1 PARLIAMENT NCOP HEARING National Treasury: Republic of South Africa 15 November 2005 DRAFT AUDITING PROFESSION BILL

2 Contents Background History of the Profession Role of auditors Overview of the Bill Conclusion

3 Background (1) 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

4 Background (2) Corporate Failures Independence of the Regulatory Board Government funding – Independence Complexities in corporates Companies Act

5 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

6 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” Emergence of globalisation Standards of accounting & auditing harmonised Culture & character of profession changes

7 Role of Auditors Expression of opinion – on AFS Provides users with assurance that AFS fairly present financial health of entities Shareholders including pension funds Workers in client companies Creditors and other investors Governments

8 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

9 Overview of the DABP

10 DABP Overview Interpretation & Object of the Bill (clauses 1 – 2) Independent Regulatory Board for Auditors (clauses 3 – 31) Accreditation and Registration (clauses 32 – 40) Conduct and Liability of RA (clauses 41 – 46) Accountability of RA (clauses 47 – 51) Offences (clauses 52 – 54) General Matters (clauses 55 – 60)

11 Objects of the Act Protection of public interest Provide for establishment of Independent Regulatory Board Prescribe ethical & auditing standards Provide for competency requirements Provide for procedures for disciplinary action in respect of proper conduct

12 INDEPENDENT REGULATORY BOARD

13 Independent Regulatory Board Establishment and status (clause 3) Functions (clauses 4 – 8) Powers (clauses 9 – 10) Governance (clauses 11 – 19) Committees (20 – 24) Funding and financial management (25 – 27) National government oversight and executive authority (28 – 31)

14 Establishment and Status Juristic person Exercise functions ito of this Act PFMA Constitution Other laws

15 Functions General functions Accreditation of professional bodies Registration of auditors Charging of fees Education, Training and Professional Development

16 General Functions Promote the integrity of the profession –Investigate improper conduct & conduct disciplinary hearing –Impose sanctions for transgressions/ improper conduct Protect public interest Prescribe standards for qualifications, competence, ethics and conduct of auditors Encourage education icw, & research into matters affecting the profession Participate in international professional activities

17 Accreditation of professional bodies Prescribe minimum requirements for accreditation Consider & decide on applications Prescribe period for the validity of accreditation Keep register of accredited professional bodies Terminate accreditation of professional bodies

18 Registration of auditors Prescribe minimum requirements for registration Consider & decide on applications Prescribe period for the validity of registration Keep register of registered auditors Terminate registration of auditors

19 Education, Training & Development (1) Conditionally or unconditionally recognise educational institution iro educational qualifications & programs Recognise or withdraw recognition for professional body iro FQE per section 38 Prescribe requirements & conditions for continued education, training & professional development Prescribe period for training and form of training contracts

20 Education, Training & Development (2) Recognise or withdraw recognition for firms as training officers Reciprocal international professional recognition Advise or consult relevant bodies wrt education, training & development of RAs Approve & register training contracts May establish an education fund

21 Fees Prescribe: –Accreditation & registration fees –Annual fees or part thereof –Examination fees ito section 38 –Fees iro education fund –Inspection or practice review fees ito clause 47 –Fees for services rendered –Due dates for all the fees

22 Powers IRBA may –Determine staff & related issues –Determine reimbursable fees for the board –Collect fees & invest funds –Borrow money ito PFMA –Grant bursaries or loans IRBA may prescribe rules regarding –Any matter as per this Act –Any matter allowing it to function effectively

23 Governance Appointment of the Regulatory Board Term of office Who does not qualify? Chairperson and Deputy Chairperson Meetings Decisions Duties of members CEO Delegations

24 Appointment of IRBA Appoint not more than 10 non-executive members Must be suitable qualified & experienced Transparency & representativity RA should not be more than 40% but must have RA Appoint alternate members

25 Term of board membership Not more than two years Reappoint may not exceed two consecutive terms Minister may override – but may only do so twice Minister may terminate period of office early Appoint interim board in the event

26 Who does not qualify? Any person who is: A Non RSA citizen and non residents; An Unrehabilitated insolvent; Convicted of offence; Removed from office of trust due to improper conduct; Guilty of improper conduct ito this Act

27 Membership ceases when: A person: –is disqualified ito the Act; –resigns; –Is of an unsound mind or mentally disordered; –Is absent for more than two consecutive mtgs; –Ceases to be permanently resident

