DELOITTE & TOUCHE
September 2005

1. The Bill provides for the control and disciplining of auditors. It provides little protection for the auditor who fearlessly and honestly performs his or her duties thereby protecting the public interest and achieving one of the prime objects of the Bill.
   
2. The ability of an auditor to perform an effective audit is dependent in large measure on receiving complete and comprehensive information on all aspects impacting on the financial affairs and situation of the enterprise concerned or on other aspects that should be disclosed to interested stakeholders. There should be a requirement in the Bill for directors, officers and employees of enterprises being audited to make timely and adequate disclosure to the auditors of all relevant information.
   
   The Bill should make it an offence to withhold any information that is material or important from an auditor, or to provide an auditor with incorrect, misleading or incomplete information. The Bill should also set out the potential fines and imprisonment for these offences.
   
   In our view, these should be no less than those set out in section 52 of the Bill. Losses and misstatements usually arise from the actions of directors, officers and employees. Therefore, there may well be merit in having greater potential fines and imprisonment for directors, officers and employees who are guilty of an offence than those set out in section 52.
   
3. The directors, officers and employees of an enterprise being audited will collectively have the full and comprehensive knowledge of what has taken place in that enterprise. Where any director, officer or employee has perpetrated, or is party to, any fraud, misrepresentation, inaccurate or inadequate disclosure in financial statements or in other relevant documents, reports or communications, he or she should be exposed to liability at least no less than that to which the auditor is exposed. This should be catered for in the Bill or in other appropriate legislation that is processed at the same time as the Bill.
   
4. The original bill envisaged the possibility of a multidisciplinary firm in which some of the partners or directors would not have to be registered auditors. This recognised the reality of the skill levels that audit firms need to possess to be able to effectively audit complex enterprises. For example, a large commercial bank with thousands of ATMs, and which provides internet banking, will require people in the audit team with a very high level of specialised skills in computer hardware and software, internet and network security, controls and other elements.
   
   Therefore, the specialist skill levels that an audit firm needs will cover taxation, information technology and several other areas that registered auditors often do not have. The Bill should allow a proportion of the total partners or directors of an audit firm to be people who are not registered auditors.

Notwithstanding the above comments, we believe that such partners or directors should be subject to the requirements and disciplinary steps of the Independent Regulatory Board for Auditors (IRBA) as if they were registered auditors. The fact

that many audit firms already have such people who are classified as "principals" or "directors" but who are partner equivalents strongly supports our contention.


5. The original bill envisaged the possibility of practising in a form that has limited liability provided that the audit firm had professional indemnity insurance cover to a level satisfactory to the IRBA. A number of other countries allow for a limited liability partnership. This, or a similar form, should be allowed in South Africa.
   
   In terms of the current Bill, a firm may practice as an incorporated company provided that section 53 (b) of the Companies Act is complied with. This means that all directors of that incorporated company have unlimited liability in respect of liabilities contracted whilst they were directors. The courts have decided that the directors of such a company have no liability for any damages that may be awarded against the company for negligence or other claims.
   
   In light of this, allowing audit firms to practice in a form that has limited liability will not prejudice clients, third parties and other claimants provided that such audit firms have adequate professional indemnity insurance.
   
   Notwithstanding the above, we consider that there should be no limitation on liability in respect of individual registered auditors who are guilty of wilful deceit, fraud or gross negligence.
   

1. Definition of "reportable irregularity"
   
   We are concerned that the current definition is unworkable and could have significant unintended adverse consequences. It will not be feasible, in virtually all instances, to determine whether or not an unlawful act or omission is material to a member, shareholder, creditor or client as this will require detailed knowledge of the financial situation of each such person.
   
   Is it really the intention to expect an auditor to report very small items? For example, a delay in the IDC paying a contractor R1,000 beyond the 30 day period mentioned in his quotation could be material to that contractor. The current definition would require the auditor to report this as a reportable irregularity. A flood of such reports would cripple the operation of the IRBA and would provide a major obstacle to the functioning of commercial activities.
   
   We recommend that a reportable irregularity should require to be reported only if the matter is material in the context of the financial information of the entity being audited.
   
   We are also concerned that the term "or is otherwise dishonest" is vague and open to varying interpretations and application. The intended meaning should be more accurately defined or the term should be deleted.
   
   
   
   Paragraph (b) does not indicate a materiality consideration. As a result, even the most trivial item would be included in this definition. For example, an unauthorised
   private telephone call or the use of a gem clip for personal purposes would be a
   reportable irregularity. This is patently absurd.
   
2. Functions of Regulatory Board
   
   Section 4 should provide for the IRBA to protect and support auditors who perform their duties properly and fearlessly.
   
3. Governance of Regulatory Board
   
   Section 11 (5) does not cater for what action needs to be taken if nominations received exceed the available positions. The act should be drafted so that it can cater for all possible situations.
   
