'Whistleblowing' – is it the right thing or the only thing to do

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					                                                                                                             Volume 1. May 2005


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...is our regular bulletin featuring news and
developments that affect your bottom line.

In this issue
1 Whistleblowing - is it the right thing or the only thing to do?
4 Putting a value on valuations
6 Tax management is risk management
8 the Guestline: PAAB details onerous new audit standards
10 Internal audit: is your provider in or out?
11 IBOS highlights
12 the Chat line

‘Whistleblowing’ – is it
the right thing or the
only thing to do?
By Advocate Dion Hucker, Principal, East London

Most people are brought up in an environment where the              The victimisation or vilification of
concepts of loyalty and peer or team spirit were taught
                                                                    whistleblowers is particularly topical
and engendered from an early age. A fundamental
                                                                    when it comes to the detection of fraud or corruption
principle of this ‘loyalty’ is never to inform on another
                                                                    within an organisation. Tip-offs received from employees,
member of your group no matter what they might have
                                                                    customers, outsiders or anonymous sources account for
done. This is regarded as betrayal of the group as a
whole and as an indication of low moral fibre on the                the detection of a significantly higher number of fraudulent
part of the informant.                                              schemes than other more conventional control measures.

Small wonder then that a person who witnesses or bears              The Association of Certified Fraud Examiners’ Report to
knowledge of unlawful or irregular conduct within an                the Nation in 2002 reports: "The most common method
organisation is somewhat reluctant to share their                   for detecting occupational fraud is by a tip from an
knowledge with outsiders at times.                                  employee, customer, vendor or anonymous source."
2      Volume 1. May 2005

In a South African context, the informant or
"impimpi" has been particularly reviled and,
if identified, often singled out for particularly
brutal forms of community or peer group
victimisation and retribution.

This report also reflects that organisations with fraud        Recent legislation has imposed criminal sanctions and
‘hotlines’ in place cut their fraud losses by approximately    penalties on people who refuse, or fail to report a wide
50% per fraud scheme.                                          variety of unlawful or even suspicious activities or
                                                               transactions. Two significant pieces of legislation
The South African Institute of Government Auditors             imposing such a duty to report unlawful or suspicious
emphasised the importance of whistleblowers in their           activities are: the Financial Intelligence Centre Act (FICA);
Public Sector Fraud Survey by stating: "Apart from             and the Prevention and Combating of Corrupt Activities
whistleblowers (number one position) internal control and      Act (PCCAA).
internal audit are also seen as the major tools in detecting
fraud." Clearly then, despite popular perception and the       The failure to report
                                                               Section 29 of FICA imposes a reporting duty upon any
threat of being subjected to various forms of retribution,
                                                               person, who carries on, manages or is in charge of, or is
vilification and ostracism, whistleblowers are still finding
                                                               employed by a business and who knows or suspects that
that their personal values, ethics and consciences will not
                                                               certain unlawful activities pertaining to money laundering
tolerate the perpetuation of fraud and corruption.
                                                               or tax evasion has, or is about to, take place. Refusal or
                                                               failure to report any unlawful or suspicious transactions is
The legal requirement to report
                                                               a criminal offence carrying a possible sentence of up to
Whilst statutory measures are in place to provide
                                                               fifteen years’ imprisonment or a fine of up to R10 million!
whistleblowers with some measure of protection                 Whilst FICA is specifically aimed at money laundering
(the Protected Disclosures Act 26 of 2000 and the              and tax evasion in this regard, the PCCAA is much wider
provisions of other existing laws that provide a measure       in its scope regarding the imposition of a reporting duty.
of confidentiality or protection to informants), there has
been little in the way of legislation compelling persons       Section 34 of the PCCAA provides that any person
to provide information or report unlawful activities on        holding a position of authority (this includes the head
pain of criminal prosecution. This situation is changing       of a government department, CEO of a company and
fast as more legislation is being promulgated to not only      member of a close corporation), who knows, or ought
punish direct criminal offenders themselves, but also to       reasonably to have suspected, that any other person has
punish those who are aware (or who suspect or should           committed one of these specified offences (relating to
reasonably be aware) of their activities and ‘turn a blind     corrupt activities), involving an amount of R100 000,
eye’ to them.                                                  must report this to any police official.

