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August 30, 2009

New legislation shakes up South African audit profession

A new Companies Act in South Africa
is set to reshape the face of the audit profession.

At present, all South African companies must
produce audited financial statements. The new law, which will come
into effect towards the middle of next year, exempts all
privately-owned companies from audit.

It creates a three-tiered system, with public
interest entities requiring an audit, some private companies
requiring an independent review and the smallest companies exempt
altogether.

The threshold to define what constitutes a
small company has not yet been set.

The question of which professionals will be
authorised to conduct the reviews has also not been resolved and
this has set different sections of the accounting profession on
opposing benches.

The Independent Regulatory Board for Auditors
(IRBA) is responsible for registering and overseeing auditors in
South Africa. IRBA chief executive Bernard Agulhas said if the
Department of Trade and Industry (DTI), which sets the legislation,
uses the IRBA definition of a review then only auditors will be
allowed to provide the service.

It will follow the terms of International
Standard on Review Engagements (ISRE) as set by the International
Audit and Assurance Standards Board.

“But there might be a different definition for
what the review is and the DTI is consulting very widely at the
moment,” Agulhas said.

“We believe it should be a review in terms of
ISRE 2400. We also believe there should be some level of assurance
for private companies because although there is no public interest
there are still the tax authorities, bankers and employees who need
some kind of assurance on their financial statements.”

New business stream

The South African Institute of
Professional Accountants (SAIPA) disagrees the independent review
should be restricted to auditors.

SAIPA members cannot become registered
auditors and the new law could provide them with a new business
stream. SAIPA chief executive Shahied Daniels said the architects
of the Companies Act had no intention of restricting the review to
auditors.

“We, as an institute, are trying say ‘let’s
come together and see what an independent review is so all members
of bodies such as us and [the South African Institute of Chartered
Accountants – SAICA] will be able to perform that review and it is
not limited only to the registered auditors’,” Daniels said.

SAICA members can become auditors, 34 percent
are in public practice (see chart).

Opening the door

Despite insisting the review should
be restricted to auditors, given their experience and knowledge in
this area, Agulhas believes the government intends to open up it up
to other professionals.

“We have been trying to position ourselves in
this changing landscape because if auditors lose the audit of
private companies, those firms and those practices that only audit
private companies will have to revisit their business strategy to
see whether they want to continue as audit practices or whether
they want to focus on other services.

“The IRBA as the regulator certainly needs to
see how it impacts on the audit profession.”

Agulhas said he thinks audit firms are “a bit
worried”, especially small- and medium-sized practices.

“If the DTI decides that it is just an
alternative assurance engagement, then they might decide that
anyone else can do it. I think for auditors, there will be some
impact on their practices.”

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