What you can expect your auditors to report to the IRBA

What you can expect your auditors to report to the IRBA

de Beer, Linda

With the promulgation of the Auditing Profession Act (APA), 2005, that became effective on 1 April 2006, a new regulatory environment came into being for auditors and their clients alike. This makes the South African regulatory framework for auditors comparable with the best in the world. The APA is therefore an important step in enhancing the credibility of the South African reporting regime.

However, as with any new piece of legislation, it took time for people affected by it to get their minds around some of the practicalities of applying the new Act.

The APA established a new regulator for auditors, known as the Independent Regulatory Board for Auditors (IRBA), to supersede the previous Public Accountants’ and Auditors’ Board.

One of the areas in the APA where some confusion still exists is around the auditor’s responsibility to report irregularities to the IRBA. section 45 of the APA imposes a duty on the registered auditor of an entity, who is satisfied or has reason to believe that a reportable irregularity has taken place or is taking place within that entity, to send a written report to the IRBA without delay.

A reportable irregularity is clearly defined in the Act as; “any unlawful act or omission committed by any person responsible for the management of an entity, which –

(a) has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity; or

(b) is fraudulent or amounts to theft; or

(c) represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or the conduct or management thereof. ”

A similar requirement existed in section 20(5) of the old Public Accountants’ and Auditors’ Act. The principle of reporting irregularities is essential for stakeholder protection.

However, confusion arises regarding the process to be followed when reporting these reportable irregularities. section 45 requires the registered auditor to report such an, irregularity to the IRBA and within three days, notify the members of the entity’s management board in writing of the sending of the report to the IRBA. The manner in which the Act is drafted, and especially a previous version in the bill-phase of the Act, created the impression that the auditor is not allowed to discuss the matter with his/her client before reporting to the IRBA.

The IRBA has clarified this in a very useful document issued, entitled Reportable Irregularities: A Guide for Registered Auditors.

The guide states that an auditor should carry out any investigation considered necessary

It is therefore important for the auditor not just to make assumptions, but to have reasonable grounds that a reportable irregularity exists or has taken place, and then report the matter to the IRBA. This is critical, as no legal protection is available to an auditor where sufficient grounds do not exist to report a matter to the IRBA. ;

Within 30 days of reporting the irregularity to the IRBA, the auditor must submit a further report to the IRBA advising whether the entity has taken corrective measures to ensure that the reportable irregularity does not exist or is no longer taking place, or whether it is continuing. If the reportable irregularity is continuing, the IRBA will notify any appropriate regulator, such as the JSE, the Financial Services Board, SARS or others.

Linda de Beer CA(SA), MCom, is the Senior Executive – Standards Division at SAICA.

Copyright South African Institute of Chartered Accountants Mar 2007

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