Supervisors or persons in managerial positions who             Any person who fails or refuses to report the afore-
have turned a ‘blind eye’ to theft or similar acts of          mentioned offences, in the prescribed format, to a police
dishonesty committed by their subordinates or colleagues       official is guilty of a criminal offence and (depending
have been considered guilty of gross dishonesty                upon the court before which he or she is charged)
themselves, and have been subject to the appropriate           could face a fine or imprisonment of up to 10 years.
sanctions (usually dismissal) in misconduct proceedings
conducted in terms of prevailing labour law for some           Do you know?
time now. Misconduct based on gross dishonesty usually         The specific inclusion of terms such as ‘suspects’ or
results in dismissal, but is this enough of an incentive to    ‘reasonably ought to have known or suspected’ in this
blow the whistle on unlawful activities?                       legislation, provides a clear indication that any court
                                                                                        Volume 1. May 2005       3

                                                              administered by
                                                              Grant Thornton

hearing criminal charges brought under this legislation       In your attempt to detect and eliminate fraud
will not just be bound to adjudicate on any case based        in your business, have you considered the
solely upon the individual actions or subjective personal     implementation of a fraud hotline?
knowledge (or lack thereof) of any person charged with
                                                              ScamStop is an employee friendly toll-free crime
failing to report the proscribed activities. The presiding
                                                              reporting line which enables and encourages
judge or magistrate will have to look at the                  your employees to contribute to reporting and
circumstances in which any failure to report arose, and       preventing planned or existing internal fraud
determine whether or not a reasonable person in the           or theft.
position of the accused should have suspected or ought
to have known that the relevant criminal activity was         This fraud hotline is administered by Grant
taking place and reported it. Determining                     Thornton in association with Corporate
reasonableness in criminal proceedings involves the           Confidential Solutions (Pty) Ltd. The ScamStop
                                                              fraud hotline operates independently of your
application of an objective test (the so-called ‘reasonable
                                                              company, ensuring objectivity, impartiality and
man’ test) which can make life difficult for any person       absolute fairness. All information is strictly
relying on an ‘ignorance of the law’ or lack of subjective    confidential and the caller is ensured anonymity
knowledge defence scenario.                                   at all times. The control centre employs a
                                                              complement of specialised and multilingual
The wide ambit of the afore-mentioned legislation and         advisors who are trained to respond to calls
the express application thereof to just about every           24 hours a day, 365 days a year.
conceivable participant in both the public and private
                                                              The types of incidents that are typically reported
sectors has serious implications for a wide cross-section
                                                              include :
of South African society. The underlying message              • theft of company assets, small or substantial
generated by the promulgation of such legislation is          • the contravention of company safety an security
clear - the criminal element can no longer rely on the           procedures
silence of the general public, colleagues or their            • the contravention of company norms e.g. drug
superiors. Criminal activities will have to be reported          and alcohol abuse in the workplace
to the authorities.                                           • serious or sensitive occurrences such as sexual
                                                                 harassment or discrimination
                                                              • telephone abuse
Cultural, moral, religious and ethical grounds aside, it is
                                                              • fraud
becoming very clear that the reporting of unlawful
activities is no longer just the "right thing to do" but,     The fraud hotline classifies all calls into high,
when facing the alternative of criminal prosecution and       medium or low risk and the reports are filtered to
the imposition of severe penal sanctions, it may also be      a client appointed risk advisor who consults with
the only thing to do!                                         the client. The need for further investigation is
                                                              then evaluated towards an eventual outcome of
                                                              disciplinary action or criminal prosecution.

                                                              For more information on implementing ScamStop
                                                              in your business, contact Pieter Muller, Director,
                                                              Forensic Services Grant Thornton Johannesburg
                                                              on (011) 322 4703 or pmuller@gt.co.za
4      Volume 1. May 2005

Putting a value on valuations

By Yaron Zimbler, Senior Manager, Corporate                 •   buying another shareholder’s shares
Finance, Johannesburg                                       •   planning a listing and/or public offering
                                                            •   negotiating a merger or an acquisition
Most business owners have some idea of the value of         •   balance sheet restructuring
their business. This is however often less than objective   •   raising debt funding
and influenced by the emotional attachment to the
                                                            At the core of any such corporate finance transaction,
business. Having a clear understanding of what a
                                                            determination of value is no doubt the most important
business is worth and what the drivers to that value are,
                                                            and contentious issue. The success of any deal and
gives owners and managers a unique insight which can        whether or not the parties involved are able to reach
assist them in planning the strategy of their business      an agreement, will in almost all cases, focus on issues
and maximising its worth.                                   of value.

