NEWS & COMMUNICATION Comment on the The Draft Accountancy Profession Bill [ Back to the News & Communication Page ] Prepared by the Secretariat of The Southern African Institute of Government Auditors These comments should be read in conjunction with the Research Report titled "Comments on the Proposed Accountancy Profession Act which is to supersede the Public Accountants' and Auditors' Act" published by the School of Accountancy, University of Pretoria (Authors: JD Gloeck & H de Jager). Since the provisions of the existing Public Accountants' and Auditors' Act have been included "largely" unchanged in the Draft Accountancy Profession Bill, the core of these comments are also applicable to the Draft Accountancy Profession Bill. The passage of the Draft Accountancy Profession Bill has not been a harmonious or happy one. Its memorandum claims that the process of developing a new Act started in 1991 when the Public Accountants' and Auditors' Board (PAAB) initiated the FAESA project (Future of Accounting Education in South Africa). The fact that almost a decade later a Draft Bill has only just been issued for comment, let alone introduced into the legislative process, gives testimony to the flawed process and lack of relevant focus which has characterised this self-regulatory effort. The reasons for starting the investigations and the process of developing a new Act are given as: "the burgeoning body of knowledge in the accounting field, rapid developments in information technology, the narrowness of the existing educational requirements, similar studies in other countries and changes in the socio-political environment". An analysis of these reasons provides the key as to why the process was destined to fail. Whilst the aspects mentioned should necessarily be considered by a profession as a matter of course, more critical areas which needed urgent, in-depth investigation and change have not been addressed. These aspects have been stubbornly ignored throughout the decade of "investigation" referred to above. During the last fifteen years or so, South Africa's investment community has witnessed an array of audit failures and the once respected auditors were steadily degraded from watchdog to lapdog-status. The role of the auditor became less relevant as outdated legislation impeded effective and efficient auditing. Auditors were increasingly pressurised by management, their fees cut and practices such as low-balling and opinion shopping undermined honest auditing efforts. The audit expectation gap was developing into a gorge and auditors diversified into providing more and more other services to the auditee in an effort to recover lost ground (and fees) in the auditing field. In the process the auditors came close to losing their independence completely. The audit function ceased to act in the public interest. In the meantime the regulators were provided with valuable information and warnings from various fronts: The King Committee on Corporate Governance warned in 1994 that "the objectivity of the audit function is adversely affected by the framework in which auditors operate". The Commission of Inquiry into the Affairs of the Masterbond Group of Companies and Investor Protection in South Africa (the Nel Commission) and related court cases gave us a glimpse behind the scene of the otherwise secretive audit processes, concluding that "the saga of dishonest or inefficient auditors which further emerged during the course of the investigation conducted by the Commission belied the generally perceived honesty, integrity and independence of auditors". Testifying before the Nel Commission, the Chief Executive of the South African Institute of Chartered Accountants described how auditors were often threatened at gunpoint by the auditees. He was also quoted as having said: "accountants and auditors have lost their credibility". Scholarly research carried out on a large scale at South African universities provided evidence of what both auditors and users of auditing services felt were serious shortcomings in the existing legislation and audit practices. But regulators and drafters of the Draft Accountancy Profession Bill ignored all this. It seems that a decision had been taken to protect vested interests at the risk of making the audit function an irrelevant service, adding no value to the accountability chain and ignoring its responsibility to act in the public's interest. The observed reluctance to introduce real reform on the part of those influencing and shaping the current provisions, raises doubt as to whether or not there is any real purpose in commenting extensively at this point. If current attitudes prevail, comment at this point (like similar comment before) will do little to alert the drafters of the Act to the critical proportions that the audit crisis in South Africa has reached. Extensive comment is therefore reserved until assurances are forthcoming that the process of shaping a new Audit Act is not unduly influenced and controlled by groups protecting vested interests. Therefore only a few specific shortcomings of the Draft Accountancy Profession Bill are listed below: 1. The fact that the Draft Bill includes powers and duties of Registered Accountants and Auditors "largely" unchanged from the provisions of the existing Public Accountants' and Auditors' Act (Act 80 of 1991) is arguably the most disappointing aspect of the process. It proves that the drafters of the Bill have largely ignored events relating to the audit function. They have turned a blind eye to the array of audit failures, court cases, research papers, outcries from the users of auditing services, pleas from auditors themselves, and a Commission reporting directly to our country's President that the audit profession is dishonest and inefficient. 