Audit Profession Amendment Bill: briefing

NCOP Finance

02 February 2021
Chairperson: Mr E Njadu (ANC)
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Meeting Summary

Video: Select Committee on Finance, 2 Feb 2021

The Select Committee convened an online video conference for a briefing by the National Treasury on the Audit Profession Amendment Bill which provided background, explained the Bill clauses, the queries arising from the public submissions and Treasury’s responses to these submissions.

The Amendment Bill deals with the following matters:
● The strengthening of the governance of the board
● The strengthening of investigating committee
● The disciplinary and enforcement committees
● The registration requirements for auditors
● The reporting of irregularities by auditors
● Referrals of non-audit matters
● Enhancing investigating processes
● Enhancing disciplinary processes
● Sanctions following adverse findings
● Offences and protection of information

The public submissions raised seven key issues:
● Governance matters
● Disciplinary committee and panels
● Referral of non-audit matters to professional bodies
● Search and seizure powers
● Sanctions: the determination of maximum fines
● Reconsideration of disciplinary decisions
● Protection and disclosure of information

Members asked about the Minister and Parliament's role in the IRBA board appointment process; the prohibition from removing a firm's auditor who finds and reports an irregularity to IRBA until that reporting process is finalised; the incorporation of African-based knowledge as opposed to South African's Eurocentric approach of using judges and Roman Dutch Law when creating IRBA systems such as the  disciplinary committee chairperson; if the minimum four IRBA board meetings are quarterly or convened as the need arises – the answer was the latter.

Meeting report

The Select Committee on Finance was joined by the following officials from National Treasury:
● Ms Karen Maree (Acting Accountant-General)
● Adv Empie van Schoor (Chief Director: Legislation)
● Adv Ailwei Mulaudzi (Director: Fiscal and Inter-governmental Legislation)
● Ms Jillian Bailey (IRBA Director: Investigations).

As Mr Carrim had to leave the Committee meeting early, the Committee  elected Mr Njadu as the Acting Chairperson to act in his stead.

Mr Y Carrim (ANC) noted that the media had reported on the Minister disbanding the Independent Regulatory Board for Auditors (IRBA) board. It appeared that there was some “unhappiness” with the new CEO and/or board members. At some stage National Treasury needed to explain to the Committee what was going on about this. South Africa had repeated reports from the relevant international authorities giving recognition and credit to South Africa's high auditing standards, despite all the “wrongdoing”. IRBA was highly regarded globally. “This was quite a clamp down”. The Committee was fully behind these amendments to ensure that IRBA had more power to sanction and investigate transgressors as auditing firms, locally and internationally alike, were having a field day contravening auditing standards, and companies were “running riot, so to speak". Many countries, including the US and UK, were tightening up laws applicable to auditors, and giving more power to the auditing associations to act decisively against delinquent auditors and audit misconduct.

Mr E Njadu (ANC) took over as Acting Chairperson and said the Committee would immediately proceed to the Treasury briefing.

Ms Karen Maree, Acting Accountant-General, introduced the Treasury delegation and asked Advocates van Schoor and Mulaudzi to proceed with the presentation.

Audit Profession Amendment Bill: briefing
Adv Empie van Schoor, Treasury Chief Director: Legislation, said that the presentation would focus on the background and overview of the Bill, as well as the public submissions and responses by Treasury and IRBA. The Committee had before them the version of the Bill as passed by the National Assembly (NA). The text of the Bill was already prepared showing all the amendments that the NA made so that it is easy to read.

Background:
The Act established IRBA as the regulator of auditors and candidate auditors. It regulates registration of auditors and candidate auditors and their education, training and professional development. It requires IRBA to promote integrity of the auditing profession by investigating alleged improper conduct, conducting disciplinary hearings and imposing sanctions for improper conduct.

The Amendment Bill proposes amendments to the Auditing Profession Act of 2005 to address challenges and limitations that IRBA faces in discharging its regulatory and oversight responsibilities especially in light of recent grave audit failures in both public and private institutions.

During the processing of the Financial Matters Amendment Bill, the Committee decided on 7 March 2019 not to proceed with this Bill since it was not possible to process it due to the limited time available before the Fifth Parliament ended. During the public hearings on that Bill in 2019, certain stakeholders raised concerns about proposed search and seizure provisions. At the Committee’s direction, Treasury engaged these stakeholders (including audit firms) but did not conclude this since the Bill was not proceeded with.

The amendments in the Audit Profession Amendment Bill, tabled in February 2020, are the same as those contained in the Financial Matters Amendment Bill. No language from discussions with the audit firms had been included, partly because, at that point, discussions had not concluded.