Obtaining an objective, independent and professionally      It is the goal of any shareholder or business owner to
prepared valuation is something which can prove             maximise the value of their asset and a deal which does
invaluable to any business owner. Although valuations       not achieve this is probably not in their best interests.
are usually obtained for the process of conducting a        Where a company’s shares are not publicly traded, the
deal, the business environment is a rapidly changing
                                                            holders of those shares remain very much in the dark as
and dynamic one and owners should have that sort
                                                            to the true value of their asset.
of information readily available during the process
of managing their day-to-day strategy.
                                                            In the case of listed companies, although market
                                                            information is at hand to give an indication of the value
The concept of value
                                                            of those securities, this is limited particularly in the case
The valuation process sets out to assign a monetary
                                                            of small capitalisation stocks that are traded in limited
value to a business or asset. Value is generally defined
                                                            volumes. Also, the market price represents the value of
as being the price at which a willing buyer and a willing
                                                            a minority interest and does not take account of aspects
seller are prepared to exchange ownership of an asset.
The majority of business owners have never set about        of value such as control premiums.
valuing their business properly or getting an expert to
do it for them. Instead, their value estimation has been    Financial statements add no value
based on emotions or rules of thumb that tend to be         Shareholders and business owners give too much
overly optimistic. Since a deal can only be reached once    attention to the financial statements of a company.
the estimation of value is mutually agreed upon by the      These only reflect the past performance of a business
parties concerned, it is important to have a valuation      and although this is useful in determining the value of
done properly by an independent source.                     that business, they are limited in that value is determined
                                                            largely by the business’s future performance, an aspect
Before a business can be valued, the purpose of the         which financial statements don’t and for that matter
valuation needs to be established. Some of the situations   cannot be expected to pay much attention to.
in which a valuation may be needed, include:
• buying or selling a business                              Methods of valuation
• structuring a BEE transaction                             There are numerous methods of valuing a business or
• selling a stake in the business to a private equity       the shares therein. The most accepted method of
   funder or a strategic investor                           valuation is, therefore, the Discounted Cash Flow or
• management buy-outs and buy-ins                           "DCF" approach. The DCF methodology projects the free
• family business selling on to the next generation         cash flows of a business going forward. Free cash flow is
                                                                                           Volume 1. May 2005       5

                                                             At the core of any corporate finance
                                                             transaction, determination of value
                                                             is no doubt the most important and
                                                             contentious issue

the cash available to shareholders from the business’        with great care as they often have flaws and limitations
operations after funding its capital investment              depending on the context in which they are applied.
requirements. Free cash flows are discounted back to
the present to determine the value of the business.          Benefits of a professional appraiser
                                                             Obtaining an objective, independent and professionally
The value of the shares in a company is determined by        prepared valuation is something which will prove very
subtracting the value of debt from the value placed on       useful to a business owner entering into any business
the business. The discount rate applied is determined        transaction. A valuation by an independent party will:
using the Capital Asset Pricing Model which approximates     • ignore rules of thumb and make a value estimate
the rate of return which an investor would require on an         based on the facts presented
investment in the business given that particular business’   • provide a useful baseline to establish a price for a
risk profile. This is done by referring to the return            business or help to increase a company’s value and
required on risk-free government bonds and taking into           attract capital
account the risk premiums investors require over and         • provide insight into what the value drivers are in the
above that rate by looking at the stock market.                  business and assist in strategic planning
                                                             • provide ongoing valuations preferable at the end
Various other methodologies can also be applied,                 of every business operating cycle or at least every
such as:                                                         three years
• Price / earning multiples                                  • give an owner sophisticated insight that will be hard
• Revenue / earnings multiples                                   to dispute by a 3rd party and will hold up in court
• Net asset value                                                if necessary

None of these is as theoretically sound as the DCF           There is no question that having accurate and objective
approach and they should in most cases only be used          valuation information readily available will enable every
as benchmarks against which to evaluate the value            business owner to make more accurate decisions
arrived at using a DCF model. If, however, one of            regarding the immediate, medium and long-term future
these methodologies has been used, it should be applied      of your business.

