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Date : 02/08/2006
Source: National Treasury
Title: Manuel: Independent Regulatory Board for Auditors Launch


  Keynote address at launch of the Independent Regulatory Board for auditors the Hon Trevor A Manuel, MP Minister of Finance, Gallagher Estate, Midrand

Programme Director
Chairperson of the Independent Regulatory Board for Auditors Dipak Nagar
Vice Chairperson of IRBA Wynand du Plessis
Past Chairpersons and Vice Chairpersons of the PAAB
Board Members of the IRBA and Past Board
Members of the PAAB
Distinguished guests
Ladies and gentlemen

I am honoured and privileged to address this, the launch of the Independent Regulatory Board for Auditors (IRBA). We gather here today on the second day of what has come to be known as Women’s Month, August. During this month, and particularly on 9 August, we flash our minds back in time to the day when our mothers and our grandmothers, tired of the cruelty visited upon them, boldly dared the odds and took up the cudgels on behalf of themselves and future generations.

Rallying around the cry, “Wathint’ abafazi, wathint’ imbokodo”, women in our country set the tone for future involvement of all women in the struggle for justice and equal rights. We look back with pride and gratitude and remember our brave women like Lilian Ngoyi, Helen Joseph, Sophie de Bruyn, Rahima Moosa, Ruth First, Charlotte Maxeke, Winifred Kgoare, Ellen Khuzwayo and many others.

As we celebrate this seminal moment, let us not dare forget the sacrifice that the women made to lead to a just society in South Africa. But even more importantly, let us continue to pick up the gauntlet that the women threw on that historic day. This struggle by the women was not just for their own sake but for a better society in which all, including men, would enjoy a better life free of fraud and corruption, among others.

This poses an important challenge to Independent Regularity Board for Auditors (IRBA), not only to ensure that the auditing profession affirms women but also to rise to the challenge of its calling, which is to protect the public interest. Let us not be shy to seek ways in which we can continue to ensure that this profession does what is necessary to redress the legacy of Apartheid discrimination against women. Out of 24 308 chartered accountants in South Africa as of January this year, 4 385 are registered auditors of which 3 008 perform the attest function. Of these 4 385 registered auditors, only 618 are women.

As we launch IRBA I wish to draw your attention to the fact that while strides have been made in many professions since 9 August 1956, IRBA has a long way to go to ensure representivity not only in terms of race but also in terms of gender. Much ground still needs to be covered as the statistics show that the profession seriously lags behind in ensuring a fair representation of the citizens of our country.

We owe it to all those women, men and children who gave up what they had to ensure that we today taste the sweet fruits of our liberation.

Let me confine myself to matters of the auditing profession. Today as we launch the Regulatory Board, we are mindful of the challenges facing the auditing profession which Prof William T Allen, Chair of the United State of America (USA) Independent Standard Board, referred to in 1998 as being in “mortal danger”. Subsequent to this telling comment the world experienced corporate failures that our President, Mr Thabo Mbeki described as “spectacular”. These corporate scandals put the profession into increased spotlight. While these corporate failures are not new, they bring to the fore the debate that has dogged the regulators and the profession for more than 75 years, and that is whether self-regulation is appropriate or not. Increasingly the realisation is that self-regulation has failed.

I do not need to convince you that it has been a long way for the profession since the invention of record keeping in about 4000 BC, to the discovery of the double entry system by about 1200 AD, and to the emergence of auditing and accounting as a profession in the late 1880s. During this period auditors used to be independent. Alex Berenson, in his book “The number” says “the British auditors auditing American companies were paid by, and answered to, their countrymen not the companies whose books they were auditing”.

This was because of the American companies’ dependence on the British capital markets, which frittered away as the capital markets developed in the United State. The auditors’ independence has since been severely compromised.

Authorities around the world have wrestled with the question of regulating the auditing profession since the times of the great depression to the late seventies when the United State (US) authorities questioned the anticompetitive practices of the self-regulated profession. The changes in the regulatory regime, however, were minimal and had limited impact. The authorities succumbed to relentless lobbying against legislation of the regulation of the auditing profession mainly by the big auditing firms.

The last 25 years or so have seen the consolidation in the auditing industry, increase in the provision of non-traditional audit services by audit firms against the backdrop of a weak regulatory framework. In the same period the world has experienced numerous corporate failures especially in the last five years. The disturbing feature of these corporate failures is that auditors are said to have either aided or were complicit in some of the malfeasance that led to the collapses. Some of the practices that result in these collapses amount to downright fraud and corruption.

Paul Volcker, former Chairman of the USA Federal Reserve, and Chairman of the Trustees of the International Accounting Standards Committee Foundation said, “The fact is the collapse of Enron and the new sense of crisis only exemplify problems that have increasingly plagued the industry for years. Those problems are plainly not limited to one company, one auditing firm, or one country. Nor are they matters for accounting and accountants alone.” He went on to say, “As policymakers, we have endlessly lectured emerging markets about the importance of transparency, good accounting and ending cronyism. Confidence in the financial reporting system is, we rightly point out, an essential element in ensuring that markets are allocating capital effectively.