2. The provisions of the current 1991 Act are also "largely" unchanged from the provisions of the Public Accountants' and Auditors' Act of the Fifties (Act 51 of 1951). They have not kept pace with the developments in the socio-political arena, the current sophistication of the financial markets, the unique risks associated with the modern business environment and scholarly advancement in respect of increased accountability. 3. The introduction of a number of new structures fosters hope for audit reform. These structures are: The Regulatory Board for Auditors (RBA); the Independent Standard-setting Board for Auditing (ISBA) and the Independent Standard-setting Board for Ethics (ISBE). Unfortunately, the composition of these bodies ensures that reform to incorporate the needs of users of auditing services and the public in general, takes a back seat: half of the members of the RBA consists of auditors who, together with other representatives from the auditing profession will be able to dictate matters and control any agenda and outcome. The auditors' control of the ISBA and ISBE is even more direct with auditors having an outright majority of seats. Thus the auditors themselves are the players, referees, rule book writers, investigators and judges. 4. Until the self-regulators realise that they cannot fulfil all of the above functions, the audit expectation gap is not likely to diminish. If the public does not see auditors providing a service shaped according to the public's needs and not those of the audit elite; if auditors are not seen to be accountable, the pressure on the audit function and a growing perception of its irrelevance will continue to increase. 5.  The new structures provide some hope of reform, but in the absence of a clear strategy, the drafters have fallen into the dangerous trap of putting into place structures before strategy. The precarious structures which are provided for, promise little reprieve as they are weakened through their one-sided monopolistic composition, they lack guidance, vision and a strong accountability framework within which to operate. 6. Whilst the preamble of the Draft Bill states that the structures of the profession "should function in an open, responsive and accountable manner", no assurances to this effect are built into the Act . The accountability of the structures (composition of disciplinary committees, public access to meetings and minutes and related accountability aspects) are not addressed in the Draft Bill. 7. The problems of auditors being effectively appointed and paid by management, whilst having to audit management's work are conveniently ignored. The Draft Bill even allows auditors to make closing entries in the books of companies they audit, assist the management with any adjusting entries and to frame any financial statements or other document. As if this were not enough, the Draft Bill specifically excludes the above services by an auditor from any disclosure requirements, so the users of auditing services will never know that their auditor was involved in the company in other capacities. 8. When dealing with material irregularities, auditors are still prohibited from taking any steps against the perpetrators before a thirty day period has passed. A requirement which, taking into account the speed at which transactions are done in an age driven by electronic advancements and innovations, is absurd to say the least. Neither is there any requirement that all material irregularities dealt with be disclosed by the auditor, leaving shareholders and investors in the dark and management unaccountable. 9. Although more than 80% of auditors indicated in a country-wide survey that they would like to have the right to report irregularities to the relevant regulators if management does not do so, without being guilty of a breach of confidentiality, this was also ignored. So have auditors' pleas to be able to do more to warn investors about possible going concern problems. It seems as if auditors want to be relevant and play a more active part in the accountability framework, but legislation impedes them from doing so. This may have suited the country in 1951, it certainly has no place in the South Africa of 2000. 10. Neither the term "accountancy profession" nor the term "auditing profession" is defined. The term "accountancy profession" is, however, extensively referred to. Scholarly research and discourse throughout the world has long since supposed that the accountancy and auditing "profession" has lost the right of claiming "professional" status and is more aptly described as the accounting and auditing industry. Apart from that, it seems as if the document intends including "auditing" in the term "accounting", thereby providing more proof that it does not recognise the unique role of auditing and its function within the accountability framework. 11. Taking into account the above, the provision that the RCA (in essence a body of and for accountants) is also empowered to make regulations concerning the auditing function (as included under "accountancy") can only create undue pressure on the audit industry and the RBA by the very group on whose work the auditors are supposed to express an independent opinion. 