Hagar the Horrible
6      Volume 1. May 2005
       Volume 1. May 2005

Tax management is risk management

By Justin Liebenberg, Senior Tax Manager, Johannesburg        SARS collection capacity
                                                              The second major impact taxpayers are facing is a
Risk management is fast becoming the number one               significant transformation in the South African Revenue
business strategy in the drive to ensure that a business is   Service (SARS) which has enabled the revenue authority
not hindered in achieving its objectives. This buzzword has   to improve their collection capabilities. In the recent past
connotations of a safe working environment and maintained     SARS has greatly enhanced its capacity to collect taxes by
  reputation but seldom is tax considered a business risk.    broadening the overall tax base and ensuring that all
                                                              taxpayers pay the taxes that are due.
     Financial loss due to improper tax risk
     management can easily be one of the largest              SARS also now employs highly skilled professionals and
      losses to a company. In addition, there could be        has introduced targeted audits in areas where there has
      a material mis-statement in financial statements.       been widespread non-compliance with the tax legislation.
      The management of tax risk should, therefore, be        The new SARS Large Business Centre has also organised
       a crucial element of the overall enterprise risk       assessors along industry lines in order for SARS to better
         management strategy.                                 understand the industries in which they audit and
                                                              consequently places them in a stronger position to detect
                The reason for tax risk reaching the          non-compliance. In addition, SARS has also focussed on
                  top of the business agenda is due to        those industries such as the financial services and mining
                    the rapidly changing tax environment      industries that traditionally have low effective tax rates
                    in which South African businesses         compared to other industries .
                    now operate.
                                                              Tax risks
                   Volume of legislation
                                                              With tax returns becoming more onerous, taxpayers are
                     The first major change facing
                                                              now more likely to inadvertantly omit information when
                      businesses today is the sheer
                      volume of complex legislation that      submitting their tax returns to SARS. With the enhanced
                       has been introduced in recent years.   capabilities of SARS it is more likely that these instances
                       In South Africa there has been a       of non-compliance will be detected. SARS is also no
                       massive shift in the way in which      longer sympathetic to taxpayers who claim that their
                       taxpayers are taxed. The change        misrepresentation was unintentional.
                       from a source basis of tax to a
                      residence basis of tax brought          It is no wonder, therefore, that tax has become a major
                      about fundamental changes to the        risk factor for all businesses. As with all business risks,
                     tax system, as did the introduction      the mismanagement or even non-management of tax
                    of capital gains tax. And, as if this     can severely hamper a company’s ability to achieve its
                   is not enough, the legislation is          profit objectives.
                   constantly changing to combat
                   avoidance of taxes, whether actual         One aspect of tax risk is the so-called "compliance" risk.
                  or perceived, as well as to take            This is the risk associated with incorrect disclosures to
                  account of changing business practices.     SARS which could result in penalties, interest and
                                                              even criminal prosecution.

                                                              Another tax risk is that a business’ tax expense is
                                                              incorrectly recognised and disclosed in the annual
                       Justin Liebenberg,                     financial statements. This could then lead to unwanted
                       Senior Tax Manager, Johannesburg       and often embarrassing adjustments in subsequent years.
                                                                                                 Volume 1. May 2005         7

A company must also consider the risk of overpaying               the current tax legislation is being properly complied with.
taxes and should take every precaution to ensure that             Non-routine transactions on the other hand do not take
taxes are paid accurately and timeously.                          place very often. Although generally infrequent, these
                                                                  transactions can be significantly more complex and also
Beyond the financial impact of tax management, a                  material in size. For example, the acquisition or sale of
company’s reputation can be severely tarnished where              businesses may not take place every day, but would
non-compliance with the tax legislation is made public            have a material impact on the entity’s tax liability.
by SARS or through the media.
                                                                  Due to the nature of these transactions, detailed tax
It is imperative, therefore, for all businesses to seriously      planning must take place. The lead-time in such
consider improving the management of their tax risk.              transactions gives the company an opportunity to
We have developed a simple strategy to assist businesses          properly assess the tax consequences of the transaction,
in better managing their tax systems and consequently             enabling it to minimise that tax.
minimising the risks posed by incorrect tax management.
                                                                  Because a non-routine transaction can be complex, it is
Making tax management manageable                                  advisable that a tax professional is involved in all tax
Formulate a tax risk policy document                              planning. Once advice has been provided, detailed
This document should contain an assessment of the                 attention must be given to its implementation because
company’s overall tax risk and an analysis of whether             slight differences could have severe tax consequences.
these risks are in line with the entity’s overall risk profile.
                                                                  Transfer of information to the preparers of the
The document should specify the relevant tax risks                tax returns
and allocate responsibility for the management thereof to         Once controls have been established over the calculation
specific persons. There should also be provision made             of the taxes arising from routine and non-routine
for communication lines between those persons                     transactions, it must be ensured that there is a proper
responsible for tax management and the board of                   transfer of such information to the preparers of the tax
directors. All internal controls over the tax function            return. Controls must be established to ensure the
should be documented.                                             completeness, accuracy and validity of the information
                                                                  that gets passed on to such persons. These controls must
Classify transactions                                             also ensure that the persons involved with transactions
Company transactions should be classified into routine            on an operational level pass on all relevant information
and non-routine transactions.                                     to ensure proper disclosure in the tax return.
Routine transactions are those transactions which take
                                                                  Transfer of information to the preparers of the
place on an everyday basis and are usually similar in
                                                                  annual financial statements
nature. Because these transactions take place on a
                                                                  There also needs to be proper communication between
frequent and repetitive basis, the incorrect processing
                                                                  the persons involved in calculating the tax, and those
thereof can have a compounding effect. It is important
                                                                  persons involved in preparing the annual financial
for the company to identify such routine transactions and
ensure that the tax legislation relating thereto is correctly     statements. The incorrect disclosure or inaccurate
interpreted and applied. The company must ensure that             recognition of tax in the financial statements could lead
all staff who are involved in the processing of these             to amendments in subsequent years. Once again, it is
transactions fully understand the relevant tax implications.      important to ensure the complete, accurate and valid
                                                                  transfer of information to the preparers of the financial
Due to the ever-changing nature of tax, it is essential           statements. In addition there needs to be proper
to keep staff up to date with legislative tax amendments.         communication channels between the board of directors
It is also advisable to have periodic independent reviews,        and the persons responsible for managing tax to ensure
such as PAYE and VAT, of these functions to ensure that           that proper decisions are be made in this regard.
8      Volume 1. May 2005