4. Disqualification from membership and vacation of office
   
   Section 13 (1) (f) should require the improper conduct to be of a serious nature, otherwise it is unnecessarily restrictive and punitive.
   
   For example, failure to answer correspondence on a timely basis is improper conduct in terms of the current Code of Professional Conduct of the Public Accountants’ and Auditors’ Board. If a registered auditor did not answer a letter because his secretary had misplaced it, this section would prevent that person from serving on the IRBA if a complaint had been lodged against the registered auditor - even if this had happened 20 years previously.
   
5. Chairperson and Deputy Chairperson
   
   Section 14 (1) (b) indicates that the Chairperson and Deputy Chairperson each hold office for a period of two years. Is it necessary to be prescriptive in the act? We feel that it would be preferable to leave it to the discretion of the IRBA.
   
6. Delegations
   
   Section 19 (3) gives the IRBA the power to confirm, vary or revoke any decision by a committee.

We feel that this power should not apply to decisions made by the disciplinary committee.

Firstly, the disciplinary committee will be headed by a judge or senior advocate and will be seen to be independent of the IRBA - a positive factor.


Secondly, if the IRBA has this power, it is probable that every disciplinary committee decision against a registered auditor and, possibly, several decisions in favour of a registered auditor will be "appealed" to the IRBA. This will be unnecessarily time-consuming and counterproductive.


8. Disciplinary committee
   
   Section 24 (b) indicates that the committee must consist of a majority of "non-registered auditors". There is no definition of a non-registered auditor. What is probably meant by the Bill is that the committee must consist of a majority of people who are not registered auditors.
   
   A number of the hearings that come before the disciplinary committee will very likely require a thorough understanding of audit principles, requirements and standards. Accordingly, the disciplinary committee should have a reasonable number of registered auditors as its members - probably 40%. However, at present the Bill does not require any registered auditors to be part of the disciplinary committee.
   
9. Retaining accreditation
   
   Section 34 should refer to the requirements for accreditation listed in section 33 and not 34.
   
10. Termination of registration
    
    Section 38 (1) (a) refers to any disqualification mentioned in section 37 (2). This reference should be to section 37 (3).
    
11. Renewal of registration
    
    Section 39 (1) is unnecessarily cumbersome and onerous. We question whether there is any benefit to be obtained in having a statutory requirement for a registered auditor to apply for renewal of registration at least three months prior to the expiry date of his or her registration. This will require every registered auditor to apply every year for renewal of registration.
    
    Surely it would be adequate for the Bill to require registered auditors to be registered with the IRBA. The IRBA, in its regulations, could require that all members must renew their registration and pay their subscriptions within the period stipulated by the IRBA.
    
12. Practice
    
    Section 41 (3) (a) implies a restriction on the use of the term "accountant". The word "accountant" is a generic description and should not be a restricted title.
    
    Section 41 (4) (c) requires the IRBA to consent to the employment by a registered auditor of any person who applied for registration under section 37 but whose application was declined. This consent should require to be obtained only when the application was declined because the IRBA considered the person:
    - not to be a fit and proper person to practice the profession, or
    - not competent to practice as a registered auditor.
    
    
    
    
    There is no logical reason or justification for requiring the IRBA to give its consent before a registered auditor can employ a person who had applied to the IRBA for registration but was declined because:

- he or she had not yet completed all the education and training required, or
- he or she had not served the prescribed period of training, or
- he or she had not yet passed the examinations prescribed, or
- he or she had not joined an accredited professional body.


13. Information to be furnished
    
    Section 43 (3) refers to "the auditor’s firm" in subsection (2) but there is no such wording in that section.
    
14. General obligation in relation to audit services
    

13.1 Section 44 (1) addresses the requirements for an auditor to report that financial statements fairly present the financial position of an entity and the results of its operations and cash flows and stipulates that the auditor needs to be satisfied about certain criteria to do so.

Section 44 (2) (g) stipulates, as one of the criteria, that the registered auditor needs to be satisfied as to the "fairness or the truth or the correctness" of the financial statements. The concepts of "fairness", "truth" and "correctness" are a carryover from old legislation, but are not defined in the Bill or in auditing standards. In addition, they are not terms that are in common use at present.

International Auditing Standards indicate that auditors can report that financial statements "fairly present" only in relation to suitable criteria. The term "suitable criteria" in this context usually indicates a published framework such as the International Financial Reporting Standards.

In light of the above, we recommend that Section 44 (2) (g) be amended accordingly, or that it be deleted as this requirement is adequately covered by Section 44 (2) (a) which requires an auditor to comply with auditing pronouncements.


13.2 Section 44 (5) indicates that a registered auditor may not conduct the "audit services of any financial statements …" What is meant by "audit services of any financial statements"? This term is not defined nor is it in common use.


13.3 Section 44 (5) requires that both the audit firm and the individual registered auditor who is to head up the audit must have been free of any conflict of interest throughout a two year period ending at the start of the financial year to the audited. This can have serious unintended adverse consequences and could result in some major financial institutions being unable to be audited by any auditor.

