ASSOCIATION FOR THE ADVANCEMENT OF BLACK ACCOUNTANTS OF SOUTHERN AFRICA

SUBMISSION OF THE ASSOCIATION FOR THE ADVANCEMENT OF BLACK ACCOUNTANTS OF SOUTHERN AFRICA TO THE TRADE AND INDUSTRY PORTFOLIO COMMMITTEE

26 MAY 2006

1. INTRODUCTION

1.1. The Association for the Advancement of Black Accountants of Southern .Africa (ABASA) is a national organisation which was formed in 1985. Its objectives amongst others, are to advance the interest of black accountants and most importantly to attract blacks into the accounting profession. It engages in a number of projects that facilitate the smooth entry of blacks into the profession. Its overall agenda is therefore that of transformation of the accounting profession so that it should ultimately reflect the demographics of the population of South Africa. Its membership is diverse; it includes students, members in public practice (auditors), accountants in commerce and industry.

1.2 ABASA continues to play a significant role in positively influencing the economic landscape within which its members operate. It is in this context that we have prepared this submission to convey the views of ABASA in the review of the corporate laws as these have a direct impact on our members and the larger economic landscape.

1.3 We believe that any review of legislative framework should take into account the broader transformation agenda of the country (impacting mainly on social and economic landscape). It should also take into account best practices in affected areas. We believe that there is scope for some of the provisions of King II to be incorporated in the corporate law framework.

1.4 ABASA appreciates the positive steps taken by the department of Trade & Industry in advancing the corporate law reform process. We agree and support the substantive proposed amendments as we believe they will have the impact of strengthening the overall company governance framework.

1.5 In addition, the reform process will result in modernising our corporate legislative framework to take cognisance of advances in communications technologies and worldwide developments in the corporate governance arena.

1.6 Our comments below are detailed along key themes that are materially affected by the proposed changes to the corporate laws.

BLACK ECONOMIC EMPOWERMENT

2.1 We fully support various government initiatives in transforming the economic landscape of our country, specifically as far as it relates to the economic empowerment of black people. The current prohibition of companies to financially assist in the purchase of its own shares places an additional hurdle in structuring empowerment deals. We therefore appreciate the proposed relaxation of provisions relating to financial assistance by companies for the purchase of its own shares. We are also satisfied with the solvency safeguards that are being proposed.

3. AUDIT COMMITTEES

3.1 Audit committees play an important role in governance of companies. It is imperative that they are effective and are not merely there to satisfy legal requirements. Various factors impact on the effectiveness of the audit committees, including, but not limited to independence, skill and experience, frequency of the audit committee meetings, regular attendance of the audit committee meetings by its members, etc.

3.2 We support the annual appointment of audit committee members and that it would comprise a majority of non-executive directors or suitable qualified persons.

3.3 We respectfully submit that audit committee members should be selected with regard to experience and skill. At least one of the members should be a Chartered Accountant. This is important to ensure that the committee is competent to deal with relevant issues.

3.4 Provision should be made that the board of directors may co opt members who are not necessarily board members but are co-opted because of their unique skill. Should the board elect to have co -opted members, the chair of the audit committee should be a non executive board member. This is to ensure that the right accountability levels are maintained.

3.5 The bill specifies that the audit committee members must act independently. We believe that independence of the members should be in the context of King n. At least one of the audit committee members should be an independent member as envisaged in King n i.e. the person should not be a representative of a significant shareholder and should not be a significant supplier or customer of the company.

3.6 The bill makes allowance for the minister to exempt certain categories of companies from having an audit committee. We believe that this is not desirable as it will have the impact of weakening the governance structures. If these powers are to be granted, then we believe that details of circumstances under which theses powers can be exercised must be clearly spelt out.

3.7 We support the proposal that the financial statements must include a report of the audit committee. In addition of the matters detailed in the bill, the audit committee report must also pronounce on the effectiveness of the system of internal controls that the company has implemented to prevent and detect material fraud and error in financial records. This will contribute to a higher level of accountability of the audit committee.

4. AUDITOR INDEPENDENCE

4.1 Lack of impartiality by the auditors was prevalent in some of the high profile reported corporate failures. We therefore support measures taken to ensure that the auditor acts impartially with the regards to matters affecting his client. The bill proposes that audit partners should be rotated every five years to enhance auditor independence.

4.2 We however believe that this does not adequately address auditor independence. There have been extensive debates both locally and worldwide as to how to best approach this matter. The question is whether to rotate audit partners or rotate audit firms. We humbly believe that this matter must be comprehensively re-examined. The preferred approach is to have a well defined framework which is uniformly applied to all players in the economy.

4.3 The practice of some state owned entities is to rotate audit firms. The Office of the Auditor General also practices the principle's of rotating audit firms in contracting out work to private firms who perform work on its behalf: This is a much stricter approach that the one proposed in the bill. This approach only impacts some players in the economy (public sector). We strongly suggest that it is imperative the governance framework in the private and public sectors be harmonised throughout the economy.

4.4 The policy of rotation of audit firms might have the positive result of opening opportunities to more accounting firms thus encouraging healthy competition. This might be a catalyst to develop accounting firms outside the big four firms as other firms gain opportunities that they would not otherwise be exposed to . We see this as assisting in development of particularly emerging black accounting firms.

4.5 We support the concept of audit committees approving the performance of non audit services by the auditor. We however believe that this must be done under very strict conditions. We propose that the approval should take place before such services can be provided. (Pre-approval). In addition the act or regulations should give more guidance as to the nature of services that are permissible. We respectfully submit that only assurance type services should be permissible.

5. FINANCIAL STATEMENTS

5.1 We fully support the introduction of legal backing for compliance with the prescribed accounting standards. This will empower the auditors to be able to deal effectively with issues of non-compliance with the financial reporting standards. It may also result in the company officers taking their financial reporting responsibility more seriously

5.2 The bill requires a public interest company to comply with the financial reporting standards. On the other hand it requires the limited interest company to comply with the framework of financial reporting standards. There is no clarity as to the actual difference in the requirements. More clarity is needed either in the definition section of the act or in the body of the act by way of expansion.

5.3 The bill allows the option of limited interest company not to consolidate financial statements. It also requires the limited interest company to prepare its financial statements to comply with the framework of financial reporting standards. The latter does not however give the option not to prepare the consolidated financial statements. This inconsistency has to be addressed.

6. AUDITORS

6.1 We believe that the law should create right of access to people charged with governance of companies. The auditor should have the right to attend all audit committee meetings. He should have an unrestricted right to the chairperson of the audit committee and also to the chairperson of the Board.

6.2 The bill makes it compulsory for the auditor to attend the annual general meeting of a public interest company. On the other hand he can only attend the annual general meeting of limited interest company by invitation. We respectfully submit believe that there is no basis for the inconsistency. The law should at least grant the right of the auditor to attend the annual general meeting of company including limited interest company

7. SCHEDULE 4

7.1 The bill attempts to define various accounting terms. We respectfully submit that is not necessary to include accounting definitions in the act as this is adequately catered for in the international financial reporting standards. This is especially important as the accounting fraternity is constantly changing and these changes might impact on the definition of the accounting terms. It may be impractical to deal with all substantive definitions and explanations of accounting terms.

8. CONCLUSION

8.1 We believe that this bill will significantly enhance corporate governance standards and we commend government for this initiative.