the Guest line:
New audit standards often onerous for audit
profession and business, says the PAAB

By Bernard Agulhas, Director of Auditing Standards,             Industry consultation
Public Accountants’ and Auditors’ Board (PAAB)                  For these reasons, in 2004, the Auditing and Assurance
                                                                Standards Board (AASB), a Committee of the PAAB,
Although many people remain cynical about whether               invited representatives of the business community,
corporate governance has resulted a true change in              government and other constituent groups affected
corporate behaviour or just a heightened sensitivity to         by auditing standards to join a Consultative Advisory
addressing public perception, I can say with confidence         Group (CAG).
that in the world of auditing much more than perception
                                                                The CAG is an independent advisory and oversight body
has changed.
                                                                established to have as many non-auditors as possible
                                                                providing input and feedback on auditing standards and
Many of the principles of good corporate governance             their impact on business.
are no longer simply an option. Increasingly, they are
enshrined in legislation and regulation - with complex and      Stakeholders represented on CAG currently include the
essential, though often onerous, implications for both the      Reserve Bank, the Financial Services Board, the JSE,
auditing profession and business.                               STRATE, the Institute for Public Finance and Auditing,
                                                                National Treasury, the Actuarial Society, The Office of the
It is not surprising, therefore, that there is increasing       Auditor-General, the Institute of Internal Auditors and the
pressure for business to be accountable for good                Institute of Directors.
governance, as highlighted in many of the comments
received by the National Treasury on the Draft Auditing         Together they will help us proactively identify matters
Profession Bill and Corporate Law Reforms. In the global        which need to be addressed through audit standards and
arena, the Sarbanes–Oxley Act requires management to            regulation and provide valuable feedback on the activities
certify their responsibility for establishing and maintaining   of the AASB, thereby enhancing the transparency and
internal controls and requires the annual report to             accountability to business and the general community of
include management’s assessment of internal controls.           our auditing standard-setting function.

                                                                The CAG forum represents a unique platform for open
Another interesting development is that auditing
                                                                dialogue, communication and education between the
standards increasingly include management
                                                                regulator and business.
responsibilities. The new international reporting
standard has expanded substantially on management’s
                                                                Convergence with international standards
responsibility for financial statements and the standards
                                                                However, the fact that the world of business increasingly
of the Public Company Accounting Oversight Board                operates beyond national borders has additional
established in terms of the Sarbanes–Oxley Act                  implications for regulators such as the PAAB. In our
re-emphasises management’s responsibility for internal          globalised world, institutional shareholders look for
controls over financial reporting.                              investments both at home and abroad as a means of
                                                                spreading their exposure to particular markets and
In drafting and issuing new auditing pronouncements             emerging economies.
for auditing South African business the PAAB cannot,
and does not, operate in isolation. We must be                  Whilst that trend provides South African business with
cogniscent of international standards, as well as               great opportunities to attract overseas capital, to take
responsive to the needs of business, bearing in mind            full advantage of those opportunities we have had to
the potential impact of regulation on the efficiency            implement some changes in the way we do business
and profitability of business.                                  here in South Africa.
                                                                                                Volume 1. May 2005           9

This is not new – the corporate governance chain
consists of many cogs, auditors and directors merely
accounting for two of the many role players.

