Technical Issues - Corporate Laws Amendment Bill, 2006: Response to Public Hearings Deloitte 275A
The dti remains of the view that an auditor's ability to perform an audit is compromised by the provision of other services to a company - if these will later be subject to its own audit. The difficulties regarding definitions and the appropriate demarcation of a restriction on these services has been noted. The dti is in favour of the proposal to have the matter dealt with under the code of conduct to be developed by the IRBA in terms of the Audit Profession Act. This option will be pursued with Treasury and the IRBA.
Alternatively, SARS has confirmed that it is willing to have the provisions of275A apply to the designated auditor only.
Either of these alternatives will satisfy the concerns raised by Deloitte and various other presenters over the current formulation of 275A.
Definition of Public Interest Company
Deloitte has proposed the inclusion of Pension Funds and Medical Aid Schemes under the definition of a public interest company.
These entities are subject to stringent oversight by regulators and need to comply with various prudential and other requirements specifically designed to safeguard the public interest in these entities. Since these entities are not companies, they are not covered by the Companies Act. The imposition of additional requirements, such as compliance with Financial Reporting Standards is best imposed by the applicable Regulator.
Attendance of Auditor at board meeting
Auditors are appointed by the shareholders in general meeting and are responsible to the company as a whole - not to management. The principle of accountability to shareholders is sound and finds expression in these provisions. The dti hopes to retain these provisions with little or no amendment.
Penalties on individuals who mislead or frustrate the audit process
Deloitte questioned why auditors are under threat of sanction while other parties responsible for information related to audits do not face similar penalties.
The dti notes that the provisions of section 287A, do in fact apply to "any person who is party to the preparation, approval, publication, issue or supply of the financial report" so that a person feeding false information to the auditor will be covered by and liable under this section.
Response time in the case of an investigation
The current response time is based on the time allowed in an investigation by the JSE GAAP Monitoring Panel. The reason for tight response times is simple: while the error prevails, members of the investment public are making decisions based on misleading information. For this reason alone, quick rectification is necessary.
In terms of current provisions, the chairman of an investigation must at the outset notify the company investigated (see section 440AA(4)(b) and a period of 18 days is allowed for the investigation, but by virtue of 440AA(8) this period may be extended. During all this time the company is aware of the investigation, and is able to follow whatever processes it requires in response to the allegation. The 7 business days given to respond apply at the very conclusion of the investigation. The dti is not persuaded that it is necessary to extent the response period currently provided for.
PWC want automatic acceptance ofIASB standards (IFRS). The Bill states at s 285 that financial reporting standards, "must be in accordance with" international standards. This ensures a tight correlation while not abrogating our responsibility to consider the national interest in respect of new developments. Historically, there have been difficulties in applying international accounting standards willy nilly in the South African context. Once such case was the adoption of AC 134 which dealt with accounting treatment of transactions in financial derivatives. It took the intervention of the banking industry with the help of the South African Reserve Bank to delay implementation, and subsequently the standard was withdrawn and revised. Implementation at the time the Standard was adopted internationally would have had far reaching and detrimental consequences for financial institutions in South Africa. The safeguard of a domestic acceptance process with regard to the international standard is considered to be both warranted in terms of historical experience and prudent in respect of safeguarding the national interest in future.
Limited Interest Companies
PWC does not like the reference to the "Accounting Framework" (s 285A) - which is a conceptual document, and does not contain any specific guidance on treatment of specific transactions. Consequently each LIC ''will have to develop its own standard". PWC further proposes that a time limit be imposed on the Council in its obligation to develop a standard for LICs (section 440S(1)(b)).
Although the dti sees as the ultimate solution the development of the LIC standard, we recognize the difficulty that will prevail in the interim We would like to consider some of the recommendations more closely, specifically that proposed by E&Y on p. 2 of the submission by Mr G. Coppin. A time limit on the development of the LIC standard may also be considered.
This section creates an offence for false and misleading statements without reference to accounting standards. PWC want ''false and misleading" to be determined with reference to FRSs.
This is not practical since the information may be false or misleading without having been computed according to FRSs. For example, the information may be provided in respect of a prospectus, which requires a variety of factual requirements in addition to accounting information.
(See our earlier comments.)
