National Treasury: Republic of South Africa DRAFT AUDITING PROFESSION BILL DELIBERATIONS National Treasury: Republic of South Africa 17 October 2005 1

Contents Background & History of the Profession Role of auditors Interested Parties Common issues raised in public hearings Treasury’s view Main areas of disagreement Conclusion 2

Background PAAA enacted in 1951 Protecting public interest main object of that Act Minister handed the regulation to the profession – de facto self regulation Amended 40 years since, in 1991 Discussions on improving it since early nineties 3

History (1) Great depression impact on the profession Oil price crisis in early seventies US authorities question – self regulation practices Increase competition, increase of non-audit services Audit overtaken by non-audit services in contributing to revenues of firms Authorities warn of impact to independence of auditors 4

History (2) Firms compete on prices for audit work and solicitation of clients intensifies Low-balling develops into practice Firms consolidate from “big 8” to “big 4” Fall of the Soviet union & emergence of globalisation Standards of accounting & auditing harmonised Culture & character of profession changes 5

Role of Auditors (1) Corporate failures world wide infuse urgency in SA legislative reform Public interest the focal issue Auditor independence & some practices questioned Profession admits consulting impairs independence Increased focus on risk management- but often skewed perspective 6

Interested Parties Expression of opinion – on AFS Shareholders including pension funds Workers in client companies Creditors and other investors Governments 7

Focus of this Bill Enhance integrity of the profession Protection of the Public interest Enhance independence & effectiveness of the regulator Enhance independence of auditors Ensure the RB is accountable Hold auditors accountable Ensure equitable access to profession 8

Common Issues (1) Definition of Audit Reportable irregularity Education & training Character of the RB Section 44 Disciplinary procedure Limitation of liability 9

Common Issues (2) Disciplinary procedure Other issues Multi Disciplinary Partnerships 10

Definition of Audit Not in accordance with IFAC Part b of the definition Use of audit services somewhat confusing Act should focus on regulating external auditing only 11

Reportable irregularity Definition too wide – any unlawful act Reporting process cumbersome Materiality preferably should refer to entity Otherwise dishonest Revert to S20(5) of PAAA Penalty is harsh Overlapping reporting with other legislations PAIA 12

Education & Training Referee & a player - exams Withdrawing of recognition of educational institutions on students Alternative supervisory arrangement on training contracts Partial accreditation Accreditation every five years New syllabus required 13

Character of RB No guarantee RA will be in the RB 4 + 1 representation of RA’s Funding of RB – independence & reciprocity Minimum representation of RA’s in DC No room made for academics in the standards and ethics Powers of RB to issue rules Standard setting & ethics committee > separate bodies 14

Section 44 Fair representation not the same as fair presentation Provisions archaic Drop section or mention all audit procedures Truthfulness and correctness Materiality on testing existence of A&L Conflict of interest – two year rule, ethics code Including annexure Term “without any restriction” 15

Limitation of Liability Align with audit only Allow for limitation non-audit engagements Proportionate liability 16

Disciplinary Procedure Make it a regulation Allow for simpler process for minor cases Consent orders Decisions of DC not to be revoked by RB Right of appeal Self incriminating evidence Right to remain silent Subpoena powers for investigation committee 17

Other issues Renewal of registration Consent to employ people refused registration Public interest company - inspection Confidentiality of information - inspections Nominated auditor vs engagement partner Erosion of audit profession Transitional provisions – limit to one year Section 41 – potentially confusing terms 18

Multi Disciplinary Practice Partnership Sharing of profits 19

Conclusion Thanks to all the presenters and hoping the committee will ensure the intention of the policy is carried out in the resultant legislation 20

THANK YOU ANY QUESTIONS? 21