Following the Portfolio Committee public hearings on the Audit Profession Amendment Bill conducted in October 2020, Treasury and IRBA consulted the South African Institute of Chartered Accountants (SAICA) and audit firms that had made submissions on key issues. It submitted to that Committee a matrix of the comments and responses and, where applicable, proposed amendments and technical refinements. Some comments were proposed to be considered in a future review of the Act. For example, expanding the scope of the Act to include accountants and providing for the mandatory rotation rule. This is because the Amendment Bill is important and needs to be considered and passed as soon as possible to strengthen the governance of IRBA and to improve investigation and disciplinary processes. The Bill, along with NA amendments, was adopted by the Portfolio Committee on 18 November 2020 and passed by the NA on 2 December 2020.

Overview of Amendments:
Adv Ailwei Mulaudzi, Treasury Director: Fiscal and Inter-governmental Legislation, said the Bill proposes amendments to the Act to (1) strengthen the governance of IRBA, (2) strengthen the investigating and disciplinary processes, (3) provide for the power to enter and search premises and to subpoena persons with information required for an investigation process, (4) provide the Minister with the power to determine the maximum monetary fines, (5) provide for offences relating to investigation and disciplinary process, and (6) provide for the protection and sharing of information.

Strengthening Governance of the Board:
- To ensure that IRBA performs its functions within a defined strategy, IRBA is given power to determine, with ministerial approval, a regulatory strategy, to be made public (clause 2).
- To strengthen IRBAs independence and address conflict of interest of board members – exclude registered auditors and candidate auditors from appointment as board members but provide for audit expertise, through two formerly registered auditors – the Bill provides for two legally qualified persons.
- The Bill prohibits board members from (1) sharing directly or indirectly in profits or interest of registered auditors or a person related to registered auditor and (2) receiving payments, excluding pension benefits, from registered auditors (clause 3).
- The term of board members proposed to be increased from two to three years (clauses 4 and 5).

Strengthening of Investigating Committee (clause 8):
The Bill provides that the Investigating Committee (inspecting conduct by registered auditors and candidate auditors) be independent of the auditing profession. The Committee is to include two formerly registered auditors and an advocate or attorney. It provides for the disqualification for board members and the investigating committee in sharing in profits or receiving payments from registered auditors. This is also proposed for members of the investigating committee.

Disciplinary and Enforcement Committees (clause 9):
Currently the disciplinary committee is overburdened by a number of disciplinary cases.To alleviate the burden on the committee, the Bill proposes to enable IRBA to appoint as many members of the disciplinary committee as it considers appropriate and from these members appoint a panel for every disciplinary hearing. The disciplinary committee is to be chaired by retired judge or senior counsel. A panel is to include at least three persons, the chair being an advocate or attorney and one member being a formerly registered auditor (new section 24B).

The provision of disqualification for board members and the investigating committee in sharing in profits or receiving payments from registered auditors, also applies to members of the disciplinary committee. There is a prohibition on using this position to improperly benefit themselves or someone else or to impede the committees work (new section 24A). To further alleviate the burden on disciplinary committee, the Bill provides for the establishment of an enforcement committee with powers to deal with recommendations made by the investigating committee (new section 24B).

Registration Requirements for Auditors (clause 11):
The Bill proposes an amendment that membership of an accredited professional body is a prerequisite for registration as an auditor or candidate auditor.

Reporting of Irregularities by Auditors (clause 14):
Given the responsibility of auditors to report irregularities to IRBA, the risk of removing relevant auditors exists. Thus the Bill proposes: (1) a prohibition on the removal of a registered auditor before the auditor completes the process of reporting irregularities to IRBA, and (2) that where an individual registered auditor has reported an irregularity and resigns from the firm before complying with relevant section, that that auditor must do the necessary handover to the incoming auditor regardless of when the resignation takes effect.

Referral of Non-Audit Matters (clause 15):
The Bill enables the enforcement committee to refer non-audit matters brought against a registered auditor to a relevant professional body for investigation and disciplinary proceedings where necessary. Non-audit matters must fall within the constitution and the rules of a professional body.

Enhancing Investigating Processes (clause 15):
For investigation into an alleged improper conduct by auditors to be thorough and effective, it is important to expand the powers of the investigating committee. Thus the power to subpoena documents is an important mechanism required to obtain evidence. The Amendment Bill empowers the investigating committee to subpoena an auditor or any other person to submit documents to the committee.

