• Is South Africa a developing economy with developed-economy regulation?
Articles:

Is South Africa a developing economy with developed-economy regulation?

25 July 2019

South Africa has a sophisticated business regulatory environment, in line with the best in the world. We can thus be assured that we adhere to global standards. However, the question needs to be asked whether our business regulations are an enabler of local business development, or if they in fact slow it down?

Is South Africa a developing economy with developed-economy regulation? It is critical that we find a way to facilitate businesses growing in an already struggling economy by lowering the compliance burden.

Deregulation comes with issues of its own. Laws are there because they are needed. At the same time, some of our regulation has become so punitive that it is counterproductive and harms our economy. An already volatile, struggling economy.

Investment into the country has slowed due to political uncertainty, growth is negligible, unemployment is at 27,6%, and we’ve seen several corporate failures. Large businesses have gone into business rescue, and others are shedding staff due to automation and other factors. The logical solution to a constrained jobs market is for skilled individuals to start businesses of their own.

Sadly, there are rafts of regulation around forming a company. The new entrepreneur will have to register with CIPC and with SARS, to complete VAT registration, income tax, and PAYE formalities… They will have to engage with the department of labour on the Compensation for Occupational Injury and Diseases Act. Then there are UIF and Companies Act requirements, B-BBEE compliance, the Basic Conditions of Employment Act and the Employment Equity Act to consider.

Compliance requirements continue throughout the life of the business. An entrepreneur with a great business idea may be able to make money, but they may not be able to keep up with the costs of compliance.

Employing a full-time accountant or administrator erodes profitability. Failure to do so may see the entrepreneur in serious trouble with the regulators. If they’re not compliant, there will be fines and penalties which will hamstring the business further.

The other piece of the puzzle is the role of the audit professional. In the past, an auditor would be able to advise clients on budgeting, costing, valuations and marketing. Under new regulations, they are not permitted to advise. Clients must simply present us with their numbers.

The trusted business-advisor relationship with auditors is vanishing, and clients are now required to hire a separate advisor from another firm, which also increases their costs.

It makes sense that auditors should not draw up the same financial statements that they audit. But when auditors cannot provide any advice, businesses are seriously handicapped.

This can lead to corporate failures, where firms fail to consult because they they’re forbidden from doing so, or they don’t have the additional funds.

The supreme irony is that auditors are precluded from offering a client advice, but are compelled to report them if they transgress. Clients are also forced to pay for this arrangement.

Meanwhile, audit and professional services firms sit with a wealth of knowledge around capital raising and budgeting, cashflow forecasting, working capital management and business models – as well as regulatory compliance.

The regulatory minefield also discourages entrepreneurs in the informal sector from entering the formal economy. As a result, many operators fall completely outside the tax net. A less regulated economy might allow more businesses to contribute positively to the fiscus.

We need to make it simpler to do business. In the current, digital era, it is possible to automate many compliance functions, to share and export information between government departments and to lighten the compliance burden with the help of technology.

Another approach is to lower the threshold below which a company is required to report, by re-evaluating the Public Interest Score (PIS). The PIS criteria have not changed for several years. Adjusting these may free many companies from a compliance burden that is suffocating their business.

Much corporate regulation is geared towards listed companies, and it is important that such companies be well regulated, since public funds are invested there. But for owner-managed, or family businesses, there is a crying ned for less regulation.

It may be useful to convene a forum of stakeholders from across the business world, to look at simplifying the regulations. The guiding principle should be to craft a regulatory regime that facilitates entrepreneurship, start-ups and business in general. After all, business is the engine that drives the South African economy. It may be time to take the brakes off.

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