SUBMISSION BY MR. SALEEM KHARWA, PRESIDENT OF THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF SOUTH AFRICA (CPA SA) TO PARLAIMENTARY PORTFOLIO COMMITTEE ON FINANCE

 

Chairperson and honourable Portfolio Committee Members, my name is Saleem Kharwa, I am the President of CPA(SA). I would like to introduce my fellow colleagues: Vice-Presidents – Jan Bothma and Mike Bester, senior members Papa Mkwane and Mary-Ann Dougan, our consultant Dr David Venter our Technical Executive – Nicolaas van Wyk, the Chief Operating Officer – Elsabe Conradie and our Chief Executive Officer, Shahied Daniels who heads the Institute.

 

On behalf of the members of my institute, I wish to congratulate the Minister of Finance, the National Treasury and the Ministerial Review Panel, for the outstanding task that they have performed in drafting this very important bill. They have admirably succeeded in achieving the objectives, to which they aspired. With the exception of a very few issues, which, in our humble opinion, detract from the intended focus of this bill, it constitutes a major step forward when compared to current legislation. Not only does it address many of the concerns we raised with regard to previous versions, but also most importantly, seeks to address the root causes of many of the corporate collapses experienced during the past decade.

 

Although we will be proposing an additional number of minor amendments, these amendments, should not be construed as opposition to the bill, but should rather be seen as our desire to assist the committee in further sharpening its focus. In our view, it is extremely unfortunate, that certain terms from the Public Accountants’ and Auditors Act, seem to have inadvertently been transferred to this bill. These terms create the impression, that the bill intends to regulate all financial and non-financial opinion and assurance providers; whereas this clearly was not the intention of the drafter, given, the very explicit title of the bill. We humbly submit, that had this been the intention of the drafter, the title of the bill would more likely have been something in the nature of the Assurance Profession Bill.

 

Having carefully studied the bill in the light of the objectives it aspires to achieve, we have come to the conclusion that the drafter, despite the inclusion of the aforementioned terms from the Public Accountants’ and Auditors’ Act, did not seek to create an all-encompassing regulatory framework, but only intended to focus on the regulation of the external audit of a public accountable entity’s financial statements. In our view, it is unthinkable that the drafter sought to negate the critically important need to distinguish between the regulatory environment required for public accountable entities, and the enabling environment required for non-public entities, as such an approach would clearly result in restricted access to accountancy services, and consequent unbearable cost burdens for non-public entities. This would effectively limit the opportunities for empowerment.

 

We believe, that our concern in this regard, is echoed by the recent establishment of a Developing Nations Task Force, by the International Federation of Accountants (IFAC), and the following statement of intent, emanating from the APB in the United Kingdom in respect of the assurance requirements of small entities: I quote from Media release on 17 December 2004: Complete Ethical Standards for Auditors

"The APB is conscious of the inexorable increase in the complexity of accounting, auditing and ethical standards and the burden that these place on small companies and their auditors. (The) APB is therefore commencing a project to re-evaluate the needs of small companies and the users of their financial statements with a view to introducing a new form of assurance that is tailored to their needs."

 

Chairperson, we submit that, in our humble view, it would be contrary to the stated intention of accelerated economic growth to ignore the different forms of assurance that are prescribed in various pieces of legislation, and are well established in our business environment. Adopting an approach of, "one size fits all" would undoubtedly have a very adverse effect on small business development; the undisputed engine of sustainable high economic growth.

 

The inclusion of the term "public accountant" in section 41 of the bill, is particularly confusing as to the manner in which it is defined. Contrary to the clearly stated objective of the bill to regulate the external auditing profession, it creates the impression that the drafter has not taken into consideration that auditing is only one of a number of disciplines of accountancy. Left unchanged, the inclusion of this term may, contrary to what we believe the drafter intended, prevent all professional accountants currently, not registered as auditors, from operating in public practice after the bill is promulgated. In our humble opinion, the object of this bill is to regulate the audit services and functions performed by the external auditing profession, not to regulate the non-audit services and functions offered to the public for a fee by registered accountants.

 

Without in any way seeking to detract from this very important piece of proposed legislation, we therefore submit, that the bill would be enhanced, if this confusing term were removed from the bill, and consideration was given to the possibility of developing an additional bill, that specifically seeks to deal with the non-audit disciplines, within the overall accountancy profession. This term has no function specifically designed to regulate the auditing profession.

 

Chairperson, unfortunately, the difficulty relating to the term "public accountant", is exacerbated by the definition given in the bill for the term "public practice". As it currently stands, this definition implies that no professional persons, other than registered auditors will, after promulgation of the bill, be permitted to place "professional services", related to the accountancy profession, at the disposal of the public for reward. In our view, this would extend the reach of this bill, way beyond what was intended by the legislator, as embodied by the Honourable Minister of Finance in his 2002 budget address. I quote:

"The issue of corporate governance and in particular the role of auditing firms has once again dominated headlines. The ENRON debacle has brought into sharp review a number of key issues – weak or non-existing governance structures, the fiduciary responsibility of directors, negligent and sometimes reckless management, ineffective auditing, independence of auditors, and conflicts of interest arising from inadequate separation between auditing and consultancy."

 

We submit, that in order to facilitate legitimate business activity, whilst simultaneously preventing stakeholder abuse, this bill should:

 

Chairperson, we are of the view that, any legislation affecting business entities should take cognisance of the distinction between widely held entities, where there is a separation between the owners and management, and closely held entities, where the owners generally, also constitute the management. Differentiating between such entities is, in our view, crucially important in terms of enhancing public protection and investor confidence. Imposing a high-level assurance framework on the overall business environment, would in our view, be counter-productive, as it would ultimately lead to an unacceptable increase in the cost of doing business in our country. This would undoubtedly have a very adverse effect, on small business development.

 

As the second largest accountancy institute in South Africa, with a membership of 5 000 (excluding students and other associates), of which 78,5% are in public practice as professional accountants, providing non-audit services to the general public, we are fully dedicated, to serving all the people of our country, in a manner that is aligned to their diverse needs. As in the case of all other institutes, we are involved in an irreversible process of ongoing radical change, to ensure that our membership, organisational structures and staff, reflect the demographics and dynamics of the market we serve. We are currently developing and implementing strategies and plans, to ensure that our current black membership of 15% is rapidly increased, by inter-alia, encouraging black learners to enter the accountancy profession.

 

In conclusion, I wish to reaffirm my institutes support for this bill, but also humbly request the committee, to grant us our rightful place in the accounting profession alongside auditors, as this will ensure that all entities in our business community, be they small or large, are afforded the full spectrum of accountancy services. We are fully committed to playing our part in advancing economic development in our country, and further a field, in our continent.

 

In our submission to the Committee a synopsis of our recommendations appears on pages 54 – 58, and our supporting documentation from page 59 onwards.

 

In summary, we support the following objectives of the Bill:

 

 

I thank you.

 

 

Saleem Kharwa

President CPA (SA)