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FROM THE CEO’S DESK
Post-1994, South Africa experienced one of the longest periods
of positive economic growth in the country’s history. The Minister
of Finance at the time had adopted the recommendations of the
2003 World Bank Report on the Observance of Standards and
Codes (ROSC) for accounting and auditing. The report suggested
that government should focus on strengthening the enforcement
mechanisms for ensuring compliance with established accounting
and auditing requirements by
“establishing an independent oversight
body, consisting of eminent persons, and restructuring the statutory
regulator of the auditing profession under an effective governance
structure and with broader mandate for efficiently regulating the
profession”.
Until then, the profession was governed by the Public Accountants
and Auditors Board (PAAB) under a regime of self-regulation with
limited powers. In 2005, South Africa became one of the first
countries worldwide to adopt International Standards on Auditing
(ISA) and the Independent Regulatory Board for Auditors (IRBA)
was created under the Auditing Profession Act, Act 26 of 2005
(APA), creating a statutory oversight board for which the maximum
number of auditors on the board was prescribed (no more than
40%), with powers to lay down regulations and set standards.
In 2008, the IRBA became one of the founding members of the
International Forum of Independent Audit Regulators (IFIAR), a
forum that shares best practices in regulation and has a mission to
strengthen global audit quality. One of the requirements to become
a member of IFIAR is that the audit regulator must be completely
independent of the auditing profession.
Over the years, the IRBA has continued to make improvements to
regulation within itsmandate. The auditor’s report has been improved
and now includes more disclosures than before for the benefit of
investors. In 2015, mandatory disclosure of the audit tenure of the
audit firm with the client was required as part of the independent
auditor’s report. This was to highlight potential familiarity threats for
investors that could lead to independence issues, which could, in
turn, impact on the reliability and credibility of the audit opinion on
the financial statements.
Further improvements were made to strengthen the IRBA’s
Inspections and Investigations departments based on the
recommendations of the World Bank’s 2013 ROSC. However,
deficiencies in audit quality concerned the Board, which required
that more should be done to protect the public, safeguard auditor
independence, improve the quality of audit and enhance trust in
the credibility of audit opinions. In 2017, the Board prescribed that
from 2023 Mandatory Audit Firm Rotation would be required every
10 years.
This progressive implementation of standards, regulations and
guidelines is a necessary role of effective regulators worldwide in
support of continuous improvement and the creation of public trust.
Recently, it became evident that the public expected more from the
IRBA than the APA prescribed or allowed, specifically considering
the recent audit and accounting failures. The limit to monetary
sanctions and the speed of bringing auditors to account were key
among these.
The Act Amendment process was subsequently fast-tracked and
the amended Act submitted to National Treasury in December
2017. It included several changes to address not only the low level
of fines, but others that will remove restrictions to obtain critical
information for investigations, as well as further strengthen the
independence of the IRBA.
The amendments apply mostly to the investigation and disciplinary
processes. These amendments will provide the IRBA with subpoena
powers in the investigation process, simplify the disciplinary
hearing process, and provide the Minister of Finance with power to
determine maximum fines, which are currently limited by the audit
legislation to R200 000 per offence. The Minister of Finance has not
indicated what level of fines he would prescribe, but these are likely
to be significantly more than the current limit, which will provide a
more effective deterrent to unethical behaviour.
The ability to subpoena will ensure that the IRBA has immediate
access to all the evidence and audit files we require to complete
an investigation more speedily, even where information is being
withheld. This will also shorten the duration of investigations.
The disciplinary process will also be simplified, without infringing on
the rights of any of the parties, by removing many of the burdensome
legal practices that mean disciplinary matters are heard in a manner
similar to that of a high court, making them unnecessarily lengthy
and costly.
In dealing with constraints, the amendments propose removing
limits to the size of the Disciplinary Committee, allowing the IRBA
to appoint as many members as it determines. This will mean
we can call on additional resources when there is any substantial
increase in the number of matters to be considered. Currently, the
limited number of committee members, often further limited by the
exclusion of members who may have a conflict of interest and the
availability of members, has had a negative impact on the speed at
which matters can be heard.
Given the IRBA’s focus on public protection, and the fact that some
of the investigations and matters referred to the IRBA are issues
that do not relate to public interest entities (PIEs), an amendment
to allow the IRBA to refer non-PIE matters to another relevant body
will ensure that we can focus on public interest matters. This will
improve the utilisation of limited resources for matters in the public
interest.
On 22 August 2018, cabinet approved the Draft Amendments to the
APA and referred these to Parliament for consultation as part of the
Financial Matters Bill 2018. Consultation closed on 14 September
and it is hoped that the Amendments will be passed by the end of
2018.
The amendments, however, on their own will not prevent corporate
malfeasance, fraud or future scandals, as business failures can
be caused by complex internal fraud and corruption by directors
or employees. Until the whole financial reporting eco-system is
regulated, which was also included among the recommendations
in the 2013 World Bank ROSC, there will continue to be opportunity
for such malfeasance to exist and possibly go unpunished. But
Issue 43 | July-September 2018
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