In a number of countries, having a financial interest in a company or in one of its affiliates would be regarded as constituting a conflict of interest. If this is to be applied in interpreting this section, then neither the firm nor the registered auditor who is to head up the audit should have had any financial interest in the company or its affiliates for the two years prior to the start of the current financial year.

Financial interests can comprise shares or debentures in the enterprise; loans from or to the enterprise concerned; an interest in any insurance policy that the enterprise may have issued; a current or savings or deposit account with the enterprise; units in any unit trust administered by the enterprise or by one of its subsidiaries; a common business interest with the enterprise or with any of its directors or officers; and a number of other situations. Furthermore, the financial interests of a spouse or dependent of a registered auditor are usually regarded as the financial interests of the registered auditor.

In light of the above, it may be very difficult, or impossible, to find an individual or firm that would be able to meet the criteria to serve as auditor for one of the major commercial banks or insurance companies.

If a change in auditors werecontemplated, the audit firm and individuals involved would have to take steps to place themselves in the position to accept the audit by divesting themselves of all financial interests at least two years prior to becoming eligible to accept the audit. This often may be unrealistic and impractical.

Furthermore, if the Bill were enacted as currently drafted, we question what could be done in reality about existing auditors to the commercial banks and insurance companies who would likely not meet these restrictive criteria? (For example, because the audit firm or the person heading up the audit had shares in Old Mutual or an account with Standard Bank).

There is a risk that a conflict of interest of a trivial or very minor nature may be discovered once an audit has been completed. For example, the spouse of the registered auditor who heads up the audit could inherit a small number of shares in a commercial bank audit client. Would the law then require the audit to be redone? If so, the consequences would be devastating, expensive and extremely time-consuming.

Apart from the very real practical difficulties that there would be in meeting the requirements of this section of the Bill as currently drafted, these requirements provide an unreasonable hurdle to the working of free-market principles. The shareholders or directors of an enterprise should be able to choose the auditors.

In our opinion, the independence requirements for appointment as auditor should be decided on by the IRBA acting through the Committee for Auditor Ethics and only after adequate research has been done. Great care will have to be taken to ensure that there are no unintended adverse consequences - otherwise damage could be done to individual companies, the capital markets and the economy.


15. Duty to report on irregularities
    
    Section 45 (3) (c) requires the sending of another report to the "Regulatory Authority". It appears that "Regulatory Board" was intended.
    
    There are a number of reporting requirements in terms of other legislation and regulations, including the Banks Act, the Financial Advisors and Intermediaries Act and the Pension Fund Act. The Bill should cater for this and require a copy of the
    
    report, or the portions thereof, that overlap with the reportable irregularity requirements, to be submitted to the IRBA.
    
16. Limitation of liability
    
    Section 46 (6) indicates that a registered auditor "may" incur liability to any partner, member, shareholder, creditor, or client of an entity or to any third party if the registered auditor fails to report a reportable irregularity in accordance with section 45.
    
    A fundamental foundation of our law is it that there needs to be causation before any liability can arise. If the above section is to remain, then it needs to be redrafted on the basis of liability arising for losses or damages actually caused by the auditor failing to report a reportable irregularity.
    
    As currently drafted, the failure to report the late payment to a small contractor (referred to as an example in paragraph 1 above) could expose the registered auditor to claims for any liability of the enterprise audited or damages by any other party that were not caused by, or have no relationship whatsoever to, the irregularity that the auditor did not report. Auditors should not be regarded as the insurer of last resort for any losses or damages that any party incurs from any cause whatsoever.
    
    Section 46 (7) prohibits the auditor from limiting liability in respect of any opinion expressed or report or statement made in the ordinary course of duties. Whilst we have no problem with this in respect of audits and audit reports issued, we cannot agree that an audit firm should be prevented from limiting its liability for those type of activities where it common practice in the industry to limit liability and where competitors have no restrictions on doing so. (For example, corporate finance services, software development and consulting services).
    
    This clause should be amended to indicate that liability may not be limited in respect of audits or audit services provided.
    

16. Inspections

• An initial, voluntary, inspection conducted on a once-off basis within three years, arising from which a confidential report would be provided to the participating registered audit firm (the Firm), giving the Firm up to 24 months
  
  
  to rectify any deficiencies noted.
  
• Thereafter, a regular inspection process, arising from which the IRBA would issue both a confidential report on specific deficiencies to the Firm and a public report on the level of compliance evidenced by the Firm, which could include any deficiencies deemed by the IRBA to be in the Public Interest.

• The IRBA be permitted to make copies of all or any reports to foreign regulators who have been recognised by IRBA and who have a legitimate interest in the reports.
  
• The IRBA communicates the findings of the inspection process to a designated official of the Firm, including the findings on individual registered auditors.