Corporate Laws Amendment Bill Submission to Portfolio Committee on Trade and Industry 23/05/2018 29 May 2006 PwC

Thabani Jali: Chairman of PricewaterhouseCoopers Southern Africa 23/05/2018 Introduction Thabani Jali: Chairman of PricewaterhouseCoopers Southern Africa Suresh Kana: Deputy CEO of PricewaterhouseCoopers Southern Africa Page 2 29 May 2006

23/05/2018 Main areas of concern Accounting Standards applicable to Public Interest Companies and Limited Interest Companies Section 285A Section 440S Section 287 Section 287A Drafting issues relating to the provision of non-audit services by the auditor Section 275A Page 3 PricewaterhouseCoopers 29 May 2006

Accounting Standards applicable to Companies Financial Reporting Standards for Public Interest Companies Accounting Standards for Limited Interest Companies Compliance with Accounting Standards, Fair Presentation and False or Misleading Financial Reports Page 4 29 May 2006

Financial Reporting Standards for Public Interest Companies Accounting Standards Applicable to Companies Financial Reporting Standards for Public Interest Companies International Financial Reporting Standards (IFRS) What are they? Standards developed by the International Accounting Standards Board (IASB) Clearly defined due process followed Globally recognisable 94 Countries apply IFRS JSE Limited requires listed companies to comply with IFRS Page 5 29 May 2006

Financial Reporting Standards for Public Interest Companies Accounting Standards Applicable to Companies Financial Reporting Standards for Public Interest Companies Bill requires compliance with Financial Reporting Standards (FRS) – (Section 285A(1)) Established by the Financial Reporting Standards Council Locally established standards FRS must be “in accordance with” IFRS FRS is not IFRS Page 6 29 May 2006

Financial Reporting Standards for Public Interest Companies Accounting Standards Applicable to Companies Financial Reporting Standards for Public Interest Companies SUGGESTION Bill should require public interest companies to comply with IFRS Therefore S440S should require the Council to adopt IFRS as issued by the IASB S285A(1) should be amended Page 7 29 May 2006

Accounting Standards for Limited Interest Companies Accounting Standards Applicable to Companies Accounting Standards for Limited Interest Companies IFRS complex and onerous There is a need for simplified requirements for limited interest companies Bill requires compliance with accounting Framework for Financial Reporting Standards; and Schedule 4 disclosure requirements Page 8 29 May 2006

Accounting Standards for Limited Interest Companies Accounting Standards Applicable to Companies Accounting Standards for Limited Interest Companies Accounting Framework: Used by the IASB when they develop individual IFRSs Conceptual guidance that underlie the preparation and presentation of financial statements Does not contain specific guidance on the accounting treatment of specific items Page 9 29 May 2006

Accounting Standards for Limited Interest Companies Accounting Standards Applicable to Companies Accounting Standards for Limited Interest Companies The bar is higher for limited interest companies than for public interest companies: The framework contains no guidance on the accounting treatment of specific transactions The directors of limited interest companies will have to develop their own accounting policies for all their transactions Each limited interest company will in effect be their own accounting “standard-setter” Limited interest companies require simplified guidance, not no guidance Page 10 29 May 2006

Accounting Standards for Limited Interest Companies Accounting Standards Applicable to Companies Accounting Standards for Limited Interest Companies SUGGESTION The Council should develop accounting standards for limited interest companies Limited interest companies should be required to comply with these standards The Department of Trade and Industry should impose a time limit for the development of these standards Page 11 29 May 2006

Compliance with Accounting Standards and Fair Presentation Accounting Standards Applicable to Companies Compliance with Accounting Standards and Fair Presentation Bill requires fair presentation of financial statements and compliance with accounting standards (S285A) Non-compliance with the standards is an offence (S287) S287A creates an offence for false or misleading financial reports, with no reference to accounting standards S287A in effect allows departure from the standards if the relevant persons believe that compliance with the standards will result in the financial report being false or misleading Page 12 29 May 2006