12. The Draft Accountancy Profession Bill fails entirely in providing the audit function with a new platform from which it can develop and regain its important role in the accountability framework. 13. The RCA and RBA do not belong in the same Act. They relate to different functions and they have two completely separate objectives. 14. The Draft Bill neither addresses the subject of community service of trainee auditors who will benefit from the statutory audit monopoly in the future, nor does it reduce imbalances of the past by assisting growth of emerging firms or funding of auditing education or independent research. 15. The RCA in particular is a vacuous body which window-dresses the serious problems of the accountancy profession. The principal method of developing a profession is to develop and enforce the standards of practice relating to the discipline involved; in the case of the RCA: the accounting industry. South Africa is in dire need of developing both normative as well as practical accounting standards which enjoy ownership by all role-players concerned. Yet as far as the setting of accountancy standards is concerned, the RCA is rendered ineffective as its powers do not even include the setting of accountancy standards let alone taking actions where such standards are not being adhered to. The proclaimed objective of achieving self-regulation seems to be defined as relating to and encompassing only one specific interest group. 16. The clever, constructive manner in which the Public Finance Management Act has utilised and strengthened the role of the Auditor-General as external audit function in the public sector must have escaped the attention of the drafters of the Draft Accountancy Profession Bill. Serious concerns also need to be expressed with regard to the following points: 17. Persons with the necessary knowledge and skills to perform the duties of auditors must in future join an "accredited professional body". This seems not only unconstitutional but also unfair and impractical, since in South Africa there is only one professional body for auditors: the Southern African Institute of Government Auditors. Other professional bodies allow auditors to become members, but they do so as "accountants" (e.g. Chartered Accountants [SA]). The numbers of auditors in these institutes are considerably lower than those of accountants and since the Draft Bill accepts the principle of proportional representation, the auditors are bound to be marginalised within these bodies. 18. The criteria for accreditation of professional associations (and their subsequent right to perform audits) are vague; definitions of crucial terms such as "discipline its members where appropriate" are not given. 19. The Representative Council of Accountants (RCA), the body created for accountants, is empowered to make regulations regarding auditors, audits and audit firms; the perfect recipe to distort the audit function and make the preparers of financial statements unaccountable. 20. No provisions are made for draft regulations made by the RCA and RBA to be published for comment in the Government Gazette. Exclusivity, accountability and openness carry no weight in the Draft Bill. 21. The Draft Bill classifies professional designations as "qualifications" which must be registered at level 7 in the National Qualifications Framework. However, it is accepted world-wide that designations such as CA[SA] or RGA (Registered Government Auditor) are not qualifications. 22. No municipality may appoint a person to perform an accounting function, including budget related work, internal audit, cash flow management, etc. unless such person is registered with a professional association. 23. All training contacts for auditors which are currently registered with the PAAB are transferred to one specific accounting Institute: the South African Institute of Chartered Accountants (the SAICA). 24. The Draft Bill does not require the RBA to prepare their annual financial statements in terms of GAAP. 25. The RBA's own auditors (who are responsible to report on the accountability of the body) are appointed by the RBA itself. This is in spite of the fact that the RBA has to report to the Minister. 26. The RBA's annual financial statements need only be submitted to the Minister six months after year end. 27. Regarding the use of funds and moneys, the Draft Bill only refers to one "E", (effectiveness), whilst ignoring the other "E's" (efficiency and economy). Why should the RBA not be subject to performance measurement? Again, the admirable example set by the Public Finance Management Act, is ignored. 28. The RBA, which now takes over the functions of the PAAB, no longer sets and administers the qualifying examination for auditors. Various institutes will fulfill this function in the future. Why the regulatory body for auditors is suddenly not considered the appropriate body to set the audit examination after having done so for decades, is not clear. 