28 Chairperson & Deputy IRBA must appoint a chairperson Hold office for two years from date of appointment Deputy assumes all powers of the chairperson in his/her absence Board members may elect an acting chair

29 Meetings At least twice a year Chairperson may convene a special meeting At least three board members may request a special meeting in writing All board members have one vote Chairperson has a casting vote

30 Duties of Members Provide effective, transparent, accountable and coherent corporate governance Provide effective oversight Comply with all applicable legislation Communicate openly and promptly with the Minister Deal with Minister in good faith Act in accordance with the code of conduct for board members

31 Delegations IRBA may delegate its powers other than prescribing rules Assign any employee to perform any of its duties Delegation is subject to limitations by the IRBA May authorise sub-delegation Delegation does not divest board of responsibility IRBA may confirm, vary or revoke decision taken by committee, CEO or member

32 Committees IRBA must appoint the ff permanent committees: –Ethics committee; –Standard setting committee; –Education, training and professional development committee; –Investigating committee; and –Disciplinary committee IRBA must consider transparency & representativity

33 Ethics committee Ethics committee shall be composed of; –Three registered auditors; –Three persons representing users of audit services; –One person representing a stock exchange; and –One advocate or an attorney with at least ten years experience Must assist IRBA in determining improper conduct Advise RAs on matters of professional ethics

34 Standard setting committee This committee shall be composed of; –Five registered auditors; –One person with experience of business; –The Auditor-General or his/her nominee; –The CEO of FSB or his/her nominee; –An experienced university lecturer in auditing; –A stock exchange nominee; –The commissioner of SARS or his/her nominee; and –The registrar of banks Develop, maintain, adopt, issue or prescribe auditing pronouncements

35 Disciplinary committees A disciplinary committee must: –Be chaired by a judge or senior advocate; –Consist of the a majority of non-RAs; –Consist of other suitably qualified persons not associated with auditing profession

36 Funding & Financial Management Funding –Collection of prescribed fees; –Other monies that may accrue to the Board; and –Annual appropriations. Annual Budgets and strategic plan ito PFMA Financial management must be in accordance with PFMA

37 National government oversight and executive authority Powers of the Minister Ministerial representatives Investigations and directives Information

38 Powers of the Minister Executive authority Ensure the IRBA complies with the PFMA and other legislation Ensure IRBA is managed responsibly and transparently Establish clear channels of communication Monitor and review performance

39 Ministerial rep Official from National Treasury Act as a participating observer May call or convene a meeting Must represent the Minister faithfully Act in accordance with Minister’s instruction

40 Investigations and directives Minister may instruct the Board to undertake specific functions Instruct the Board to stop or desist from acting against the interest of the auditing profession May investigate the affairs of the Board at any time

41 Accreditation & Registration Accreditation of professional bodies (clause 32 – 36) Registration of individual auditors and firms (clauses 37 – 40)

42 Requirements for Accreditation Compliance with prescribed requirements of professional development Ensure continued professional development for members Disciplinary framework Financially & operationally viable Transparency and representivity

43 Termination of Accreditation Accreditation lapses automatically if: –PB ceases to exist –Fails to pay prescribed fees IRBA must cancel Accreditation: –On non-compliance with requirements or –Suspend accreditation to protect public interest or auditing profession

44 Effect of termination of ACC Termination does not affect registration of RAs RAs must satisfy the Board of suitability to continue registration

45 Must comply with prescribed education, training and competency requirements for a RA; Serve under a registered training contract for the prescribed period; Pass prescribed final qualifying examinations; Have access to continued professional development; Fit to practice the profession; and Has the necessary competence to practice. Registration of Auditors

46 Board may not register an individual: –Was removed from an office of trust due misconduct; –Was convicted of fraud, theft, forgery or an offence ito PRECCA; –Is of unsound mind; and –Disqualified under this Act. Registration of Auditors

47 Board must cancel registration: –Disqualification subsequent to registration; –If registration was made in error; and –Individual is guilty of improper conduct. Board may cancel registration: –Sequestration or compromise with creditors –Fails to satisfy CPD requirements after ceasing to be a member of a professional body. Termination of Registration

48 Only firms that may be registered are: - –Partnerships where all partners are themselves registered auditors –Sole proprietor owned by an RA; Companies if; –Registered ito of Companies Act; and –Only RA are shareholders; Registration of Firms

49 Conduct and liability of registered auditors Practice (clause 41) Compliance with rules (clause 42) Information to be furnished (clause 43) Duties in relation to audit (clause 44) Duty to report irregularities (clause 45) Limitation to liability (clause 46)

50 Practice Only registered auditors may practice or call themselves auditors; A person not registered as RA may not; –Perform audit services; –Pretend to be, or in any manner hold out as an auditor; –Use any name per subsection (1) or any misleading name; –Make people believe he/she is an audtitor.

