Background on the IRBA

1. PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCEFIC AMENDMENT BILL, 200807 May 2008By: Kariem Hoosain – Chief Executive Officer

2. Background on the IRBA • Statutory regulator for auditing profession in South Africa. • Statutory mandate provided by Auditing Profession Act, Act 26 of 2006 (“APA”). • Also a supervisory body in terms of Schedule 2 to FICA. • Supports enforcement of Anti Money Laundering (AML) and prevention of organised crime and other terrorist related activity.

3. Synopsis • Overall comments in relation to the Bill • Comments in relation to specific paragraphs • Recommendations to address concerns

4. Overall Comments in Relation to the Bill • Due Process • Earlier draft released December 2006 and IRBA submitted comments as requested. • Bill was released 4 April 2008 with comment deadline 30 April 2008. This coincided with public and school holidays and long weekends. It did not provide for sufficient time for IRBA to consult with its stakeholders and governance structures. • Concern based on fact that Bill reads certain provisions into APA and IRBA not able to determine whether these new provisions are aligned with APA.

5. Overall Comments Continued - Regulatory Framework • IRBA as a supervisory body • Registered auditors in their capacity as auditors are not listed in Schedule 1 as accountable institutions – only when they render investment advice or investment brokering services. • A person who renders above service is regulated and supervised by FSB. • IRBA only regulates the audit function of registered auditor and this function is not listed in terms of FICA.

6. Overall Comments cont. • Therefore the IRBA is a supervisory body without accountable institutions to supervise under the Act. • FIC Annual Report 2006-2007 – it was noted that FIC had completed initial recommendations to update various references in schedules to outdated Acts and schedules changed and broadened. These recommendations have not been shared with the IRBA and the Board cannot assess its impact, if any. • Proposals for amendments of schedules for supervisory bodies and accountable institutions not included in Bill

7. Overall Comments cont. • The Right to Override Decisions • If the IRBA declines to enforce compliance in terms of proposed section 4(g)(ii) the FIC is empowered to press ahead and supervise and enforce compliance. • It is of great concern that a non-auditing body will have power to override considered decision taken by audit regulator. IRBA can only decline on good grounds. • Further concern that FIC may issue directives in respect of auditors which the IRBA supervises in terms of section 43A(6)(a). • SA adopted ISAs in 2005 in anticipation of the provisions of the APA.

8. Overall Comments cont. • This requires SA to comply with internationally comparable auditing standards. This was also a strategic initiative by government to ensure international reliance on auditors reports issued in SA and encourage global investing because of confidence in such reports. • The Bill may negate the aims, objectives and independence of other regulated professions, such as the auditing profession.

9. Overall Comments cont. • Power to issue directives • The Bill provides FIC and all supervisory bodies to issue directives and failure to comply with directive is an offence with a fine not exceeding R100 million and 15 years imprisonment. • The definition of “this Act” (section 1) includes directives but seems to elevate them to higher order than normal administrative rules issued by supervisory body. The Bill vests same powers in IRBA. • Concern is that these powers seem to be quasi-legislative powers but not subject to normal democratic controls. Important to provide guidance on the exercise of such powers and to provide safeguards, for example, guidance on aspects that may be covered by a directive, public consultation before a directive is issued, tabling of directives in Parliament, appeal against and review of a directive.

10. Overall Comments Continued - Concentration of Powers • In various sections of the Bill, the Director of FIC is given powers to take various decisions and carry out various functions which have substantial impact on supervisory bodies and other interested parties. • Concern that there appears to be concentration of powers in one individual which is not subject to any oversight from a governance or supervisory structure such as a Board or Council.

11. Overall Comments Continued - Administrative Impact • Increasing of penalties and enforcement powers before clarifying important compliance issues. • The IRBA operates within its mandate set out in its own legislation. There needs to be proper alignment and integration of powers - a concern is that a registered auditor may be subject to higher penalty for administrative failure to comply with record-keeping under FICA than he can for a serious failure in the auditing process, which undermines the core function of the IRBA. • Supervisory bodies must have infrastructure, capacity and financial resources to enforce compliance. IRBA obtains funding from government. Important to consider impact of additional powers and responsibilities.