This is why, for the past few years, the PAAB has                  Also, as part of our role as regulator of the standards
concentrated on converging South African auditing                 and conduct of members of the profession, the PAAB
standards with international standards, with full adoption        conducts regular practice reviews to ensure registered
of International Standards on Auditing coming into effect         auditors are carrying out their role appropriately,
in January this year.                                             including that all auditing standards are being
                                                                  applied comprehensively.
Convergence means that an auditor’s report on a set of
financial statements for a South African based business           The auditing profession is unique in conducting these
can be interpreted and understood in the same way                 ongoing reviews of all members every three years.
anywhere in the world because a common set of                     If a member’s work is found wanting they will be called
                                                                  to account as the PAAB Practice Review Committee has
principles can be applied.
                                                                  the authority to require the member to undergo
                                                                  additional training. If the practice is continually found
Previously, potential investors would have needed to
                                                                  to be substandard the member will face disciplinary
have an understanding of the national standards used
                                                                  action which can result in them being reprimanded,
in the country where the audit report was issued.
                                                                  fined, suspended or even deregistered.

So while South African auditing standards have always             It can certainly not be said that the
been world class, adoption of global standards effectively        auditing profession has tried to hide
removes a perceived barrier to investment as they                 from realities exposed by the
provide assurance that is familiar to foreign investors and       corporate collapses of recent years.
where such assurance is positive, a presumption that our          Promoting independence and good
capital markets are operating effectively.                        corporate governance is a priority
                                                                  and much time and effort has been
Impact on your auditor                                            spent addressing issues relating to
All these changes are positive for business but the very          standards and quality of work.
practical impact on the auditing profession must also be
considered. Every new standard must be learnt,                    In South Africa we can
understood and applied to every business by every                 be proud of the
Registered Accountant and Auditor from the date of                achievements of the
adoption.                                                         profession and find
As outlined already, over recent years the pace and               comfort in that the
quantity of new standards have been immense, with the             PAAB will continue to
effect that conducting an audit is now significantly more         be an independent
complex and challenging, often requiring more time.               watchdog on behalf
                                                                  of business and the
                                                                  investing public.
However, business can rest assured that the increase
in workload will not diminish the quality of work
prepared by an auditor. The PAAB is in the process of
finalising new quality control standards and quality
control guidelines. These guidelines will provide
practical direction to auditors and promote best practice                  Bernard Agulhas,
                                                              Director of Auditing Standards,
in applying standards in the audits or reviews of                   Public Accountants’ and
financial statements.                                                Auditors’ Board (PAAB)
10        Volume 1. May 2005

Internal audit: is your
provider in or out?

By Lisa Labuschagne, Director of Internal Audit,               With the onslaught of company failures and corporate
Business Risk Services, Johannesburg                           governance debacles, however, this practice is beginning
                                                               to be questioned.
Recent high profile corporate failures both in South Africa
and abroad have highlighted loopholes in the management        Until recently, the only South African guidelines relating
processes and internal control systems of companies.           to this issue were in the King Report on Corporate
In an attempt to detect and close these loopholes,             Governance. The report recommends that the audit
companies have employed the services of internal auditors      committee set the principles for non-audit services that
but now changing legislation will impact on where these        are provided by the external auditors. Now, however,
services can be bought.                                        many listed companies have started to follow
                                                               international trends and restrict non-audit services that
Internal audit is an independent assessment within an          are supplied by their external auditors. In response,
organisation that reviews a wide range of activities in a      large auditing firms have also followed suit and sold
company’s management control system. The current               their ‘consulting’ arms. Now, proposed amendments to
complex business environment requires internal audit           the Companies Act will prevent external auditors from
departments to be staffed with highly skilled and              providing internal audit services to the same company.
qualified personnel who bring a diversity of skills to the
organisation. Some larger companies have their own             Proposed amendments
internal audit departments but the function is often           The draft Auditing Profession Bill was issued for
outsourced to an external firm for various reasons, such as:   comment in 2004. Its purpose is ‘to regulate the auditing
• the company may be too small to sustain its own              profession, to make provision for an Independent
    internal audit department                                  Regulatory Board for Auditors, a Standard-Setting Board
• outsourcing allows management to focus on                    for Auditors Ethics and Auditing, to replace the Public
    core competencies                                          Accountant’ and Auditor’ Act (1991) and to provide for
• access to best practice, technology and                      incidental matters. In order to achieve the objectives of
    international support                                      the Bill, certain amendments to the Companies Act (1973)
• specialised skills                                           will also be required. One of the proposed amendments
• independence                                                 to the Act is reflected under the heading ‘Certain non-
                                                               audit services not open to current auditor of public
In the past, when a company has decided to outsource           interest company’ and states that an auditor of a public
or co-source its internal audit function its executives        interest company may not perform any of the following
have often turned to their external auditors for help.         for that company:
                                                               • accounting
                                                               • bookkeeping
A public interest company is defined as                        • internal auditing
a company that is not a ‘limited purpose company’.
A ‘limited purpose company’ is defined as a private            The Companies Amendment Bill is in line with
company that does not:
                                                               international trends and in particular the Sarbanes-Oxley
• take deposits or loans from the public,
• offer its shares to the public,                              Act of 2002. This act applies to all American public
• act as a holding company in respect of                       companies and all foreign companies that have listed
    a public interest company, and                             their securities on a US public stock exchange.
• is not a subsidiary or associate of, or joint
    venture with a public interest company,
                                                               Section 201 of the act makes it unlawful for a registered
    that is authorised by unanimous consent
    of its members to operate as a limited purpose             public accounting firm to simultaneously perform both
    company for the purposes of the Companies Act.             audit and certain non-audit services.
                                                                                       Volume 1. May 2005        11

