Public Interest Entities
The final pronouncement on the revisions to the definitions of ‘listed entity’ and ‘public interest entity’ has finally been issued by the IRBA. Therefore, it is time for South African auditors to determine how these local revisions impact their firms, and to adapt, as necessary. The revised requirements are effective for audits of financial statements for periods beginning on or after 15 December 2024, with early adoption permitted.
Definition of a PIE
Up to now, the definition of a public interest entity (PIE), according to the IRBA Code included:
a. Listed entities
b. Entities defined by regulation or legislation to be PIEs
c. Entities for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities.
The revised definition is more specific and indicates that an entity is a PIE when it falls within any of the following categories:
a. A publicly traded entity
b. An entity one, of which the main functions are to take deposits from the public
c. An entity one, of which the main functions are to provide insurance to the public
d. An entity specified as such by law, regulation or professional standards to meet the purpose described in paragraph 400.15.
Publicly traded entity
The reference to a ‘listed entity’ has been expanded to now refer to a ‘publicly traded entity’.
A ‘publicly traded entity’ is defined as an entity that issues financial instruments that are transferrable and traded through a publicly accessible market mechanism, including listing on a stock exchange. A ‘listed entity’ as defined by relevant securities law or regulation is an example of a publicly traded entity.
Other categories
The current version of the IRBA Code, paragraph R400.8b SA, provides a list of entities that are likely to be considered as PIEs. Based on the revision of the PIE definition, the list has been amended and made compulsory, and is now included in paragraph R400.23 SA. The most important changes in the list include the following:
| Current list | Revised list | Implication |
| Major public entities that directly or indirectly provide essential or strategic services, or hold strategic assets for the benefit of the country | a. Publicly traded entities
b. Schedule 2 PFMA public entities c. Entities per section 4(3) of the Public Audit Act d. Universities |
More categories of public sector entities will now be included |
| Banks and mutual banks | Banks and mutual banks | None |
| Market infrastructures | Market infrastructures | None |
| Insurers registered under the Long-term Insurance Act, 1998, and the Short-term Insurance Act, 1998, excluding micro-lenders | Insurers, as defined in the Insurance Act No. 18 of 2017 | Micro-lenders are no longer excluded, if they meet the definition given in the new Insurance Act No. 18 of 2017 |
| Collective investment schemes, including hedge funds, which hold assets in excess of R15 billion | Collective investment schemes, including hedge funds, which hold assets in excess of R30 billion | Increased threshold may exclude some collective investment schemes |
| Pension funds that hold, or are otherwise responsible for safeguarding client assets in excess of R10 billion | Pension funds that hold, or are otherwise responsible for safeguarding client assets in excess of R30 billion | Increased threshold may exclude some pension funds |
| Pension fund administrators with total assets under administration in excess of R20 billion | Pension fund administrators with total assets under administration in excess of R30 billion | Increased threshold may exclude some pension fund administrators |
| Financial services providers with assets under management in excess of R50 billion | Financial services providers with assets under management in excess of R30 billion | Reduced threshold will include more financial services providers |
| Medical schemes that are open to the public, or are restricted schemes with a large number of members | Medical schemes with a membership in excess of 89 000 beneficiaries as at financial year-end | The clarified threshold will hopefully ease the burden on medical aids |
| Authorised users of an exchange who hold, or are otherwise responsible for safeguarding client assets in excess of R10 billion | Authorised users of an exchange who hold, or are otherwise responsible for safeguarding client assets in excess of R30 billion | Increased threshold may exclude some users |
| Other issuers of debt and equity instruments to the public | Other issuers of debt and equity instruments to the public | None |
New disclosure requirement
When a firm has applied the independence requirements for public interest entities in performing an audit of the financial statements of an entity, the firm must publicly disclose that fact in a manner deemed appropriate, taking into account the timing and accessibility of the information to stakeholders. For example, it may be communicated in a letter to the shareholders, included in an audit quality report, or stated in the audit report.
The only exception to this rule is if making such a disclosure will result in disclosing confidential future plans of the entity.
In summary
The IRBA Code includes stricter independence requirements for PIEs. It is crucial for audit firms to review their client list before the effective date of the revision, so that the necessary steps may be taken, and processes put in place. This may impact client acceptance and continuance decisions going forward.
LEAF can assist firms with providing practical advice, reviewing methodology design, designing audit working paper templates, and providing staff training on the relevant requirements and procedures.
References
1. IRBA Code of Professional Conduct for Registered Auditors (Revised April 2023), including Independence Standards
2. IRBA Final Pronouncement, issued November 2023: Revisions to the IRBA Code of Professional Conduct for Registered Auditors (Revised April 2023), Revisions to the Definitions of Listed Entity and Public Interest Entity.
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