12. Overall Comments cont. • The IRBA already has certain statutory processes in place such as inspections, investigations and disciplinary processes – caution should be exercised not only where there is duplication of processes but also where objectives of the IRBA and FIC are different - may result in inefficiencies.

13. Comments in Relation to Specific Paragraphs in the Bill • Paragraph 2 – It is inappropriate for FICA to override all other legislation including the APA. This will lead to confusion when the two laws are in conflict. Unclear whether this insertion will apply retrospectively. • Paragraph 4 – FIC’s role and responsibility is now at apex of AML/CTF supervisor. We are concerned about the FIC’s right to overrule considered decisions of supervisory body. • Paragraph 11 – We are concerned about the discretion given to the FIC with regards to the sharing of information, especially in light of amendment to section 45 which provides for parties to enter into Memoranda of Understanding. It is unclear on what grounds the FIC can decide not to disclose information affecting IRBA.

14. Comments in Relation to Specific Paragraphs in the Bill - Cont • Paragraph 12 – Registered auditors now have to register with an additional body, in addition to registration with IRBA and FSB in their capacity as financial services providers. Multiple registration becomes onerous for the practitioner both financially and in terms of compliance requirements with the different legislation. • Paragraph 13 – The IRBA’s core functions as set out in the APA do not include enforcement of compliance with AML legislation. • It is inappropriate to defray expenses from levies we are authorised to impose on registrants. We question the practical application of this provision where all registrants are not accountable institutions, as we presently have in our situation.

15. Comments in Relation to Specific Paragraphs in the Bill - Cont • Section 45B(4) gives the FIC and supervisory body the discretion on whether to recover costs for an inspection from person inspected. IRBA needs guidance on the circumstances under which costs should not be recovered. We are unclear as to the application of the PFMA on a decision not to recover costs. • Section 45B – We believe it is inappropriate that the decision of sharing such information which is in the public interest rests with one individual. We are concerned about the authority and wide powers of inspectors to access and get information from persons.

16. Comments in Relation to Specific Paragraphs in the Bill - Cont • Paragraph 14 – Section 45D allows the Appeal Board to set aside any decision of the FIC or supervisory body. The IRBA has in terms of its enabling legislation specific powers to issue judgments against registered auditors. The relationship between the powers and rights under the Bill and those under the APA is not sufficiently clear. • Paragraph 14 – Penalties envisaged range from R10 to R50 million. We question the basis for arriving at such extreme penalties. While these may be levied by the IRBA as a supervisory body, these exceed the maximum penalties which may be levied in terms of our enabling legislation.

17. Recommendations to Address our Comments • We recommend that consideration is given to strengthening the horizontal relationship between supervisory bodies and other regulators. This could be achieved by establishing a coordinating body which will inter alia, • Resolve any conflicts in legislation; • Eliminate the concentration of powers vested in a single individual; • Adjudicate administrative justice, especially where penalties in different pieces of legislation are incongruous; and • Provide guidance on all matters relating to exercise of powers of regulation and supervision under FICA, including the powers and qualifications of inspectors, whether appointed by the FIC or supervisory body.

18. Recommendations cont. • Multiple registration for accountable institutions should be eliminated and where considered necessary to enforce compliance with AML legislation by accountable institutions under the jurisdiction of supervisory bodies which already have legislative powers, it is recommended to amend the enabling legislation of supervisory bodies. • Similarly conflicting provisions between the FICA legislation and the enabling legislation of supervisory bodies should be addressed by amendments to the legislation of supervisory bodies. • It is recommended that reliance is placed on existing structures and processes, e.g. the inspections and disciplinary processes at the IRBA.

19. Recommendations cont. • It is recommended that reference is made to international trends. It is our view that the proposed amendments are not in line with other countries’ AML legislation and neither with the requirements of the Financial Action Task Force. Conclusion It is our view that the IRBA will be in a better position to be subjected to the FATF evaluation in September based on the current legislation, than it would be should the Amendment Bill be enacted.