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September 29, 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 believe there should be some level of assurance for private companies because although there is no public interest there are still tax authorities, bankers and employees who need some kind of assurance on the 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).

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 SMPs.

“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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