mr Nomvalo replied that this was a possibility but he believed that this would enforce accountability and maintain higher standards.

Mr K Moloto (ANC) asked whether firms that provide both auditing and non-auditing services within a single corporate entity would have to separate their activities into different entities.

Mr Nomvalo replied that these firms operating as a single entity could not be objective and offered the example of Arthur Andersen's decline. A conflict of interest would arise due to the different goals of the auditing and non-auditing operations.

Ms B Hogan (ANC) commented that the requirement that firms could only be accredited if all their shareholders were registered auditors (RAs) would be problematic. She asked if the Bill would affect the internal auditing profession and the government auditors.

Mr Nomvalo replied that the legislation was aimed at external auditors only and did not affect internal auditing practices. He added that individuals in the Office of the Auditor-General could register as individuals but that the department as an institution had constitutional independence that barred it from registration.

Mr I Davidson (DA) reiterated that auditing firms had diverse services. He asked if these firms would have to dissolve. He said that the Bill neglected the realities of the industry’s structure and asked for the reaction to the Bill by major firms.

Mr Nomvalo replied that the Bill allows for prosecution of firms if they are registered and said that this had not been possible in the past. South African auditing firms were willingly separating their activities but that the Bill did not specifically focus on this issue.

In reply to Mr M Van Dyk (DA) asking what types of companies would need to be audited, Mr Nomvalo replied that the Bill did not focus on this issue.

Ms Hogan (ANC) called attention to Clause 31(1)(a)(ii) which states "that the Minister (of Finance) may issue directives to stop or desist from performing a specific function if that function is not in the best interests of the auditing profession." She said that this clause signalled a lack of confidence in the effectiveness of an independent body.

Mr Nomvalo replied that this did not show a lack of confidence and he stressed that the Minister would have guidelines to govern a necessary intervention. Ms J Ferreira added that the IRBA was a government initiative and that the Minister would be explicitly involved because the IRBA could be construed as an instrument of government policy.

Ms Hogan (ANC) asked why auditors would not be allowed to be members of the disciplinary committee and questioned the difficulty of rotating board members every two years.

Mr F Nomvalo replied that accredited auditors would be on hand to advise the disciplinary committee but stressed that objectivity was paramount. The board member rotation system was in place to ensure an environment of continuity.

Mr Davidson asked what was implied by the reference to international best practices.

Mr F Nomvalo replied that the Bill was consistent with the ministerial review panel's findings and that these were compliant with international auditing practices.

Mr B Mnguni (ANC) asked how the professional body was going to work with other education institutions in terms of aligning standards.

Mr Nomvalo replied that the goal was to adopt international standards and that the IRBA would consult with examining boards on how to develop their capacities in this aspect. He stressed that the IRBA would not unilaterally implement measures.

Mr B Mnguni (ANC) questioned the criteria of 40% of the board being registered audits and said that this would result in a lack of expertise. Mr F Nomvolo replied that the criteria ensured independence and objectivity.

Mr K Moloto (ANC) asked if it was possible to legally define the term conflict of interest. Mr F Nomvalo replied that the Bill did not specifically outline the concept of conflict of interest and that this allowed for a degree of flexibility.

Mr Y Bhamjee (ANC) asked if the Bill facilitated a large scope for auditors and if it implied that these auditors should inspect every transaction a firm undertakes.

Mr Nomvalo replied that an audit should inspect the total entity but that the Bill did not create a framework for this concern.

Mr M Johnson (ANC) asked if there was overlapping regulation occurring between different bodies.

Mr F Nomvalo replied that the issue was outside of the legislation.

Mr K Moloto (ANC) questioned the Bill's implications for Small Medium and Micro Enterprises (SMMEs) and further asked if they would be able to afford the costs of extensive audits.

Mr Nomvolo replied that the issue of costs was irrelevant to the legislation.

The meeting was adjourned.