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  • The business regulatory framework: enabler and enforcer

The business regulatory framework: enabler and enforcer

25 April 2019

The South African legislative environment, as it pertains to business, performs a crucial function. It attempts to ensure fairness and to provides assurance to investors.

In this sense, business regulations are intended to protect and assist business. They are also utilised by our country’s tax authorities as a mechanism to guarantee that everyone doing business with government is tax compliant.

That said, small enterprises can find the administrative responsibility of compliance somewhat daunting and not necessarily one that adds value. To improve this situation, there is a need for education to inform business people about the regulations in place, and why it is important that they comply.

Many entrepreneurs are blissfully unaware of what is required of them from a compliance perspective.

There is a clear need for government, and perhaps business and the private sector, to put heads together and ensure better compliance and fewer unwanted surprises for new entrepreneurs.

Even where businesses are aware of duty to report, they complain that it’s a complicated process.

South African regulations dictate that certain businesses must comply with certain financial reporting standards). This year, there are several major new accounting standards that have become effective. There is a significant financial and systemic cost for business to comply with these standards.

As an audit firm, we see that our clients are experiencing challenges with this. It can have a material impact on their financial statements which can in turn. If financial statements are materially misstated and non-compliant with the relevant accounting reporting standards then this can create.

This can be critical, as most banks and potential investors ask to see audited financial statements before they invest in a company or lend the company any funds.

We try to assist ahead of time through annual technical updates with clients, highlighting emerging risks that affect them. But these standards place a lot of responsibility on the client to develop their models to ensure compliance.

Another serious implication of regulatory compliance is that if a firm fails to comply – for instance with regulations around tax and BEE – then they are prevented from doing business with government – the biggest spender in the country. This is a massive risk, yet the compliance burden becomes ever more complex.

Firms are getting desperate, as their very survival now hinges on their ability to understand the regulations. All the more reason for better education.

Regulations, broadly speaking, are good. They add value, and provide protection for investors. A lack of regulation can discourage investors if they feel their investment might not be safe. However, too much regulation may see them move to other markets if they feel their investment might be difficult to liquidate.

However, legislation can also create a climate ripe for manipulation. For example, in the public sector, certain procurement legislation allows an organ of state to set pre-qualifying criteria before they award a contract. These criteria can be manipulated such that a contract can be awarded to any pre-arranged supplier.

This goes against the spirit and the intention of that legislation. Such unintended consequences are having a devastating effect on the effectiveness of our state procurement processes. The very corruption scourge the laws were meant to address is now rife, using these regulations as loophole. It is crucial that such laws be revisited to close the loopholes.

Government needs to take a better look at the level of consequence management built into legislation; it must create a deterrent around corruption and corporate failures. We need to be firmer in dealing with people who break the law.

Regulations are an indispensable tool in creating a conducive business environment. They should be a facilitator that protects the businesses that bring growth, jobs and investment. They must also be an enforcer, outlining the consequences of contravention and holding law-breakers to account.

Only when we adequately balance these two functions of business regulation will we have built an optimally functioning business environment that will attract foreign and domestic investment and start making real inroads into poverty, inequality and unemployment.

  • Rushay Singh is audit partner at BDO South Africa’s Pretoria office

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