In a well-functioning, disciplined financial system, we should not be surprised by shoddy bookkeeping. And, now we discover, those lectures apply at home even in the United States where we have taken such pride in our accounting standards and practices and in our open and active securities markets.”

President Mbeki argues that fraud and corruption in the public and private sector “therefore directly undermines the critically important national effort to defeat poverty and underdevelopment, and thus ensure sustained progress towards the achievement of the goal of a better life for all. Our country and people therefore count on the auditors and accountants, who are trained to analyse financial accounts and records, and are thus able to determine whether the money flows point to wrongdoing of one kind or another. This assumes that these auditors and accountants are people of integrity who will, at all times, respect the ethical imperatives that are fundamental to, and should characterise their profession. It also assumes that these honest professionals would be inspired by a level of courage and commitment to the public good that would oblige them to report any corruption they may unearth, to enable our law enforcement authorities to take the necessary action to punish the corrupt.”

While many of those in the profession are inspired by ideals of upright ethical conduct, sadly the same cannot be said of everybody as we now painfully know.

But, we must accept that the temptations are both strong and real, and their pressure so overwhelming because wrongdoing could become so pervasive that it might be difficult to distinguish from appropriate conduct. This state of affairs prompted the economist Professor Paul Krugman to write, “The same holds true of corporate malfeasance, whether or not it actually involves breaking the law Executives who devote their time to creating innovative ways to divert shareholder money into their own pockets probably are not running the real business very well (think Enron, WorldCom, Tyco, Global Crossing, Adelphia). Investments are chosen because they create the illusion of profitability while insiders cash in their stock options are a waste of scarce resources. And if the supply of funds from lenders and shareholders dries up because of a lack of trust, the economy as a whole suffers.”

We can add to Krugman’s list of examples of corporate malfeasance from our own and tragically growing list of South African stories. It is to provide a bulwark against the temptation that we need strong, competent auditors. And, it is to protect such strong, competent auditors that we need good legislation, such as the Auditing Professions Act.

This Act has as its object the protection of public interest through the following amongst others:

* creating an independent Regulatory Board that is free from real or perceived domination by registered auditors
* establishing a committee for auditor ethics which should minimise if not eliminate any doubt in as to what is acceptable behaviour
* enhancing international investor confidence through the encouragement of adherence to international best practice in respect of auditing and accounting
* ensuring the auditing professional competence and due care through mandatory continued professional development of auditing professionals
* ensuring a robust and independent disciplinary process that is transparent, equitable and effective
* levelling the playing fields to allow for the possibility of suitable professional bodies to be recognised if they meet criteria set by the regulatory board
* empowering the regulatory authorities through ensuring that auditors report certain reportable irregularities.

It is with great pride that we celebrate the changes effected by the Auditing Professions Act since it sets the profession in South Africa apart, ahead of the pack. We know that the single most important objective of this act is the restoration of the pride and professionalism of the auditing profession. We are also painfully aware that some of the innovations in the Act will require special attention and we must demonstrate our willingness to partner and learn by periodic reflection in order to improve on the workings of the Act.

It is expected that the new Regulatory Board and the profession will work closely to rid the profession of the albatross it now carries around its neck since the corporate failures I talked about earlier were uncovered. I pledge my support and that of the National Treasury in strengthening this body so that it will accomplish the mammoth task set for it.

Jane Diplock, Chairman of the New Zealand Securities Commission advises that “There is no place in the current world environment for small countries to take a narrow parochial view. In order to take our place in international markets, and to make our markets attractive to investors, we have to be seen to be in line with international best practice and to achieve international standards.” As a policymaker in a small country, I share Ms Diplock’s concern. The determination of this government is a bit stronger, we will not sit around and wait for international best practice, and we will assist in the development thereof.

Now, we have the legislation, and we have the Independent Regulatory Board. But, we still have emerging stories of corporate skulduggery and sometimes, even of auditors complicity. Now we must use the power to ensure that South Africa is a country where businesses flourish because they comply with the statute and rules, and not because they cheat. This is the power vested in the IRBA.

As I conclude, Programme Director, let me point to a number of issues that I think IRBA should address itself to. While this body is new, it builds on a foundation that the Public Accountants’ and Auditors’ Board (PAAB) has laid and so I firmly believe that these challenges can be met with courage and can be overcome.

What are the challenges for IRBA going forward?

* calling auditors to integrity
* restoring faith to a profession that has been hit by scandal, undertones of which continue to unfold in South Africa and the rest of the world
* re-skilling the old members and ensuring that new entrants into the profession buy into a culture that promotes ethical behavioural practices in executing their duties
* strengthening oversight of the profession, and ensuring that mechanisms to enforce conformity and compliance are developed and are effective
* actively seeking to ensure that the goals of equity and transformation in the profession are vigorously pursued.

I wish to congratulate the Board on the work done thus far and remind the board members that their task is that of ensuring a smooth transition to the appointment of the new Board, in terms of this legislation. I wish you success in your endeavours and offer the Ministry of Finance and the National Treasury’s unwavering support.

I thank you

Issued by: National Treasury
2 August 2006
   

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