To conduct a thorough investigation into alleged improper conduct by an auditor, it may be necessary that the investigator gains access to premises. The Bill proposes that (1) entry and search is only allowed with consent or a warrant issued by a judge or magistrate, and (2) that powers are exercised with strict regard to constitutional rights as well as decency and good order (new sections 48A and 48B).

Enhancing Disciplinary Processes (clause 17):
To expedite disciplinary procedures, the Bill proposes that if a completed investigation indicates sufficient grounds for an auditor to be charged for improper conduct, the process is either (1) an admission of guilt process by the enforcement committee or (2) referring the matter to the disciplinary committee for hearing. Where the matter is referred to the disciplinary committee, a panel will be appointed for each case instead of the disciplinary committee having to deal with all cases.

Sanctions Following Guilty Findings (clauses 17 and 19):
The Act currently empowers the disciplinary committee to impose a fine not exceeding an amount calculated according to a ratio for five years imprisonment, in terms of the Adjustment of Fines Act, on an auditor found guilty following a disciplinary hearing. Fines which have been so determined, are too low and do serve as an adequate deterrent.

Where an admission of guilt process is followed, the Bill proposes sanctions which may be imposed by the enforcement committee, such as a caution or reprimand, the imposition of a fine not exceeding an amount determined by the Minister on the recommendation of IRBA, or training. This is one of the amendments provided for in the Bill.

The sanctions to be imposed following a disciplinary hearing include the same sanctions that the enforcement committee may impose. In addition to these, the disqualification from registration on a temporary or permanent basis, may be imposed.

Offences and Protection of Information (clauses 20 and 21):
To demonstrate that improper conduct by an auditor is not to be tolerated, the Bill proposes to make it an offence to fail to comply with a subpoena or to interfere with or hinder the business of an investigation. A person found guilty of this offence may be liable upon conviction to fine or imprisonment for a period not exceeding five years, or both.

To safeguard information obtained during performance of functions in terms of the Act, the Bill proposes a prohibition on disclosing information, except where, among other things: (1) it is so required by other legislation, or (2) it is for purposes of referring non-audit matters.

Public Submissions:
The key issues raised in public submissions to the Portfolio Committee included:
● Governance matters
● Disciplinary committee and its panels
● Referral of non-audit matters to professional bodies
● Search and seizure powers
● Sanctions: the determination of maximum fines
● Reconsideration of disciplinary decisions made by IRBA
● Protection and disclosure of information

Key issue 1—Governance Matters:
Composition:
Stakeholder comment: include registered auditors on the Board and increase legal representation.
Response: including registered auditors on Board may impede IRBA independence and result in IRBA membership with IFRA being withdrawn.
Proposed amendment: increase the number of formerly registered auditors and legally qualified persons from one to two.

Related persons:
Stakeholder comment: non-sharing of profits or interest with a registered auditor or any person related to a registered auditor.
Response: Supported.
Proposed amendment: (8) No member may: (a) share, directly or indirectly, in any of the profits or interests of a registered auditor or any person related to a registered auditor; or (b) receive payments, excluding pension benefits, from a registered auditor. (9) For purposes of subsection (8)(a) relatedmeans persons who are connected to one another in any manner contemplated in section 2(1)(a) to (c), read with section 2(2), of the Companies Act, 2008 (Act No. 71 of 2008).

Stakeholder comment: The Bill provides for IRBA to determine the policy framework for performing its functions in terms of section 4(1), with Ministerial approval. It is proposed that IRBA requires Ministerial approval to proceed with a policy framework and time frame.
Response and proposed amendments: ‘‘(3)(a) The Regulatory Board must [with the approval of the Minister] determine a [policy framework] regulatory strategy for performing its functions in terms of subsection (1). (b) The Regulatory Board must submit the regulatory strategy to the Minister for approval within three months after the date that the Auditing Profession Amendment Act, 2020, takes effect. (c) The Minister- (i) may, after consulting the Regulatory Board, make amendments to the strategy referred to in paragraph (b); and (ii) must publish in the Gazette the approved regulatory strategy within six months after the date that the Auditing Profession Amendment Act, 2020, takes effect. (d) The Minister or the Regulatory Board may request an amendment to the regulatory strategy published in terms of paragraph (c) or a new regulatory strategy be determined in accordance with paragraph (c)".

Number of Meetings of Committees:
Stakeholder comment: keep the number of meetings at four per year at least.
Response: Supported.

