In November last year, the national treasury released the new Draft Auditing Professions Bill and a summary of proposed amendments to the Companies Act of 1973. This has come as a relief to the SA accounting profession because it has long felt that the Companies Act and related legislation were out of date.
Debate during the drafting phase of the bill centred on whether companies should be forced to rotate their auditors every four years, or whether they should just rotate partners within auditing firms. Government seems to favour the more practical route of partner rotation, though the issue is not yet resolved.
Former Ernst & Young senior partner Tom Wixley, an expert on governance, notes that Italy has used firm rotation, but believes the US preference for partner rotation is the more practical example for SA. Ernst & Young national director of auditing and accounting Garth Coppin says both sides of the debate use case studies from overseas to back up their arguments, "but the difference is that SA is a small pond, with a shortage of skills".
Another aspect of the draft legislation that concerns firms is the stipulation that a firm cannot audit the statements of a company in which it has had financial interests during the past two years. "To expect an auditor not to have any financial interest in all potential future audit clients is impractical," says Coppin.
Then there is increased liability. Indemnity insurance is becoming a big cost for audit firms. Because investors know they're more likely to recoup their losses from an auditor than the directors of a company, auditors could become soft targets. "The law as it stands provides for joint and several liability," Coppin says. "An auditor could therefore be required to pay for the full loss, though they are only partly to blame."
Unless changes are made to the Companies Act that would hold directors, employees and other stakeholders responsible for misleading, deceiving or failing to provide material disclosures, rotation of auditors will not prevent corporate fraud.
The introduction of the International Financial Reporting Standards (IFRS) in January this year should go some way to prevent errant directors from committing fraud. The standards will fundamentally alter the way companies' numbers will be reported. Though there have been differences of opinion on many aspects of the standards, there is consensus on their importance.
IFRS 2 (issued in SA as AC 139) deals with share-based payments by companies and requires that any discount to fair value must now be recognised as an expense in the income statement. In particular, there are implications for how the financial impact of black economic empowerment (BEE) deals must be reported. And a company's brands will now need to be formally valued, because it will no longer be enough to include them under intangible assets.
Bernard Agulhas, director of accounting standards at the Public Accountants & Auditors Board (PAAB), says big changes that came with the introduction of IFRS have led to old standards being adjusted, adding some extra work for the professionals (and presumably extra fees).
"There's lots to learn in the process and clients are complaining that costs have gone up," says Agulhas.
Empowerment is an imperative for all sectors of the economy and government will increasingly be looking at the number of black partners in auditing and accounting firms. Growth is expected in smaller black firms such as Nkonki, which are now partnering bigger firms on major accounts.
"Empowered firms are being given opportunities to work on complex accounts and to build their intellectual capital," says Nkonki CEO Cindi Zilwa. "And we're starting to see an unprecedented number of graduating black chartered accountants [CAs]."
But the numbers of black accounting professionals still reflect the apartheid bias. By March 2005, there were only 507 black CAs, 317 coloured and 1 395 Indian, compared with 20 850 white.
The SA Institute of Chartered Accountants (SAICA) has set up various educational and bursary programmes to increase the number of black accountants, but it will still be some time before they work their way through the system to partner level. Meanwhile, smaller black firms must compete against the big four for limited black talent. "Partnering on bigger accounts gives us the opportunity to attract young black staff who want this type of exposure and experience," says Zilwa.
But she says companies are still wary of appointing empowered firms to handle an entire account.