                                                                “SA story is one of hope,
                                                                thanks to Grant Thornton
                                                                survey”, says Mbeki

The prohibited non-audit services include the following:        Grant Thornton hosted five successful Owners’ Day
• bookkeeping or other services related to the                  events throughout the country on 18 May.
   accounting records or financial statements of the            The events were the culmination of our International
   audit client                                                 Business Owners Survey (IBOS) that investigates the
• financial information systems design and                      issues pertinent to business owners globally, and
   implementation                                               provide a platform to showcase the South African-
• internal audit outsourcing services                           specific findings.
• management functions or human resources
                                                                Now in its third year, the survey tracks the
Ultimately, it is anticipated that South Africa will align      trends and opinions of 6 300 business owners
itself to international standards and identify internal audit   in 24 countries including 300 in South Africa. In his
as a service that an external auditing firm cannot offer        weekly online newsletter, President Thabo Mbeki
to the same firm.                                               has lauded the positive IBOS results. These are some
                                                                of the findings from the business owner’s mouth…
Good governance
Various other new pieces of legislation such as the
                                                                "I am very positive, my business is young and there
Financial Intelligence Centre Act (FICA), Prevention
                                                                are lots of opportunities for me"
and Combating of Corrupt Activities Act, Financial
Advisory and Intermediary Services Act (FAIS) and the
                                                                "For a medium sized business red tape is very time
requirements of other regulators such as the JSE, place
                                                                consuming and not really cost effective. You have to
enormous responsibility on companies to maintain good
                                                                fill in forms and employ people to do it."
systems of internal control.

There are only a limited number of auditing firms that          "There are fluctuations with employee numbers, but
offer specialised services such as internal audit and           at the moment we are in an expansion phase and
companies using their external auditors for these services      are taking on more people."
may soon have to look elsewhere for this service. In the
case of some large listed companies, the problem is             "HIV/AIDS impact on my business has been small"
exacerbated when they have two external audit firms
performing the statutory audit.                                 "Everything about business causes stress and yes,
                                                                my stress levels are definitely increasing."
Business as usual
Grant Thornton does provide a wide range of specialist          "I think we are all in favour of BEE. Unless there is
services, including internal audit. This issue of               upliftment of the masses there is going to be
Bottomline focuses on several of these services.                insurrection. In addition, BEE is going to be good
                                                                for the economy."
Increasingly, restrictions are being placed on public
interest entities in South Africa to purchase non-audit
services from external auditors. Instead of restricting the
growth of our firm, these changes provide opportunities
for us to grow our service offerings.

It is important to note however, that although we are           For a copy of the South African IBOS report and
increasingly providing specialist services to new clients,      an opportunity to benchmark your business
we do, at the same time, remain committed to the                against peers both locally and internationally,
highest level of audit services to our existing markets.        visit our website www.gt.co.za
    the                                                                                                            You are always welcome to

chat line
...features exciting developments at our firm.
                                                                                                                   contact us...

                                                                                                                   Cape Town
                                                                                                                   Deryck Woolley
                                                                                                                   The Pinnacle, 5th Floor, Cnr Strand & Burg Street,
                                                                                                                   Cape Town, 8001
                                                                                                                   P O Box 1550, Cape Town, 8000
                                                                                                                   T +27 (0) 21 481 9000
                                                                                                                   F +27 (0) 21 481 9020
                                                                                                                   E mail@gtct.co.za