Key issue 2—Disciplinary Committee and its Panels:
Composition of Committee and its Panel:
Stakeholder comment: Provide clarity about composition of disciplinary committee in addition to auditors and legally qualified persons. The number of panel members should be at least three.
Response: Proposal to clarify that the other one-third of disciplinary committee is to include other suitably qualified persons of the disciplinary committee. The proposal for a minimum of three panel members is supported.

Chairperson of Committee and its Panel:
Stakeholder comment: On seniority of the disciplinary committee chairperson, the chairperson of the panel is to be a retired judge or senior legal person with more than 20 years experience.
Response: It is proposed that the disciplinary committee be chaired by either a retired judge or senior counsel. It is proposed that the chairperson of the disciplinary panel be a legally qualified member with requite experience and qualifications.

Key issue 3—Referral of Non-Audit Matters to Professional Bodies:
Stakeholder comment: Provide clarity about referral of non-audit matters to professional bodies.
Response: There is no need to define non-audit as 'audit' defined in section 1 of the Act.
Proposed amendment: Details of referral of non-audit matters to be dealt with in IRBA rules and that referral must fall within the constitution and the rules of a professional body.

Key issue 4—Search and Seizure Powers:
Stakeholder comment: Constitutional concerns about search and seizure.
Response: A submission is made that provisions should be constitutionally sound. However, stakeholders identified areas for refinement, some of which have been included in the proposed amendments: (1) the qualification and certificate for a person authorised to conduct search and seizure, (2) enhanced protection (for example, non-use of answers in criminal proceedings), and (3) clarity on criteria for a warrant.

Key issue 5—Reconsideration of Disciplinary Decisions:
Comment: Provide right to either internal or external appeal against disciplinary decisions.
Response: Although the Bill does not provide for internal or court appeals against disciplinary decisions, the right to take these decisions to court for review remains available. Grounds for review by a court in terms of the Promotion of Administrative Justice Act are sufficiently extensive to offer protection to persons affected by such decisions due to bias, procedural unfairness, materially influenced by error of law, ulterior purpose, irrelevant considerations, bad faith, arbitrariness or capriciousness, action not rationally connected to the purpose or information before decision-maker, or the action was otherwise unconstitutional or unlawful.

Key issue 6—Sanctions:
Stakeholder comment: The determination of a maximum fine by the Minister in the Act must be accompanied by the factors to be considered by the Minister before imposing sanctions.
Response: To allow for flexibility it is not desirable to determine the amount in the Act. However, it is proposed that the Minister determines the maximum fine on recommendation of the Board and to publish the proposed maximum fine for public comment. Mitigating factors may be submitted for consideration in determining the sanction.

Key issue 7—Protection and Disclosure of Information:
Comment: The Bill should provide for disclosure of information if it is in the public interest to combat unlawful or unethical conduct. It should ensure appropriate protection of personal information, as well as allow sharing of information with professional bodies for referral of non-audit matters.
Response: IRBA publishes the names of persons found guilty of improper conduct if the entity audited was a public interest entity and/or if the respondent is a repeat offender (refer to IRBA Policy on Sanctions issued in December 2016). IRBA as a state organ is bound by the Protection of Personal Information Act. This requirement is reiterated in proposed section 57A. A proposal is made for sharing of information with professional bodies for referral of non-audit matters.

Discussion:
The Acting Chairperson thanked Treasury for the concise presentation and opened for questions.

Mr Ryder (DA) referred to slide 12 and said the first point was unclear. He asked for clarity. His second question was on the appointment of IRBA board members and chairperson. What exactly are the responsibilities of the Minister in appointing the board and the chairperson, and what oversight role is there for the Portfolio and Select Committees in the appointment process?

Mr M Moletsane (EFF) asked about the minimum meetings per year being four. He asked if the four annual audit meetings were held each quarter, or simply held when the need arose.

Mr Z Mkiva (ANC) welcomed the presentation and said the Bill was “very progressive". It was clearly initiated by the ANC to mitigate all the wrongdoing.

Mr Mkiva said that in terms of investigations, retired judges are always looked to for their assistance notwithstanding South Africa’s various institutions comprising “capable traditional leaders” who serve in their own traditional courts. Therefore traditional leaders had a clear understanding of the Constitution and other laws. Why are we always limiting ourselves to people who are only trained in accordance with Roman-Dutch and English laws? He suggested a more balanced approach which could “transform the landscape” and begin to “decolonise and start recognising organic intellectuals with a wealth of experience drawn from indigenous knowledge systems". It did not reflect well for society that South Africa only draws views from a single perspective “where there is a capable presiding officer flowing from an indigenous—or an institution of indigenous leadership" who ought to be considered. We are an “African country through-and-through". He wanted more incorporation of South Africa’s “cultural outlook” in both its legislation and its offices.

