DELIBERATIONS

1. DRAFT AUDITING PROFESSION BILL DELIBERATIONS National Treasury: Republic of South Africa 17 October 2005 1

2. Contents • Background & History of the Profession • Role of auditors • Interested Parties • Common issues raised in public hearings • Treasury’s view • Main areas of disagreement • Conclusion 2

3. Background • PAAA enacted in 1951 • Protecting public interest main object of that Act • Minister handed the regulation to the profession – de facto self regulation • Amended 40 years since, in 1991 • Discussions on improving it since early nineties 3

4. History (1) • Great depression impact on the profession • Oil price crisis in early seventies • US authorities question – self regulation practices • Increase competition, increase of non-audit services • Audit overtaken by non-audit services in contributing to revenues of firms • Authorities warn of impact to independence of auditors 4

5. History (2) • Firms compete on prices for audit work and solicitation of clients intensifies • Low-balling develops into practice • Firms consolidate from “big 8” to “big 4” • Fall of the Soviet union & emergence of globalisation • Standards of accounting & auditing harmonised • Culture & character of profession changes 5

6. Role of Auditors (1) • Corporate failures world wide infuse urgency in SA legislative reform • Public interest the focal issue • Auditor independence & some practices questioned • Profession admits consulting impairs independence • Increased focus on risk management- but often skewed perspective 6

7. Interested Parties • Expression of opinion – on AFS • Shareholders including pension funds • Workers in client companies • Creditors and other investors • Governments 7

8. Focus of this Bill • Enhance integrity of the profession • Protection of the Public interest • Enhance independence & effectiveness of the regulator • Enhance independence of auditors • Ensure the RB is accountable • Hold auditors accountable • Ensure equitable access to profession 8

9. Common Issues (1) • Definition of Audit • Reportable irregularity • Education & training • Character of the RB • Section 44 • Disciplinary procedure • Limitation of liability 9

10. Common Issues (2) • Disciplinary procedure • Other issues • Multi Disciplinary Partnerships 10

11. Definition of Audit • Not in accordance with IFAC • Part b of the definition • Use of audit services somewhat confusing • Act should focus on regulating external auditing only 11

12. Reportable irregularity • Definition too wide – any unlawful act • Reporting process cumbersome • Materiality preferably should refer to entity • Otherwise dishonest • Revert to S20(5) of PAAA • Penalty is harsh • Overlapping reporting with other legislations • PAIA 12

13. Education & Training • Referee & a player - exams • Withdrawing of recognition of educational institutions on students • Alternative supervisory arrangement on training contracts • Partial accreditation • Accreditation every five years • New syllabus required 13

14. Character of RB • No guarantee RA will be in the RB • 4 + 1 representation of RA’s • Funding of RB – independence & reciprocity • Minimum representation of RA’s in DC • No room made for academics in the standards and ethics • Powers of RB to issue rules • Standard setting & ethics committee > separate bodies 14

15. Section 44 • Fair representation not the same as fair presentation • Provisions archaic • Drop section or mention all audit procedures • Truthfulness and correctness • Materiality on testing existence of A&L • Conflict of interest – two year rule, ethics code • Including annexure • Term “without any restriction” 15

16. Limitation of Liability • Align with audit only • Allow for limitation non-audit engagements • Proportionate liability 16

17. Disciplinary Procedure • Make it a regulation • Allow for simpler process for minor cases • Consent orders • Decisions of DC not to be revoked by RB • Right of appeal • Self incriminating evidence • Right to remain silent • Subpoena powers for investigation committee 17

18. Other issues • Renewal of registration • Consent to employ people refused registration • Public interest company - inspection • Confidentiality of information - inspections • Nominated auditor vs engagement partner • Erosion of audit profession • Transitional provisions – limit to one year • Section 41 – potentially confusing terms 18

19. Multi Disciplinary Practice • Partnership • Sharing of profits 19

20. Conclusion • Thanks to all the presenters and hoping the committee will ensure the intention of the policy is carried out in the resultant legislation 20

21. THANK YOUANY QUESTIONS? 21