51 General obligations A RA may not issue an unqualified opinion unless; –He/she carried out the audit free from restrictions; –He/she is satisfied of the existence all assets and liabilities reported; –Proper accounting records are kept by the client; –He/she obtained all information, vouchers necessary for the conclusion of the audit; and –Satisfied as to the fairness or truth or correctness of the financial statements

52 Duty to report on irregularities RA satisfied or has reason to believe a reportable irregularity is taking place must report to the Board without delay Must notify the board of the entity with 3 days in writing Within 30 days discuss with management, allow them representations iro the report and send another report to IRBA. The IRBA must notify the appropriate regulator in writing To conduct investigations an RA must have to all info from whatever source Reporting when an entity is sequestrated or liquidated

53 Limitation of liability A RA does not incur liability unless he/she is negligent A RA incur liability if: –He/she knew the report would be used by the client to induce third party act or refrain to act in some way or –That the party would rely on the opinion –Represented subsequent to the opinion being issued to the third party that the opinion was correct Having performed audit services is not sufficient proof for liability A RA may incur a liability if he/she fails to report a reportable irregularity

54 Accountability of registered auditors Inspections (clause 47) Investigation of improper conduct (clause 48) Charge of improper conduct (clause 49) Disciplinary hearing (clause 50) Proceedings after the hearing (clause 51)

55 Inspections/ practice review IRBA or its appointee may conduct practice reviews At annually for public interest company audits IRBA may recover costs of the review from an RA An RA must supply all info required by the IRBA or its appointee An RA submitting info in good faith may not be criminally liable for producing the info

56 Investigating improper conduct (1) IRBA must refer matters to the IC if; –It suspects RA may guilty of improper conduct –The charge appears to be justified Court may direct that a copy of its record be sent to board At the request of IRBA the IC must: –Investigate the matter; and –Determine if the RA concerned may be charged

57 Investigating improper conduct (2) IC may not question an RA unless; –The RA is informed of the right to representation; and –The RA is informed of the right to silence. In investigating the IC may; –Require an RA to produce any necessary information –Inspect and retain the information; and –Make copies of extracts of the information. Professional bodies may still discipline its members IC must submit recommendations to IRBA

58 Charge of improper conduct IRBA must charge the RA if IC so recommends on sufficient grounds IRBA must furnish the charge sheet to the RA by hand or registered mail An RA must be informed of details and nature of the charge and that he/she must respond in writing If an RA admits a penalty may be impose ito sec 51(3) Acquital by a court of law does not bar IRBA from charging an RA

59 Disciplinary hearing (1) Must be conducted by a DC The DC may appoint a person to assist in proceeding Open to public unless the chair otherwise rules DC may subpoena any person considered useful DC may retain info obtained during the hearing Chairperson may solicit sworn statements ex witnesses

60 Disciplinary hearing (2) Charged RA has certain rights sec 50(7) & (8) Subpoenaed witnesses should act ito sec 50(9) IC’s evidence is sufficient if accompanied by a certification of its lawfulness by the chair Conviction in court is sufficient evidence of commission of offence

61 Proceedings after the hearing Decision in 30 days If RA is found guilty, committee may one or more of the ff: –Caution or reprimand –Impose a fine –Suspend registration or –Cancel registration

62 Offences Reportable irregularities and false statements in connection with audits (clause 52) Offences relating to disciplinary hearing (clause 53) Offences relating to public practice (clause 54)

63 General matters Powers of the Minister (clause 55) Indemnity (clause 56) Administrative matters (clause 57) Repeal and amendments of laws (clause 58) Transitional provisions (clause 59) Short title and commencement (clause 60)

64 THANK YOU ANY QUESTIONS?