The increased scrutiny on the auditing profession in South Africa is resulting in some auditors
refusing to sign off on an entity's annual financial statements where the entity is believed or found to have contravened environmental laws.
In the recent past we have acted for both auditing firms and clients in advising on potential
environmental non-compliance issues related to an audit process.
The Auditing Profession Act, 26 of 2005 imposes an obligation on auditors to report irregularities
to the Independent Regulatory Board for Auditors (IRBA). A "reportable irregularity" is any unlawful act or omission committed by any person responsible for the management of the entity, which:
- 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/its dealings with the entity; or
- is fraudulent or amounts to theft; or
- 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.
Environmental non-compliance issues generally fall into one of these buckets.
If the auditor suspects that a reportable irregularity has taken or is taking place, it must be
reported to the IRBA, following which the entity will have the opportunity to engage with and make representations to the auditor in respect of its report.
The auditor must thereafter, within 30 days, issue a second report, stating in its opinion either
- no reportable irregularity has taken place or is taking place; or
- the suspected reportable irregularity is no longer taking place and that adequate steps have been taken for the
prevention or recovery of any loss as a result thereof, if relevant; or
- the reportable irregularity is continuing.
In this last instance, the IRBA is obliged to notify any appropriate regulator (such as the
Department of Environmental Affairs or Department of Mineral Resources) in writing of the details of the reportable irregularity which is continuing, and provide such regulator with a copy of the auditor's report. The auditor's findings on reportable irregularities will need to be included in the entity's annual financial statements.
The notification to the regulatory authorities may further trigger inspections, investigations
and/or instructions to be issued to the entity, which may too have an impact on the ability of the entity to conduct business in the ordinary course, incur costs in order to comply with any such instructions, lead to the imposition of fines or
recommendations for prosecution and/or risk of breaches of commercial obligations held by the entity with third parties.
Avoid being reported; make sure your house is in order.