The Chartered Accountancy (CA) profession’s BEE Sector Code, part 2 – The Scorecard

GUIDING PRINCIPLES FOR THE PREPARATION OF THE SCORECARD

ADOPTION OF THE GENERIC SCORECARD

In the process of developing a scorecard specifically for the CA profession, the participants’ decisions were first and foremost informed by their determination to use this Sector Code, and the scorecard(s) included herein, to make a difference to the profession and the country as a whole.

Even though the CA profession has some unique characteristics that make comparisons with other industries, such as the IT, mining, or financial services sectors, members of the CA profession were determined to conform to government guidelines regarding the scorecard and all its related aspects. The fundamental point of departure was thus to begin with the Generic Scorecard. Any deviations were supported by sound economic principles, unique sectoral characteristics, or empirical research.

The most important of these is that while firms in the CA Sector may be structured as sole proprietorships, partnerships, incorporated entities, or companies, eligibility as an RA (registered auditor) is strictly circumscribed by legislation. Ownership and Management of the Assurance Practice at the highest levels are bound together – neither responsibility nor ‘wealth’ (which would constitute equity interest in terms of the Codes) may be shared with or sold to individuals who are not RAs. This aspect finds expression in the definitions, which are tailored to circumstances unique to the CA Sector.

The uniqueness of the CA Sector also extends to its training and development focus: The sector lends itself ideally to being a ‘training ground’ for future CA(SA) for the country, thereby enhancing the economy and not just the CA Sector itself. Therefore, on the one hand, many of the definitions are aimed at building a pipeline of trainees and CA(SA)s. On the other hand, however, once qualified CA(SA)s choose from a wide variety of employment opportunities in commerce and industry.

Although the CA Sector may be offering opportunities for recruiting and training particularly the Black CA(SA)s, this increase is not reflected in the numbers of qualified Black CA(-SA)s and RAs that remain in the sector.

A factor that could strongly impact the goals and targets the CA Sector has set for itself, is that the environment in which the CA profession operates is constantly subject to change.

The introduction of Mandatory Audit Firm rotation will likely change the environment and functioning of audit firms. The IRBA announced in September 2016 that it would begin a process to implement Mandatory Audit Firm Rotation for audit firms to strengthen the auditors’ independence from clients. Mandatory Audit Firm Rotation is aligned with the IRBA’s objective to enhance audit quality, which ultimately contributes to public and investor protection.

THE APPLICATION OF TWO SCORECARDS

The CA Sector can be stratified into the following main constituencies:

1. Large Firms;
2. Medium Size Firms;
3. Small Size Firms;
4. Black Owned Firms, represented by the Black Chartered Accountant Professionals (BCAP);
5. Auditor-General of South Africa; and
6. Affiliated entities.

Statement 000 of the Codes of Good Practice takes cognisance of the following, which will also be applied to the CA Sector:

Exempted Micro Enterprises (EMEs)

1. A Measured Entity with an annual total revenue of R10 million or less will qualify as an EME.
2. The following recognition levels are applicable: 2.1. EMEs which are less than 51% Black owned: Level four contributor with 100% recognition for B-BBEE procurement purposes.
   2.2. EMEs which are 51% Black owned: Level two contributor with 125% recognition for B-BBEE procurement purposes.
   2.3. EMEs which are 100% Black owned: Level one contributor with 135% recognition for B-BBEE procurement purposes.

An EME is allowed to be measured in terms of the QSE Scorecard should it wish to maximise its points and move to a higher B-BBEE recognition level for procurement purposes.

3. An EME is only required to obtain a sworn affidavit or certificate issued by the Companies and Intellectual Property Commission (CIPC) on an annual basis, confirming the following: 3.1. Annual total revenue of R10 million or less; and
   3.2. Level of Black ownership.

Any misrepresentation of the above constitutes a criminal offense as set out in the B-BBEE Act, as amended.

4. Qualifying Small Entities (QSEs) 4.1. A Measured Entity with an annual total revenue of between R10 million and R50 million qualifies as a QSE.
   4.2. A QSE must comply with all of the elements of B-BBEE for purposes of measurement. 4.3. The following enhanced recognition levels and measurements are applicable for QSEs that are at least 51% Black owned:
   4.3.1. QSEs which are 51% Black owned: Level two contributor with 125% recognition for B-BBEE procurement purposes.
   4.3.2. QSEs which are 100% Black owned: Level one contributor with 135% recognition for B-BBEE procurement purposes. 4.3.3. A QSE is only required to obtain, on an annual basis, an affidavit confirming the following:4.3.3.1 Annual total revenue of between R10 million and R50 million; and 4.3.3.2 Level of Black Ownership.</code></pre></li>

Any misrepresentation of the above constitutes a criminal offense as set out in the B-BBEE Act, as amended.

