T Manuel: Independent Regulatory Board for auditors launch

2 August 2006

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