PRESENTATION TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY COMPANIES BILL [B ] 13 August 2008 By: Bernard Peter Agulhas – Acting Chief Executive Officer

Background on the IRBA Statutory regulator for auditing profession in South Africa. Statutory mandate provided by Auditing Profession Act, Act 26 of 2006 (“APA”). National Standard Setter for auditing, review and other assurance standards Promotion of investment and employment and protection of minority interests

Synopsis Matters of Principle in relation to the Bill Comments and Recommendations in relation to Specific Sections

Matters of Principle Independent Review of Financial Statements Maintenance of Accounting Records Financial Reporting Standards Preparation of Annual Financial Statements Auditors – Removal and Rotation

Independent Review of Financial Statements Concerns regarding Regulations still to be made in terms of: –S 30(10)(a) the categories of private companies required to have their financial statements audited; and –S 30(10)(b) for the “manner, form and procedures for an independent review engagement, other than an audit, as well as the professional qualifications, if any of persons who may conduct such reviews”.

Independent Review of Financial Statements Recommendation: It is hoped that in the drafting of these particular Regulations the following matters will be taken into account: 1.Such reviews, should express limited assurance to stakeholders and should not be equated to the present Accounting Officer’s report for a Close Corporation which expresses no assurance.

Independent Review of Financial Statements (Continued) 2.Consequently the review should be conducted in accordance with a recognised review standard, issued by a recognised standard setter to ensure credibility for stakeholders. 3.Auditing pronouncements applicable to registered auditors (RA’s) in SA include both audit and review standards that enable RA’s to express both reasonable and limited assurance. 4.RA’s are thus professionally qualified to perform both audit and reviews of financial statements.

Independent Review of Financial Statements (Continued) Quality of RA’s attest work subject to monitoring by Practice Review of IRBA. Non-compliance with standards identified – referred for investigation - may lead to disciplinary action. Recommendation: 1.the Regulations for “reviews of financial statements” are developed in consultation with the IRBA.

Maintenance of Accounting Records Concern that it may be inferred from S 28 that if a company is not required to prepare financial statements it does not have to keep accurate and complete accounting records. We believe it important and necessary for all companies to keep such records for regulatory and judicial purposes, also necessary where companies previously exempt are later required in terms of S 30(2) to prepare annual financial statements. Recommendation: 1.the words “with respect to the preparation of financial statements” in S 28(1)(a) are deleted

Financial Reporting Standards The basis on which the functions of the Financial Reporting Standards Council (FRSC) are provided for is critical to maintain the credibility of financial reporting in SA, and its ability to attract foreign investment. S29(5) requires financial reporting standards (FRS) to be consistent with IFRS – potentially creates inflexibility as to whether existing FRS used in SA would continue to apply: –Private sector: IFRS, SA GAAP, SA GAAP for SME’s –Public Sector: GRAP

Financial Reporting Standards (Continued) FRSC function in S 440S of the present Companies Act, now dropped – clarity required as to whether the FRSC will fulfill only an advisory role to the Minister as indicated in S 204 of Bill? Recommendations: 1.The functions of the FRSC in S204 include a mandate to determine what FRS are appropriate for different companies and state owned enterprises in SA, in order for those audited, to be prepared in terms of a recognised framework that achieves fair presentation 2.Public companies, state owned enterprises and private companies, with public accountability, should be required to prepare annual financial statements, in accordance with IFRS and be audited.

Financial Reporting Standards (Continued) Recommendations: 1.The functions of the FRSC include responsibility for coordinating the accounting standard setting process and S 204 and 29(4) be amended accordingly; and 2.The Regulations regarding the FRS be made available prior to the effective date of the Bill and due process provided for comment on draft regulations in Schedule 7 Par 14 is followed.

Preparation of Annual Financial Statements Exemption in S 30(1) from the preparation of annual financial statements (AFS), sets an undesirable precedent. Any person wishing to enjoy the benefits of conducting business as a company should accept responsibility for being accountable, at lease annually, for the preparation of AFS. Ignores and potentially undermines other regulatory requirements many of which require AFS to be prepared.

Preparation of Annual Financial Statements Recommendations: 1.The requirements of S 29 be encapsulated into S30 with appropriate changes to ensure all companies have a responsibility to prepare AFS as at a specific year end; and 2.The financial year end of any company is not subject to change by virtue of falling on a Saturday, Sunday or Public holiday.

Auditors – Removal and Rotation The Bill does not contain any provision for the removal of an auditor, Recommendation: 1.sections similar to S 277 to 279 in the Companies Act are introduced Recommendation: auditor rotation in terms of S92 of the Bill should be: 1.Aligned internationally with the Code of Ethics of the IRBA; and 2.Apply specifically to public companies; for 3.A rotation period of 5 years to apply only to the individual lead engagement partner; with 4.A cooling off period of 2 years only.

Auditors – Removal and Rotation Lack of clarity as to whom the auditor rotation applies due to the use of the term “auditor” and “designated auditor”. The Bill does not define a “designated auditor” and the APA included a “firm of auditors” under the definition of “auditor” Recommendation: 1.the Bill should specify that the rotation applies to “the individual registered auditor within the firm that is responsible or accountable for that audit” for public companies, and not the “firm” that is the registered auditor.

Comments in Relation to Specific Sections in the Bill Refer by Chapter and Section to Issues identified and provide our Recommendations, as set out on pages of our Comment Letter Chapter 1: Comments primarily around definitions which require clarification; Chapter 2: Relate primarily to concerns regarding practical implementation of various sections that may result in unintended consequences; Chapter 3: Issues requiring clarity with regard to the auditor’s responsibilities and possible overlap with other legislation and Corporate Governance Codes; Chapter 4: Concerns regarding definitions, matters requiring clarification and consistent use of legal and technical terms

Comments in Relation to Specific Sections in the Bill Chapter 5: Issues relating to acquisitions and mergers and the remit of the Securities Regulation Panel; Chapter 6: A number of practical implementation issues around the proposed new “Business Rescue” provisions that need further consideration to avoid unintended consequences; Chapter 7:Sections requiring clarity or further consideration

Comments in Relation to Specific Sections in the Bill Chapter 8: Suggestions to enhance the functioning of the Commission and the proposed Companies Ombud; Chapter 9: Underlying presumption questioned; and Schedule 3: Editorial comment Schedule 7:Clarification issues.