5. Start-up Enterprises

5.1. Start-up Enterprises are measured as EME’s for the first year following their formation or incorporation. This provision applies regardless of the expected total revenue of the Start-up Enterprise.
5.2. Start-up Enterprises have the same recognition levels as indicated above for EME’s.
5.3 In order to qualify as a Start-up Enterprise, the enterprise must provide an independent confirmation of its status.
5.4 Despite the paragraphs above, a Start-up Enterprise must submit a QSE scorecard when tendering for any contact, or seeking any other economic activity covered by Section 10 of the Act, with a value higher than R10 million but less than R50 million.

For contracts of R50 million or more, they should submit the Generic Scorecard under the CA Charter.

The preparation of such scorecards must use annualised data.

PRIORITY ELEMENTS, SUB-MINIMUM, AND DISCOUNTING PRINCIPLE

1. The priority elements are as follows:

1.1. Ownership – A sub-minimum of 40% of the total weighting points of 6 points for the Economic Interest of Black CA’s and Black People needs to be achieved (40% of 6 points).
1.2. Skills Development – A sub-minimum of 40% of the total weighting points of 30 points for Skills Development needs to be achieved (40% of 30 points).
1.3. Enterprise and Supplier Development – A sub-minimum of 40% for each of the three categories stated below:

1.3.1.  Preferential Procurement: 40% of 15 points.
1.3.2.  Supplier Development: 40% of 10 points.
1.3.3.  Enterprise Development: 40% of 5 points.

2. Large Enterprises need to comply with all three of the priority elements.
3. QSE’s need to comply with Ownership (1.1) as a compulsory element, and either Skills Development (1.2) or Enterprise and Supplier Development (1.3).
4. Non-compliance with the 40% sub-minimum requirement in any of the priority elements as indicated above will result in the following for both Large Enterprises and QSE’s: 4.1. The actual score achieved (regardless of the non-compliance with the sub-minimum requirements) will be discounted by one level down until the next applicable verification period in which the entity can demonstrate compliance with the 40% sub-minimum requirement, at which point the recorded level will become the applicable rating. 4.2. Only the discounted level of Measured Entities shall appear on the face of the B-BBEE certificate.
5. In terms of the CA Sector Code a Measured Entity includes all entities included under Affiliated entities.

ELEMENT WEIGHTINGS

There are five key Elements that form the pillars of B-BBEE.

The Elements, that provide a common base for measuring the impact of policy objectives of B-BBEE across different entities and sectors within the economy, are the following:

1. Ownership
2. Management Control
3. Skills Development
4. Enterprise and Supplier Development
5. Socio-Economic Development

In terms of the Codes of Good Practice, it is recommended that the overall weightings attached to the different Elements of the scorecard follow the Generic Scorecard as presented in statement 000 of the Codes of Good Practice as closely as possible
with a minimum of deviation.

In terms of code series 000, statement 003, the following principles need to be applied in developing and gazetting Sector Codes:

1. There must be common commercial and other characteristics within those entities operating in the sector which would make it feasible to formulate a transformation sector code subject to the proposed Sector Code.
2. The proposed Sector Code must fully address all the Elements in the Generic Scorecard.
3. The proposed Sector Code must use the same definitions with respect to all beneficiaries as those used in the Codes.
4. The proposed Sector Code must use the same calculation methodologies to measure compliance as those used in the Codes.
5. The proposed Sector Code may deviate from targets and weightings used in the Codes only where the deviations are justifiable based on sound economic principles, sectoral characteristics, or empirical research.
6. The proposed Sector Code may introduce a new additional Element for measurement where such addition is justifiable based on sound economic principles, sectoral objectives, or empirical research.
7. The proposed Sector Code must clearly define its scope of application.

In paragraph 11.1 of the CA Sector Code, it was stated that the aim of the guiding principles was to closely align the CA Sector Code with that of the Generic Scorecard. As highlighted above, the Codes do make provision for deviations based on sound economic principles sectoral characteristics or empirical research. The CA Sector has come to the conclusion that there are sound economic principles, sectoral characteristics and empirical research to justify deviations from element weightings and even certain targets.

Article three will discuss indicator weighting and compliance targets of the scorecard.