Definition of financial statements (3.1 of the submissions)
The dti hopes to include all financial information upon which investors might place a reliance. This would include preliminary statements, and these should thus be included
Section 280 (3.2 of the submission)
KPMG proposed improved wording for the section. The dti itends to adopt the alternative wording proposes by PWC.
Sections 303 and 304 (3.3 of the submission)
The dti would like to further consider whether subsidiaries of public interest companies should be required to prepare interim and provisional reports.
Definition of PIC
KPMG were concerned whether foreign companies would be included in the definition of PIC. The definition reads, "a company is a public interest company if... "- whereas "company" is defined as "a company incorporated under Chapter IV of this Act". Foreign entities are thus clearly excluded. A locally incorporated subsidiary of a foreign entity will however be included if it complies with the other criteria under the definition of a PIC.
Audit committees - composition
KPMG argues that it is not practical to restrict membership of the audit committee to "independent non executive directors". This is not strictly speaking the requirement. The Bill specifies that all members of the audit committee must be non-executive directors, but requires that its members are able to act independently.
The purpose of excluding executive directors altogether from participation in the audit committee is the likelihood of dominance. A single executive director may well influence the decisions of the audit committee, whereby its function becomes a formality rather than a truly beneficial independent contribution to the nomination and engagement of auditors.
Audit committees - transitional mechanisms
KPMG further argued that there was no transitional mechanism and that companies would be in immediate non-compliance upon passage of the Bill. This is not the case. Proposed section 269A states that the duty to appoint an audit committee arises to a company which qualifies as a public interest company, but that this duty operates "for the following financial year". Thus a company which upon the effective date of the Act is a PIC will have to appoint an audit committee for its immediately following financial year.
Rotation of auditors
KPMG suggest that the transitional provisions of clause 53(3) are unclear and have questioned whether they apply prospectively or retrospectively? This clause reads "the term of service of an auditor or designated auditor shall be measured from the date of the auditor's first appointment or reappointment after the date on which this Act took effect."
We suggest that there is no ambiguity.
Audit committees - functions
KPMG supports the delegation of functions to the audit committee, but these must not detract from the duties of the board. See s. 270A(3) which states that the duties of the board are not diminished by the appointment of the audit committee "except with respect to the appointment, fees and terms of engagement of the auditor." In retrospect the word "appointment" should read "nomination".
The reference to private company, and the general continuation of the use of the former designations of "public" and "private" was questioned.
Multiple descriptions of companies already exist, for example "listed" and "unlisted", "private" and "public". The dti has not done away with the public / private distinction since several provisions of the Act still rest on this distinction. In addition, every South African company is currently designated "Ltd" or "(Pty) Ltd" depending on this classification. The eventual abolitions of this distinction will have significant administrative implications for companies. The dti would like to delay this until the conclusion of the Corporate Law Reform process.
285A - accounting standard applicable to LICs
KPMG want a more definite standard for LICs and want this adopted before the promulgation of the Bill.
(See earlier comments.)
290 - option not to consolidate financial statements
KPMG was concerned that this is a departure form international standards and should not be permitted. Firstly, this is a provision of the current Act and is thus currently permitted. Our amendment merely restricts the option to LICs. Secondly, the very rationale behind creating a dual standard, is to enable LICs to depart 1Tom the more onerous international standard.
KPMG were concerned about the retention of certain of the provisions of Arnnexure 4, for reason that these are also covered in FRSs and that discrepancies may arise over time. In the view of dti this concern is unwarranted since Armexure 4 applies to PICs "to the extent that there is no conflicting requirement in financial reporting standards" (See paragraph 4A(b) of the Schedule).
ABASA Schedule 4
ABASA questioned the need for the definitions in Schedule 4 since these are also contained in FRSs. The definitions are nonetheless required for LICs which will not need to comply with FRSs, but will need to comply with the provisions of Schedule 4.
Part 7 - the use of the phrase "fairly valued"
This term is not contained in Schedule 4. The dti will review the provisions of 285A in respect of LICs and review the use of the term in that context.