Leonard Brehm steps down from Board of Governors                                                                   Durban
After four years, Leonard Brehm has decided to resign his position as                                              Tony Berman
Chairman of the Grant Thornton International Board of Governors.                                                   2nd Floor, 4 Pencarrow Crescent, Pencarrow Park,
This decision stems from his other onerous responsibilities as National                                            La Lucia Ridge Office Estate, 4019.
Chairman of Grant Thornton’ South Africa and Managing Partner of the                                               P O Box 752, Durban, 4000
                                                                                                                   T +27 (0) 31 576 5500
Johannesburg office. Leonard will, however, remain South Africa’s                                                  F +27 (0) 31 576 5555
representative on the Board.                                                                                       E mail@gtdbn.co.za

David McDonnell, Grant Thornton’s Worldwide Chief Executive had this                                               East London
to say about Leonard’s Chairmanship:                                                                               Tony Balshaw
"Leonard has been an outstanding Chairman and has made a major                                                     26 Vincent Road, Vincent, 5247
                                                                                                                   P O Box 313, East London, 5200
contribution to the development of our organisation. I am particularly                                             T +27 (0) 43 726 9898
grateful to him for his support during some challenging times."                                                    F +27 (0) 43 726 9899
                                                                                                                   E gtel@gtec.co.za
The Chairman-designate is Ed Nausbaum, Chief Executive of Grant
Thornton, US who will take up the position from June 2005.                                                         Johannesburg
                                                                                                                   Leonard Brehm
                                                                                                                   137 Daisy Street, Cnr Grayston Drive,
Deepak Nager appointed to the PAAB                                                                                 Sandown, 2196
Congratulations to Deepak Nagar, Partner at Grant Thornton Durban on                                               Private Bag X28, Benmore, 2010
his appointment as a member of the Executive Committee of the Public                                               T +27 (0) 11 322 4500
Accountants’ and Auditors’ Board (PAAB).                                                                           F +27 (0) 11 322 4545
                                                                                                                   E info@gt.co.za
The Executive Committee is responsible for ensuring the continued
                                                                                                                   Port Elizabeth
compliance of PAAB as well as raising and debating strategic issues for                                            Tony Balshaw
implementation by the Board.                                                                                       165 Cape Road, Port Elizabeth, 6001
                                                                                                                   PO Box 35133, Newton Park, 6055
Grant Thornton trainees excel in Qualifying Board Exams                                                            T +27 (0) 41 373 4200
Grant Thornton’s trainee accountants have excelled in this year’s                                                  F +27 (0) 41 373 4201
Public Practice Examination (PPE). Joseph Komape is the first black,                                               E gtpe@gtec.co.za

blind candidate to pass the Public Practice Examination first time while                                           Pretoria/Tshwane
Justin Goldberg from Johannesburg and Vaughan Grandin from Durban                                                  Johan Blignaut
were ranked third and eighth respectively.                                                                         121 Boshoff Street,
                                                                                                                   New Muckleneuk, 0181
Grant Thornton’s national pass rate of 85% was well above the national                                             P O Box 1470, Pretoria, 0001
average of 70%. Grant Thornton is the only firm outside the "Big 4" to                                             T +27 (0) 12 346 1430
                                                                                                                   F +27 (0) 12 346 2502 or 4191
have candidates ranked in the "Top Ten".                                                                           E gtpta@gtpta.co.za

Cape Town office supports Margaret’s House                                                                         Media enquiries
Margaret’s House provides a home for orphaned street children in                                                   Jennifer Kann
Lansdowne, Cape Town. Currently 13 boys are cared for at the shelter,                                              T +27 (0) 11 322 4588
predominantly by volunteers.                                                                                       E jkann@gt.co.za

The Grant Thornton office in Cape Town supports Margaret’s House in a
variety of ways. In addition to a financial investment made by the partners,                                       Editorial Panel: Leonard Brehm, National Chairman;
the staff contributes their time and resources to shopping for food, painting,                                     Pamela Grayman, National Marketing Principal;
                                                                                                                   Jennifer Kann, Communications Executive;
repairs and organising fund raisers.                                                                               David Reuben, Partner

Although Margaret’s House does receive a government grant, Grant Thornton’s
contribution is vital to ensure the ongoing running of the home.

The Bottom Line is published as a service to our clients and other interested parties. It is intended to provide
practical and technical information which is of use to you in your business. Please be advised that the
information contained herein is for general guidance only. Any reader intending to base a decision on
information contained in this publication is advised to consult a Grant Thornton partner before proceeding.        Auditors, Accountants & Business Advisers
                                                                                                                   South African member of Grant Thornton International
                                                                                                                   Sub-Saharan offices in: Botswana, Kenya, Mauritius,
                                                                                                                   Mozambique, Nambia, Tanzania, Uganda and Zambia

                                                                                                                   Visit our website on www.gt.co.za
Please advise us should any of your contact details change.                                                        Advisers to the independently minded

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