The Auditing Profession Bill Submission made 13 October

Items being addressed • The multidisciplinary firm • Reportable irregularities • Constraints on first time appointment • Accountability of others • Liability and registration of auditors © 2005 Deloitte Touche Tohmatsu

Multidisciplinary firms • A history of the multi-disciplinary firm • Why should audit firms

A history of the multi-disciplinary firm • The complexity of financial reporting increased owing to – tax, – information systems and – financial instruments • Specialist skills were needed to enhance the response in audits to this © 2005 Deloitte Touche Tohmatsu

Why should audit firms be allowed to have non-auditors as partners? • It is the right thing to do – The complexities faced in a financial statement audit demand the use of specialists – These specialists improve the rigour of audits, which benefits stakeholders – The added benefit to management in the insights provided improves the quality of financial accountability and governance © 2005 Deloitte Touche Tohmatsu

Our specialist skills This chart represents the number of partners in the service lines

Examples of specialist skills we use on audits • Information technology skills, including IT security specialists and specialist knowledge in specific applications, such as SAP, BAAN, People. Soft • Forensic audit skills, in particular in the identification and response to fraud risk factors • Controls skills, in particular in the area of financial statement reporting controls • Actuarial skills, in particular in assessing the valuation of long term items such as pension fund liabilities, financial instruments and asset impairments • Valuation and transaction skills, so as to play our role as reporting accountants and corporate advisors on listed company audits where transaction support services are required from the auditor • Taxation skills, particularly in the area of compliance and appropriate raising of tax liabilities • Regulatory skills, particularly in the regulated industries, such as banks and insurance companies. • Accounting technical skills in the interpretation and application of complex accounting standards • Legal skills, in the interpretation of legal arrangements to ensure the correct accounting and disclosure of these © 2005 Deloitte Touche Tohmatsu

We recommend that: • Audit Firms be allowed to admit a [limited] number of partners (or directors for incorporated Firms) who are not themselves Registered Auditors, provided all partners subscribe to the Code of Ethics and Other Pronouncements of IRBA and its sub-committees, and the majority of the partners by number are Registered Auditors. • The relevant provisions of the Auditing Profession Bill should establish clearly the ability of Registered Auditors to share profits with persons not registered as auditors. © 2005 Deloitte Touche Tohmatsu

Reportable irregularities • The definition of a reportable irregularity should be amended – There needs to be a level of materiality relative to the entity being audited – Concepts which are vague, such as a “dishonest” act are not capable of consistent results • The Auditing Profession Bill allows for an auditor to be liable for failing to report a reportable irregularity – this is not a reasonable requirement. While an auditor should be professionally accountable for his actions in this area – he should not be financially liable © 2005 Deloitte Touche Tohmatsu

We recommend that: • A reportable event should only occur if the matter is material in the context of the financial information of the entity being audited (and not if material to the individual creditor or shareholder as this would be impossible to establish). • A reportable event should only exist if the matters considered fraudulent or amounting to theft exceed a predetermined level, which level may be consistent with the Prevention and Combating of Corrupt Practices Act. • We do not believe that the requirement to report conduct that is “otherwise dishonest” will be capable of consistent application by Registered Auditors and the requirement should be deleted. © 2005 Deloitte Touche Tohmatsu

We recommend that: • Where there are reporting requirements in other legislation or regulation, such as the Banks Act, the Financial Advisors and Intermediaries Act, The Pension Fund Act, the Auditing Profession Bill should be amended to merely require the auditor to also submit a copy of the report so required to IRBA when despatched to the entity subject to audit and/or for the auditor to follow the reporting requirements of the other legislation where there is an overlap. • Auditors should be protected from any potential financial liability for acting or failing to act in terms of reporting irregularities. © 2005 Deloitte Touche Tohmatsu

Constraints on first appointments of auditors • New auditors cannot be expected to be free of a “conflict of interest” for two years prior to appointment • Further, this provision constrains the ability of companies and shareholders selecting the appropriate auditors and is contrary to the workings of an efficient capital market • We recommend that this provision be deleted and the Committee for Ethics be left to issue standards in this regard © 2005 Deloitte Touche Tohmatsu

Accountability and responsibilities of others in the audit process • Auditors are dependent on open, transparent and honest disclosure by management of entities being audited • Such parties should be accountable in law for their actions and the impact they have on the audit process © 2005 Deloitte Touche Tohmatsu

We recommend that: • The Auditing Profession Bill, or other suitable legislation, establish a legal onus on persons in management and those charged with the governance of audited entities to make proactive and comprehensive disclosure to the entity’s auditor of matters material to the audit. • The Auditing Profession Bill, or other suitable legislation, provide for civil sanctions on individuals and entities misleading an auditor be provided for in legislation. • Appropriate criminal sanction on persons and parties misleading an auditor be provided for in legislation. © 2005 Deloitte Touche Tohmatsu

Liability and registration of auditors • The ability of auditors to operate within limited liability partnerships has been excluded from the Auditing Profession Bill, while this form of protection can be achieved if operating in the form of a Company incorporated in terms of the Bill and Companies Act. • The Bill prohibits an auditor from limiting liability for any opinion expressed or report or statement issued – while this may be appropriate in respect of audits conducted under statute - it is inappropriate to prevent such a limitation of liability in respect of engagements conducted in terms of a contract © 2005 Deloitte Touche Tohmatsu

We recommend that: • The Auditing Profession Bill specifically allow for the registration of Limited Liability Partnerships • That auditors be allowed to negotiate and establish by contract the amount of liability taken on in expressing an opinion, report or statement where the auditors’ appointment is not in terms of a statutory requirement (for instance in an acquisition transaction or to support a funding application) © 2005 Deloitte Touche Tohmatsu

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