Part 24 - Considerations appropriate in the assessment of auditor independence
SAIP A has suggested in the context of considering whether any prior engagement of a person as auditor to a company might affect his or her independence, that the audit committee also regard whether the person was employed in any other capacity. The dti is of the view that this additional requirement is adequately covered in subparagraph 270A(5)(b). (See earlier comment on the proposed amendment to section 270A(5)(d).)
Part 50 - continuity in Council
SAIPA expressed the concern that the requirement that former members of the Council be appointed for the sake of continuity will not be possible in light of the 6 year restriction on the term of service of a member. However, since the Council will have 16 members, and since only five members need to be reappointed for the sake of continuity, no such problem will arise.
Point 3 of submission - section 148A
This section allows the Registrar to exempt a company from disclosing certain information in a prospectus under certain circumstances. There is an equivalent provision in the JSE listing requirements. The JSE is concerned that the Registrar may exempt a listed company from disclosure in circumstances in which the JSE will not grant a similar exemption. While this is possible, it is of no consequence since the company will not be permitted to list unless it complies with the JSE listing requirements. The JSE's decision will thus prevail in such a case.
Point 4 of submission - section 261A and the preservation of secrecy
The JSE has requested that an inspector be permitted to share information with other regulators, and that such a disclosure will not fall within the duty to preserve secrecy. The dti sees merit in this request, and will consider inserting such a provision.
Point 8 - section 270A(1)(g)
ACCA is concerned that this section imposes an obligation on the audit committee to deal with complaints regarding the audit, whereas it may not have the capacity to do so. The dti recognizes the concern, but notes that the Act does provide for the audit committee to augment its capacity (see 270A(4)).
Point 9 - independence criteria for auditors
ACCA is concerned that the amount of information to be taken into consideration by an audit committee to establish independence is too onerous. The dti is satisfied that this information is readily available and not onerous.
Point 16 - an offence for a company to supply incorrect information
ACCA is of the view that a company should not be held liable for such an offence, since the cost will be carried by the shareholders. The directors or officers responsible should carry responsibility. The dti will consider this proposal.
Point 21- Sections 440T and 440Y
These sections provide for interested parties to receive notification. ACCA suggests that this is merely an administrative issue. The dti would like by the introduction of these measures to reduce reliance on the Gazette and other forms of publication.
Point 440AA - practicality of investigations procedure specified for Panel
ACCA suggests the procedures set out for an investigation are not practical. These procedures have however been modeled on the procedures currently employed by the JSE GAAP monitoring panel. For this reason, the dti considers them workable. The Minister is nonetheless able in terms of section 440AA(10) extend the number of days permitted for an investigation.
Point 29 - section 440FF
ACCA is concerned that directors commit an offence only he or she was party to "the approval" of an offending report. The dti is in favour of this proposal.
Points 30 to 33 - alternative penalties under 440FF
ACCA has asked for a clarification of the administrative penalty and the criminal sanction. The dti considers that this is clear enough under the current wording.
Ernst and Young
A.2 Consolidated statements - exemption for LICs (See earlier comment.)
A.3 Transitional provisions - application of clause 53
E&Y have proposed that we specify whether the financial year mentioned in 53(1) is the one beginning or ending after that date. The dti welcomes this proposal.
B.2 and B. 7 - the need to define "auditor" and "designated auditor" The Act already defines these terms - see sections 269(6) and 273(5).
B.4 - wording of 274(2).
The dti is of the view that it is not necessary to change this section.
B. 5 - Brian, pIs consider with reference to the Audit Profession Act.
C.1 and C.2 - Definition of PIC (See earlier comments).
C.3 - wording of section 38
The dti favours the proposal that the term "consolidated" be omitted from this section and that the word "include" be substituted for "consider".
C.4 - use of the term "fair value"
E&Y have argued that this term has a variety of applications in FRSs, and is thus inappropriate. The dti considers that any such application would thus suffice for determining "fair value".
C.5 - audit committee to verify that audit is in compliance with applicable law
E&Y proposes that this provision contained as section 270A(1)(e)(i) of an earlier draft of the Act should be reinserted. It is however impossible for the audit committee to give such assurance unless it redoes the entire audit. The dti considers that this is not a proper function for the audit committee.
C.7 - E&Y suggest that the offence in 440FF is already covered in 287 and 287 A The dti agrees that there is an overlap and will address the issue.