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Nationalise: The BEE Verification Industry – EconoBEE Newsletter – 18 August 2014

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Nationalise: The BEE Verification Industry

The dti has announced its intention to do away with private verification agencies, and start performing its own verification.

We see this as a ridiculous attempt to solve a genuine problem.

There is a problem with verification: The purpose of verification is to give confidence in any entity’s BEE status level. At the moment many verification certificates we see do not give us confidence that it correctly represents the entity’s BEE status. There is one reason for this and only one organisation to blame; the department of trade and industry. If they, and the regulators appointed by them, did their job properly, the problem would cease to exist.

The dti is not doing its job of monitoring BEE progress, issuing guidelines, taking action against errant agencies and companies. Most sector councils are dysfunctional. No one is doing anything to combat fronting. We have been waiting for 3 years for the BEE Amendment Act to come into force to allow the creation of the office of the BEE Commissioner. While the Amendment Act was finally gazetted in January 2014, the President has not yet proclaimed it, so it could still be another 2 years before any action against fronting is seen.

The Problem
The BEE Codes, while having good sentiments, are badly written and riddled with errors. We have asked the dti many times to issue guidelines, and to take action against inconsistent verifications, errors, interpretations and fronting. They have not done so. Where they have issued guidelines, they invariably get it wrong! The single most important reason why BEE is failing and verification is inconsistent is the dti.

We have complained many times and written numerous articles highlighting the fact that different agencies, even different people in the same agency will award vastly differing points.

The codes themselves are quite complex. It is made worse by the number of errors in the codes – not just technical errors, but errors of logic, spelling and grammar. The original codes were issued in 2007. In 2013 when the Amended codes were issued, they contained some of the exact same spelling and grammatical errors. After 6 years the dti did not even fix up its own grammar!

Against this backdrop the verification industry is trying to come up with its own interpretations. Each agency has its own interpretation, and in many cases different analysts from the same agency have different views. There can be up to a four level difference in how agencies see a company’s status.

The dti has appointed two regulators, SANAS and IRBA. Each regulator has its own way of doing things, and its own requirements, which are contradictory. Both regulators follow a methodology (Verification Manual for SANAS and SASAE for IRBA), but neither has any interpretation standards. The regulators check on the methodologies being followed but refuse to issue guidelines on interpretation, and have no concern over the fact that different agencies award differing points for the same activities. Both SANAS and IRBA tell us to refer any queries to the dti, who tell us to refer them to the regulators. Both regulators are underfunded. Informed sources tell us that IRBA is in a running battle with the dti over funding and the Audit Act needs to be changed before IRBA can become the sole regulator which seems to be the minister’s preference.

Sector Councils
The Sector Councils are in the same position. They invariably are underfunded and lack expertise. Let us take a case in point. We had a problem with an IT company that had issued a codes of Good Practice certificate. We asked IRBA for an opinion, but received no response. We asked the department of communications (responsible for the ICT sector code) for an opinion.

Eventually we received the following reply:
The <Name removed> B-BBEE Certificate is valid until the 1st September 2014. This entity should thereafter ensure that it applies for its B-BBEE weighting and certification under the ICT Score Card after the expiry of its current certificate“.

What they are saying is if you use the wrong sector code, or produce an incorrect certificate, it will be presumed valid. Is this a once-off “get-out-of jail” card that every company can use? Obviously this is a ridiculous response and we’d welcome the dti taking action. There should be a division inside the dti to look at these issues. When we query why the sector councils don’t get more involved, they complain that the dti should be doing this work.

The Verification and Consulting Industry is not Blameless
As pointed out above, different analysts at the same agency often use different methodologies and award differing points. Agencies should have better controls, and better knowledge. It is too easy for agencies to become accredited. An auditor only needs to pass a BEE management development course to be let loose on the industry, without any experience, or even support from IRBA. Many agencies, being small businesses do not have the infrastructure to manage the knowledgebase they need to do the job properly. We have hundreds of instances of errors by agencies. In one case, out of 30 certificates we have that were issued by one auditor, 10 were faulty. In some cases the points awarded for each element did not even add up to the total!

Too many consultants/lawyers look only for the loopholes. There are indeed loopholes – due to the dti’s refusal to close them! For example some companies end up earning all their enterprise development points forever by rolling over a single loan from 10 years ago. Some companies are awarded full ownership points and are seen to have majority black ownership because they have established a broad-based trust even if it does not have voting rights and economic interest! Once again the dti has been informed of these loopholes, but have never closed them – not even in the Amended codes.

Companies themselves will deliberately misinform their agencies, who do not check further. One company that had an annual revenue in excess of R1 billion per annum, managed to get an EME certificate from their auditor!

Fronting, defined as a misrepresentation of an entity’s BEE status, whether done knowingly or where the CEO and directors “ought to have known” that this was a misrepresentation happens at an enormous rate. We see about 10 invalid certificates per week and always report them to the agency or entity, or sector councils, dti or regulators. A lot more slips under the radar. No one wants to take action – the excuse being the BEE Amendment Act has not yet been proclaimed so fronting is not yet a criminal offense (it is fraud!). Most companies whose suppliers are fronting tend to ignore the issue hoping that their verification agency will not pick up the invalid certificate.

Most blame must be Apportioned to the dti
The deputy minister correctly has identified some of the issues – he has failed to recognise that the problem is the dti itself. The solution is not to get the dti to start issuing BEE certificates – it is to get the verification industry to operate properly. The dti is responsible for appointing and managing the regulators of the verification industry – and this they have also failed to do. IRBA, SANAS do their own thing, and both have complained that the dti refused to give any direction. For the dti now to want to take over verification is a recipe for disaster – transformation will suffer and compliance will drop.

Let us note that the dti has been trying to establish an office of the BEE Commissioner for the past 4 years. The act was finally gazetted in January 2014, but has yet to be proclaimed by the president. It is the same office that the deputy minister expects to setup a verification division inside the dti. Just when does the deputy minister expect it to be finally in operation? 2020? Our feeling is the deputy minister has made ridiculous comments to black industrialists only to try to appease them that government is failing the transformation process. The dti will never be able to issue up to 100 000 BEE certificates every year.

The Solution
The true solution is for the dti and the regulators to become far more pro-active.

Take action as follows:

  • Fix errors in the codes
  • Give sufficient assistance to SANAS and IRBA to do their job properly
  • Issue interpretations
  • Scrap the sector councils
  • Don’t scrap the verification industry – make them work properly, take action against incompetent agencies.
  • Ensure the regulators are empowered to do their jobs

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EconoBEE Newsletter
 18 August 2014

In this issue

  • Nationalise: The BEE Verification Industry

In other news

About EconoBEE

EconoBEE is an expert BEE consultancy. EconoBEE helps businesses Become BEE Compliant, prepare for verification, earn maximum BEE Points and ensure that they achieve the BEE Level they need to get more business.

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