We are taking an in-depth look at the regulation of accounting, from past to future. Read as our CEO explains the challenges and victories as our country embarks on a renewed regulation of the profession.
Regulating accountants – what lies ahead
Unification of the accounting profession has long been an elusive ideal. South Africa currently accommodates 10 professional accountancy bodies with varying entry, conduct and disciplinary requirements.
This situation delivers variety of choice and approach, but also presents some challenges. A largely unsophisticated business community struggles to understand the basic difference between bookkeeper and auditor. Duplication of effort is rife and no unified voice can speak with and for the local and international community.
In addition accounting and auditing requirements are not consistently applied across various statutes leaving the public and accountants uncertain as to what can be expected and what should be delivered. This has resulted in creditors and other users developing their own set of criteria to evaluate financial information presented by accountants. Furthermore, the market is characterised by a dominant professional body that is able to influence the financial reporting supply change in its favour.
The question should be raised as to whether a developing country can afford this approach in one of the core contributors to economic growth – namely the accounting profession.
The birth of the accountancy profession in South Africa
South Africa’s first professional accountancy body was formed in 1894. This body was known as The Institute of Accountants and Auditors. Subsequently, four more Institutes were formed in the then Natal, Cape Province and Orange Free State – following the adoption of the Companies Act of 1926 the four Institutes attempted to unify under a single body.
These efforts resulted in the adoption of the Public Accountants and Auditors Act of 1951. The Act allowed for a register of public accountants and auditors, the use of the designation Registered Accountants and Auditors, the establishment of the Public Accountants and Auditor’s Board (PAAB), registration of trainees and the setting of exams.
Passing the exam would result in membership to one of the provincial accounting bodies. However, in January 1980 the four provincial societies unified and formed the South African Institute of Chartered Accountants (SAICA). Consequently only members of SAICA were allowed to obtain recognition as auditors in South Africa.
With the advent of the Close Corporations Act in 1984 a number of additional South African professional accountancy bodies were established or received statutory recognition:
1981: Institute of Accounting and Commerce (IAC)
1984: South African Institute for Professional Accountants (SAIPA)
1987: Southern African Institute for Business Accountants (SAIBA)
1988: Southern African Institute of Government Auditors (SAIGA)
Subsequently, a number of international professional bodies also entered the accounting market, including the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Management Accountants (CIMA) and the Institute of Chartered Secretaries and Administration (ICSA).
The accounting profession was characterised by accountants performing a range of services to clients. These included accounting, auditing, accounting officer engagements, audits, and tax services.
Towards Unification – the early years
In 1995 the Public Accountants and Auditors Board (PAAB) convened an Interim Representative Council of Accountants (IRCA) to draft a proposed Accountancy Profession Bill. The Bill made a number of proposals to unify the profession.
This included the establishment of a Representative Council for Accountants (RCA) and a Regulatory Board for Auditors (RBA). The RCA and the RBA were to have distinctive roles. The RCA were to regulate access and mobility in respect of accountants and the RBA would regulate auditors.
In 1998 South Africa was set to adopt the new approach to regulate the accounting profession when a final draft Bill was prepared under the auspices of the then Deputy Minister of Finance, Ms Gill Marcus.
However, a number of corporate collapses focussed attention on shortcomings in the regulation of auditors. These collapses included Enron in the United States and a number of South African companies including Macmed, Leisurenet, Regal Treasury, and Unifer2.
As a result the Minister of Finance in 2002 appointed a Ministerial Panel for the Review of the Draft Accountancy Profession Bill. The remit of the Panel was to address the shortcomings in audit regulation highlighted by the Nel Commission as being ineffective auditing, independence of auditors, and conflicts of interest arising from inadequate separation between auditing and consultancy.
The review resulted in the adoption of the Auditing Profession Act in 2005. This Act only regulates auditors and neglected to address access and mobility within the broader accountancy profession.
Subsequently the accounting profession has continued to operate without uniform standards.
In 2012 the National Treasury introduced proposals to regulate tax practitioners. Prior to this proposed regulation of tax practitioners, tax was seen as a sub element of accounting and an integral part of the accounting profession. With the adoption of the Tax Administration Act of 2013 tax obtained an independent standing and were to be practiced by tax practitioners and not attorneys or accountants.
Towards Unification – Current Developments
The World Bank recently issued a second report assessing the quality of South Africa’s accounting and auditing practices. The assessment compared local and international standards and practices.
The elements assessed included:
- The statutory framework in which the profession operates
- The education and training of accountants
- The professional bodies operating within the sector
- The prevalence of accounting and auditing standards
- The monitoring, enforcement and oversight of the profession
Based on this assessment the World Bank recommended that South Africa adopt the following policies:
- Enact accountancy profession legislation that includes both the Professional Accountancy Organisations (PAO) and the current audit regulator, the (Independent Regulatory Board for Auditors) IRBA
- Establish a regulatory body that would
- Define and categorise the education and training requirements for different accountancy services (e.g. audit, independent review, accounting officers, bookkeepers) and aligning the PAO qualifications to these respective categories.
- Accredit, register, monitor, and sanction the PAO
- Create awareness of the qualifications of all accredited professional accountancy organisations to employers, tertiary institutions, students and the public.
- Strengthen the IRBA inspection methodology, independence and their disciplinary committee
- Increase resources and capacity of IRBA, and improve the funding model
- Improve the processing of reportable irregularities
- Audit firms should be allowed to operate via limited liability partnerships
- PAOand tertiary institutions should include public sector subjects in education and training curricula
- Strengthen the capacity of PAO
- Provide the Financial Reporting Standards Council with sufficient resources to ensure achievement of its mandate
The Report further recommends that the current Auditing Professions Act be amended in order for PAO to be supervised and auditors to be regulated.
A draft policy document plotting the way forward (to regulate the accountancy profession) is expected in 2015.
A number of issues remain unanswered from the initial proposals. These include:
- Will all accountants be required to register with a PAO? Or does this requirement only include accountants in practice?
- What is the definition of an accountant? Does this include anyone who performs an accounting function or just those that prepare financial statements to the public for a fee?
- Will all accountants be regulated or only those that perform accounting officer, independent review and audit work?
- Will PAO be supervised as to their standards of conduct or will they be regulated?
- Will tax practitioners be included in the regulation or just accounting and auditing?
- Will this regulation integrate or replace current regulation affecting accountants and their representative bodies? These include the South African Qualification Authority (SAQA) regulations for registering a professional body designation, Close Corporations Act and Companies Act regulations setting entry criteria and monitoring rules for professional bodies whose members act as accounting officers and as independent reviewers
- What is the time frame for implementation?
- What will it cost the PAO and their members?
- What will be the role of the IRBA?
Before South Africa embarks on a new form of regulation we need to do our homework. Any regulation should be based on cost vs benefit analysis and the impact of the regulation on Small and Medium-sized Entprises (SMEs) and accountants should be clearly understood. An international comparative report would assist us to make the best selection for South Africa. A famous saying by former President Ronald Reagan perhaps provides an answer “If it isn’t broke, why fix it”.
SAIBA has and will continue to engage National Treasury to ensure the best outcome for members and the public. As the only professional body that can boast more than 51% black ownership, we need to be heard.