Responses:
On Mr Ryder’s question about slide 12, Adv Mulaudzi clarified that when auditors are conducting audits, it does happen that they come across certain irregularities which they have an obligation to report to IRBA. The irregularity may point to wrongdoing by a firm in which the auditor is employed. It may happen that the firm attempts to remove the auditor. The Bill proposes a prohibition of removing the auditor in such a circumstance, until the reporting process on the putative irregularity has been finalised. This was for obvious reasons that whatever irregularity has been identified needs to be brought to the attention of IRBA and appropriately dealt with. If the firm is permitted to remove the auditor, there is a big chance that the irregularity might never be reported.

Apart from the auditor being removed from the firm, there is the possibility that the auditor may have found an opportunity elsewhere, and consequently decides to resign from the firm in which the irregularity took place. In this case, if the auditor resigns before the reporting process is complied with – which cannot legally be prevented – the Bill requires the auditor, when handing over to his/her successor, to make the successor aware of the irregularity.

Adv van Schoor replied to Mr Ryder that Treasury was not proposing amendments to the current appointment powers of the Minister. There are provisions in the Bill about the composition of the board, namely, to ensure independence from the auditing profession in addition to certain minimum requirements about formally registered auditors (along with certain required professional experience as well as non-sharing in profits).

Adv van Schoor replied that the Act states that the board is to meet at least four times per year, but does not stipulate when or that it is required to meet once per quarter. It was proposed that the board meet twice a year, but this was rejected by stakeholders who wanted at least to retain the minimum of four. The proposal therefore reverted to four meetings per year. Ms Maree could advise how many times the board meets in practice.

Ms Maree said that twice per year was “definitely not adequate". The board has a number of subcommittees which all feed into the main board. However, previous history has shown that four times is adequate in addition to provisions for certain “special meetings” of the board in which members may deal with any other matters. At this stage she thinks the provisions are adequate.

On Mr Mkiva’s question, Adv Mulaudzi said that he was challenged by the issues raised in his question. These issues were not necessarily being ignored, but he conceded that perhaps there was a lack of thought about other skills which could be used other than from sources traditionally utilised, particularly for investigations and the conduct of hearings. Mr Mkiva was correct that there are other skills “out there” and that traditional leaders do deal with discipline and resolution of matters within their communities on a daily basis. He agreed that this needed to be taken into account.

Adv Mulaudzi replied on the composition of the disciplinary committee and the investigating committee. The disciplinary committee should be chaired either by a retired judge or a senior counsel. This was limited to the chairing of the committee itself. However it does not limit the composition or appointment of members onto either committee, especially were prospective members lack the requisite background and capacity.

On the composition of the investigating committee, Adv Mulaudzi referred the Committee to clause eight (amending section 24) where the requirements are set out. There is allowance that the investigation committee would have persons with different skills other than auditing and law. This means that if there are skills required in other disciplines there is provision for these to be included in the investigating committee.

On the disciplinary committee, Adv Mulaudzi referred the Committee to clause 9 amending section 24A(1) of the Act. It provides that IRBA must appoint the disciplinary committee referred to in section 22F, which members must be independent of the auditing profession, consisting of as many competent members as it may determine necessary to deal with disciplinary hearings. There was an allowance in the proposed amendment for the disciplinary committee to be comprised of as many people with differing skills as is needed. The only limitation on particular skills concerns the chairing of the committee itself, as was already mentioned.

Mr Ryder thanked Adv van Schoor but said she had not really answered his question on IRBA board appointments. In terms of the current Act and the proposed Amendment Bill, what is the Minister’s responsibility and what level of oversight is given to the Portfolio and Select Committees in the appointment of the IRBA board and the chairperson?  She had answered that the Amendment Bill proposed no changes. He now wanted her to answer in terms of the existing legislation.

Adv van Schoor replied that power to appoint vests in the Minister and there is a process of gazetting for nominations. In terms of the Act and the Amendment Bill, there is no role for the parliamentary committee. The appointments are a process of seeking nominations through gazetting and newspapers. Thereafter the Minister makes the final decision on the appointments, and generally the practice is that the decision is submitted to Cabinet for approval.

Mr Mkiva asked if the Bill is available in any other official language and, if so, he asked for it to be emailed to him. They acceded.

The Chairperson thanked all attendees for their input and adjourned the meeting.
 

Present

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