Corporate Laws Amendment Bill: Department response to submissions

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
31 May 2006
CORPORATE LAWS AMENDMENT BILL: DEPARTMENT RESPONSE TO SUBMISSIONS

Chairperson:

Department response: Policy Issues presentation
Department response: Technical Issues presentation
Corporate Laws Amendment Bill [B6-2006]

SUMMARY
The Department of Trade and Industry met with the Committee to provide responses to issues raised during the public hearings on the Corporate Law Amendment Bill. The presentation was divided into policy and technical issues. Submissions had been made by the Independent Regulatory Board for Auditors and various accounting institutes and associations. The Department highlighted key issues that might result in amendments to the Bill.

Members asked various questions including the distinction between public interest and limited interest companies, the composition of audit committees, the rotation of individual auditors as opposed to firms, the participation of auditors at Annual General Meetings, the process of exemption of companies to aspects of the legislation, the inclusion of an executive director to an audit committee, the need for independence of the audit committees and the appropriate regulatory framework for audit committees.

MINUTES
Department of Trade and Industry presentation
Mr F Sibanda (Chief Director-Policy and Legislation) provided an overview of the Department’s response to submissions made by interested parties to the Corporate Law Amendment Bill. The initial response of the Department to recommendations and comments was conveyed and issues that might result in further amendments explained.

Discussion
Dr P Rabie (DA) noted that certain international accounting organisations had questioned the Bill’s proposal that limited interest companies did not have to establish audit committees in the South African context.

Prof B Turok (ANC) asked whether proposed amendments would be referred back to the Committee for consideration. He noted a lack of reference to the Katz submission in the presentation. The members of audit committees had to be non-direct beneficiaries of company profits. Audit committees should be comprised of non-executive directors. The mere rotation of individual auditors as opposed to firms could result in the predominance of the commercial interests of the firm and thereby compromise the independence of the audit. Non-audit functions provided a substantial proportion of an accounting firm’s income and a mixture of services were offered. Relevant standards were needed for limited interest companies. The Financial Reporting Standards Council should have one member drawn from the academic world to provide a balance to stakeholder influence. All pertinent documents should be tabled in Parliament to assist oversight. Non-profit companies should also be subject to an audit process. Greater scrutiny of State Owned Enterprises (SOEs) was needed.

Ms F Mahomed (ANC) noted that the language of the Bill should address gender issues. She proposed that clause 50 should include the need for one qualified individual to serve on the Council.

Mr D Dlali (ANC) stated that auditors should answer questions at Annual General Meetings to promote transparency. He asked whether the Independent Regulatory Board for Auditors (IRBA) would monitor audit committees to ensure compliance.

Mr L Laubschangne (DA) referred to categories of exemption from audit committees and asked how the threshold for exemption would be determined. He asked whether a complaint rejected by an audit committee could be sent to the IRBA on appeal. The Bill should not be too prescriptive.

Mr Sibanda declared that limited interest companies were exempt from the stipulation to establish audit committees. Amendments arising from submissions would be referred back to the Committee for consideration. Checks and balances would be introduced to protect the interests of shareholders when companies provided own capital for share acquisition.

Mr M Netshitenzhe (Director-Commercial Law and Policy) noted that audit committees tended to be formed by Board members in practice with varying degrees of financial interest. The question to consider was whether audit committees should invite outsiders to become members. Qualification standards should not be set for audit committees. Audit committees had to comprise non-executive directors.

Prof Turok reminded Members of practices in the United States where executive directors provided bonuses and share schemes to themselves. The danger lay with the awarding of extra bonuses and non-executive directors could also have a similar interest in manipulating the audit process.

Mr S Njikelana (ANC) concurred that audit committees needed some qualified individuals to render expertise on relevant matters. He asked whether the inclusion of non-Board members would assist the process. The audit committee could remain independent with members that had financial interest in the company concerned.

Mr Sibanda reminded Members that the purpose of the audit committee was to maintain an arms-length relationship with management and monitor the audit process. The Bill advocated that all members of the audit committee should be non-executive directors as executive directors had a financial interest in the company. Outsiders may not have the well-being of the company at heart whereas non-executive directors possessed some interest in the company’s stability. A balance was needed between the rotation of the individual auditor verses the accounting firm. The rotation of firms might not achieve the desired objectives. Firms would know that a new client would be acquired after a certain period of time that would hinder competition. The rotation of firms was the current practice.

Mr Mutwa (DTI-Policy and Legislation) noted that the Auditor-General rotated firms within the public sector and proposed that an extensive study was required to evaluate the merits of the two options.