Compliance with Accounting Standards and Fair Presentation 23/05/2018 Accounting Standards Applicable to Companies Compliance with Accounting Standards and Fair Presentation SUGGESTION S287A should be redrafted to state that nothing in this section permits non-compliance with accounting standards Page 13 29 May 2006

Proposed section 275A (paragraph 29 of Bill) 23/05/2018 Non-audit Service Provided by the Auditor Proposed section 275A (paragraph 29 of Bill) “Certain non-audit services not open to current designated auditor of public interest company 275A. (1) An auditor appointed to a public interest company may not for the duration of the appointment perform any bookkeeping or accounting (as distinct from auditing) services and, to the extent that these would be subject to its own auditing, internal audit or tax advisory services for that company. 29 May 2006

Issues Previous draft of the Bill 23/05/2018 Non-audit Service Provided by the Auditor Issues Previous draft of the Bill Prohibition only applied to the individual who was the “nominated auditor” s275A(1) of current Bill applies to “auditor” Did not include any reference to “tax advisory services” Wider scope than previous draft Due to current section now applying to: the “auditor”, and not only to the individual who was the “nominated auditor” as previously (NB. “designated auditor” in current Bill), “Tax advisory services subject to own auditing” 29 May 2006

Interpretation of Section 275A 23/05/2018 Non-audit Service Provided by the Auditor Interpretation of Section 275A The wording of section 275A(1) itself (“auditor”) takes precedence over the section heading (“designated auditor”) Original draft section referred to “nominated auditor” (now “designated auditor”). “Auditor” in heading of previous draft Bill became “designated auditor” in current Bill 29 May 2006

3rd Parties' Views on Intention of Section 275A 23/05/2018 Non-audit Service Provided by the Auditor 3rd Parties' Views on Intention of Section 275A We understand that the South African Revenue Service (SARS) concur that intention was that section 275A(1) should only apply to the “designated auditor” and not also to services provided by other partners and staff of a “firm. 29 May 2006

Role of IRBA pre-empted 23/05/2018 Non-audit Service Provided by the Auditor Role of IRBA pre-empted Auditing Professions Act (“APA), established Independent Regulatory Board for Auditors (“IRBA”) to replace PAAB s21 of APA requires IRBA to establish Auditor Ethics Committee, which must set Code of Conduct Code of Conduct will deal with auditor independence Statutory role of IRBA in regulating audits & ensuring good ethics (including auditor independence) partially pre-empted by s275A of Companies Act determining the types of non-audit services “auditor” of Public Interest Company may not provide 29 May 2006

CONCLUSION & RECOMMENDATIONS (1) 23/05/2018 Non-audit Service Provided by the Auditor CONCLUSION & RECOMMENDATIONS (1) WE RECOMMEND THAT: 1. Section 275A should be deleted in its entirety from the Bill 2. IRBA should be allowed to fulfil its statutory duty of regulating the audit profession This would allow IRBA to consider auditor independence and seek input from all stakeholders (e.g. Government, SARS, investing public, Public Interest Companies, IRBA, Registered Auditors, SAICA, JSE etc) as part of its Code of Auditor Ethics 29 May 2006

CONCLUSION & RECOMMENDATIONS (2) 23/05/2018 Non-audit Service Provided by the Auditor CONCLUSION & RECOMMENDATIONS (2) If our recommendation that s275A should be deleted in its entirety from the Bill is not accepted, we recommend that: Section 275A(1) should only apply to the “designated auditor” (where “auditor” is a “firm”) or to the individual Registered Auditor (where not a “firm”) To achieve this we recommend that the words “An auditor” in section 275A(1) should be replaced with the words “The “designated auditor” or the individual Registered Auditor referred to in section 37 of the Auditing Profession Act, 2005 (Act No. 26 of 2005) who is ....” The reference to “tax advisory services” should be deleted from s275A(1), as it is accepted internationally that most auditor provided tax services do not adversely affect auditor independence 29 May 2006

23/05/2018 Questions? 29 May 2006