29. The setting and administering of the final qualifying audit examination is not only an exclusive audit function, but arguably the most crucial element in assuring the competence of future auditors. It is common knowledge that all accounting institutes would like the audit function to be part (but note: only part) of the professional services repertoire of their members. With auditing standards requiring little of auditors this is the ideal marketing tool to identify and sell a host of other services to so-called audit clients. This leads to the inescapable conclusion that the accounting institutes will marginalise the audit function through sub-standard audit examinations. Since the RBA only accredits the institutes' syllabi and has no influence over, for example, the marking of scripts and the manipulation of final marks, the institutes would be able to pass the audit privilege to its members in a way which is neither in the interest of the public nor the future development of sound and constructive audit practices. 30. In view of the above it is imperative that the RBA carries on administering the examination, but that this process is made more accountable and educationally acceptable than is currently the case. Should the privilege of administering the qualifying audit examination be extended to institutes, the Southern African Institute of Government Auditors would be the only institute to qualify, as its membership consists exclusively of auditors and its function focuses exclusively on the audit function. 31. The SAICA, for example has gone to great lengths to show that audit standards (and therefore practices) for the private sector (GAAS) and those of the public sector (GAGAS) do not differ substantially. Whilst we do not wish to pursue this point in this document, the SAIGA's stand certainly shows that the Southern African Institute of Government Auditors is uniquely positioned to fulfil such function. 32. All training contracts registered with the Public Accountants' and Auditors' Board for trainee auditors are transferred to the South African Institute of Chartered Accountants (SAICA). What this voluntary association of accountants has done to deserve this privilege, after the PAAB successfully administered training contracts for many decades is mystifying. It is also not clear whether other institutes who have been administering training contracts for many years have been given the chance to get involved. As a matter of fact, the SAICA has only recently started to administer training contracts for its so-called TOPP-programme (Training Outside Public Practice), It has never administered training contracts for practitioners. 33. The specific mention of a particular accountancy institute (the SAICA) in the Act confers undue privileges and reveals favouritism on the part of the drafters. 34. Taking into account the above, it is difficult not to interpret the presence of the many members of the SAICA on the various committees as having exercised undue influence to favour their professional body. 35. In future professional bodies and not individuals will be accredited to perform audits. For example, if the organisations are appropriately accredited, members of the ACCA, the CFA and the SAICA will in future be allowed to perform audits but not individuals who meet the necessary educational and experience requirements (but are not members of a voluntary association). 36. Accreditation on an institute basis rather than an individual basis, is bound to make the audit function even more exclusive whilst at the same time lowering standards. A unique combination which may not have seemed possible by logical reasoning. 37. The criteria for accreditation of professional bodies are inappropriate and provide the platform for many problems in the future. 38. The short list of accreditation criteria in the form of three subjective broad terms: "qualifications", "CPE" and "discipline of members", is fundamentally flawed . A short example will display the shortcomings: A professional association which practices racial prejudice, discriminates against its members and operates under archaic veils of secrecy, yet has its qualification registered with the NQF, provides the occasional update course and sometimes uses "small" (refer to economic strength) members as an example that it does apply some "discipline", will enjoy a "life-long" association with the RCA as an accredited body. Surely this is not what South Africa needs. 39. The Draft Accountancy Profession Bill neither provides for an appeal mechanism if an applying body is of the opinion that its application was not properly dealt with, nor does it provide for the cancellation of accreditation on the grounds of unaccountability and other action which brings the "profession" into disrepute. 40. The fact that an auditing related body must also be accredited by the RCA underlines the intended (yet totally undue) influence which the accountants will exercise over the audit function. Thereby providing the ideal platform for marginalising the auditing function and making accountants less accountable. Even more of what this country does not need. 41. Again, vested interests are more entrenched and protected - a situation which was expected to be relieved rather than exacerbated. The Draft Bill has yet to develop into a Bill and be tabled by the Minister of Finance in Parliament. Taking into account the serious shortcomings of the existing Draft and its failure to free the audit function from the 1951 paradigms by introducing real reform, suggests that a long and thorny road lies ahead. [ Back to the News & Communication Page ]
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