The Chairperson suggested that the presence of an outsider could strengthen the value of audit committees. He referred to the audit committee of the Robben Island Council that consisted of predominantly outside individuals to provide expert advice. Outsiders would not be tempted to keep matters quiet if problems arose.

Dr Rabie agreed that outsiders could add value to audit committees and proposed that the particular circumstances of each company should be analysed to determine the type of appropriate audit committee.

Ms D Ramodibe (ANC) requested an example to understand the concept of "independence".

Mr S Rasmeni (ANC) noted that certain submissions had advocated the inclusion of an executive director to an audit committee and asked whether the Department could clarify the issue.

Mr Njikelana asked whether the inclusion of external members to audit committees would add value to the process. The distinction between tax advisors, accounting and auditing had to be clearly demarcated. He asked for an example of an exemption of audit requirements and whether the issue of foreign public companies had been adequately dealt with.

Mr Sibanda reasserted that audit committees were designed to provide independence to the audit process. The presence of outsiders on an audit committee would be acceptable if it was in the best interests of the company. Audit committees could hire consultants to carry out certain functions that contributed to the efficacy of the process. The IRBA would determine the appropriate function for auditors.

Mr Netshitenzhe stated that the subsidiaries of foreign companies domiciled in South Africa had to comply with the legislation if the subsidiary fell within the public interest company parameters. Such a subsidiary would be regulated in the normal manner.

Mr Sibanda declared that limited interest companies had to comply with the existing accounting framework.

Mr M Lepaku (Director-Policy and Legislation) stated that Schedule 4 of the Company’s Act allowed for the avoidance of standards in certain circumstances. The Bill was intentionally less onerous for limited interest companies and would clearly define the accounting framework.

Prof Turok advocated that all companies and non-profit organisations should employ qualified bookkeepers from the beginning to avoid costly repercussions in future.

Mr Laubschangne sought clarity on the definition of categories of exemptions for audit committees and asked whether management issues would also be included in the assessment process.

Mr Lepaku stated that the Bill would not impose the need for an audit committee on limited interest companies.

Mr Netshitenzhe declared that the Minister’s discretion would not be unfettered in terms of corporate governance.

Mr Sibanda stated that the Department was not against the inclusion in principle of an outsider in the Council.

Mr Lepaku stated that the Bill made no mention of the internal audit process.

Mr Sibanda declared that the corporate law reform process would deal with the issue of non-profit companies. Audit committees would remain solely composed of non-executive directors whereas the Council could include certain experts to promote efficacy. Auditors had to account to shareholders at Annual General Meetings and act in the best interest of the company.

Mr Mutwa added that questions to auditors should not be provided prior to meetings and answers should be limited to the scope of the audit report.

Mr Lepaku stated that the Company’s Act stipulated that auditors had to report to shareholders. The audit committee did not require financially literate members to complete its duties.

Prof Turok declared that the legislation should clearly state that external auditors could not be involved in the internal audit process.

Mr Sibanda replied that Clause 25 prohibited external auditors from conducting internal audits. Audit committees could deal with complaints in an objective manner. However, complainants had the right to approach the IRBA if necessary. The IRBA would determine the rules for audit committees.

Mr Netshitenzhe stated that a political decision was needed in respect of SOEs to provide guidance on the appropriate audit process.

Mr Mutwa asserted that the legislation would only apply to an SOE if shares had been offered to the public. The corporate law reform process would consider the issue of appropriate thresholds to determine the public interest aspect of a company.

Mr Lepaku added that SOEs were established by specific Acts that contained certain provisions and were subject to the Public Finance Management Act that contained different requirements to the Company’s Act.


Prof Turok noted that the Auditor-General had expressed the opinion that SOEs should be audited by his department as opposed to private auditors. The issue of SOE reporting had to be debated by the Committee in future.

Technical Issues presentation
Mr Sibanda provided detail on the technical aspects of the submissions. Comments were expressed on the definition of a public interest company, attendance of auditors at Annual General Meetings, accounting standards, the composition of audit companies, rotation of auditors and the functions of audit committees.

Mr Dlali asked for clarity on the nature of the sanction for the failure of a company to comply with the reporting standards.

Mr Sibanda stated that the Department would consider the nature of the sanction and ensure that a consistent approach was adopted.

Mr Rasmeni asked why audit committees should only contain non-executive directors. He asked why the perception prevailed that one executive director on an audit committee would tend to dominate the others.

Mr Sibanda responded that the executive director had the potential to unduly influence the audit committee’s opinions to the detriment of independence.

The Chairperson declared that the Department would include all relevant comments and points of view in the Bill to be presented to the Committee for deliberation.

The meeting was adjourned.