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News & Press: EDITORIAL

Accountants - Acting in public or private interest?

Wednesday, 07 May 2014   (0 Comments)
Posted by: Nicolaas van Wyk
Organs of State are constitutionally bound to act in the public interest. This seems fairly obvious. But what happens if the State licences or allows by way of tender a private company to offer constitutionally mandated services in its stead. Will this private entity also become subject to higher scrutiny, governance, transparency and accountability?

What implications does this have for accountants and auditors - who by way of legislation receive a government licence to prepare and review client financial statements?

The Constitutional Case

The Constitutional Court recently issued judgement on the issue of extending government accountability requirements to third party providers. 

In short, the South African Social Security Agency (SASSA) mandated Cash Paymaster, a private company, to administer social grant payouts on its behalf. However the tender process by which Cash Paymaster was appointed was questioned by a another provider All Pay. The case was heard in various courts and final judgement was issued by the Constitution Court in April 2014.

It was clear to the Court that SASSA was an organ of state, however  "...for the purposes of the impugned contract, so too is Cash Paymaster. In determining whether an entity is an organ of state, the presence or absence of governmental control over that entity is a factor, but in our constitutional era, is not determinative. In Cash Paymaster’s case the “control test” is not helpful; although it may be independent from SASSA’s control, the function that it performs – the country-wide administration of the payment of social grants – is fundamentally public in nature".

It is an constitutional imperative that organ's of State should be subject to public scrutiny. This implies access to decisions, motives, contracts, and accounts. Similarly if Cash Paymaster performs constitutional mandated services on behalf of a State organ then CashPaymaster will itself be considered an organ of State and subject to the same governance standards, including public scrutiny. 

This view is supported by Thina Siwendu, director at  Cliffe Dekker Hofmeyr: " terms of this decision, by tapping the state for contracts, a private company might soon find itself in a position where it has to disclose pertinent aspects around its operational and financial business to improve transparency and accountability...It seems the ambit of a private company's accountability reaches beyond the meaning and interpretation of  "public interest" as well as its public interest score as narrowly defined in the Companies Act".

Accountants and the public interest

Accountants that act as auditors or accounting officers in effect receive a licence from the state to perform a specific legislative function i.e. issue a report on financial statements. As such, a question can be raised whether they are therefore subject to public scrutiny, transparency and accountability in the same manner as organs of State.  

For example, should their working papers be available for public inspection? Should their governing bodies, through which they receive their licences, be treated as organs of State?

The key here is that auditors and accountants do not perform a constitutionally mandated service on behalf of the State. Examples of constitutionally mandated services are section 26 (housing), 27 (social services) and 29 (education) of the Constitution. According to this interpretation auditors and accountants are not subject to the public interest rule as per the Constitution. 

However, the accountancy profession as a whole has voluntarily adopted a general public interest rule as a governing framework for all accountants.

According to the International Federation of Accountants (IFAC) a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. Similarly various bodies have adopted this framework. See here, here and here

The voluntary acceptance by accountants to act in the public interest has some serious implications. 

On the one hand it provides support to the arguments that accountants and auditors, and their governing bodies, should receive special licences from the State to perform their work. For example certain companies are required to be audited and only registered auditors may perform such work; only registered tax practitioner that belong to a private controlling body may perform tax work for the public. 

On the other hand the public interest concept stretches far wider that just the preparation of financial statements as an accountant or the performance of an audit or completion of a tax return. 

The governing body in the UK, the Financial Reporting Council recently issued judgement against Deloitte, one of the big 4 accounting firms, for not acting in the public interest. Deloitte was fined £14 million for professional misconduct.  

What makes this case interesting is that the judgement did not relate to Deloitte's work as auditors but as consultants.

According to the FRC the decision will “send a strong and clear message to all members of the accountancy profession about their responsibility to act in the public interest and comply with their code of ethics.” 

Deloitte argues that this decision could have negative implications for the advice that can be provided by members of professional bodies. 

According to the judgement Deloitte “put their own interests ahead of that of the public and compromised their own objectivity” and found "no evidence to suggest the public interest" had been "considered adequately at all." Deloitte had failed to act in the public interest in its role as financial advisers to their client. 

Deloitte has appealed the decision.  

What next?

It is not clear how the public interest rule will develop within the South African context. It may be that SA regulators hold accountants and auditors accountable to their stated objective to act in the public interest. 

If the UK approach is followed it may mean that accountants will have to act not in the best interest of their clients but in the interest of the broader community, and ultimately in a developmental state, the State itself.

Alternatively the profession will need to reconsider the extent of their commitment to the public interest rule. 

Clear guidance is needed prior to the enactment of legislation to regulate the accounting profession

The outcome will determine if accountants and auditors in effect become agents of the State or advisors to their clients. 

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