Shop Around for your Verification Agency – EconoBEE Newsletter – 28 March 2012

The aim of verification is to ensure a consistent and accurate score.

Regretfully verification agencies, and their regulator SANAS, do not practice a consistent approach to verification. Many agencies have their own differing viewpoint. Unfortunately based on some interpretations you could easily be issued with a scorecard that is 20 or more points lower than another agency. This is potentially a 3 level change which is why it is worthwhile finding an agency who agrees with your interpretation.

Where there is a dispute, the verification manual makes allowances for you to appeal the verification agency’s ruling. An appeal is a great method of allowing the market to offer additional comments, further interpretations and better the quality of verification but not when the verification agency themselves adjudicates the appeal. So, during an appeal, the person who made the initial decision is being asked to change their mind. Where the appeal calls for some form of interpretation, the agency usually digs in its heels. One agency absolutely follows the ABVA Practice Notes, while another, also a member of ABVA will follow their own interpretation. In some cases where a simple error has been made, the agency will agree to fix it up (though we have had to wait 3 months for an agency to reissue a new certificate that had a simple addition error on it).

Complaints, or queries to SANAS or the dti invariably are ignored or not followed up. In one case where SANAS did respond they gave an absolute assurance that any agency that did not follow the interpretation given by the dti would receive a non-conformance. This has not stopped some agencies from ignoring the dti interpretation. Additional complaints to SANAS yield no further response.

Key principle of the codes; “The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.” and “In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.” is of critical importance. Agencies who view B-BBEE in-line with the objectives of B-BBEE invariably are easier to talk to and work with because they use a pragmatic approach during their verifications. A good example of this is proof of ID. Agencies require a certified copy of an ID yet if it is not available during the on-site they allow you to fax it through later. It is impossible to use a copied certified copy because it is another copy (this time not certified). On the other hand a drivers licence or passport is also a legal form of identification.

A thorough verification does not necessarily imply checking every single document. It implies ensuring that the risk associated with accepting a particular document is acceptably low. Instead some agencies will check a small sample and if a mistake is discovered will apply the error percentage throughout the indicator rather than checking a larger sample.

IRBA, the second regulator has begun approving auditing firms to issue valid BEE certificates. To date IRBA has published the names of 39 auditing firms that may issue your certificate, so when you shop around, they should also be considered in your decision. We can only hope that IRBA will be more pro-active in ensuring consistency in verification. We also hope that the added competition between agencies and audit firms will ensure a more standardised and accurate verification.

How to appoint the best agency and get the best score

There are many areas of the codes where there are differences of interpretation. Each different interpretation can affect your scorecard which is why before appointing your verification agency you need to:

• Prepare a scorecard before beginning your verification process. Quite simply the more prepared you are the easier and quicker your next verification will be.
  
• Interview the agency or auditor BEFORE appointing them. You are particularly looking for experience in your sector, consistent interpretations that result in more points and a willingness to give good service. Agencies who are not prepared to offer interpretations are generally not prepared to change them if they are different to other agencies.
• Test the agencies knowledge of Black Economic Empowerment. During the interview process it sometimes makes sense to suggest an unethical or incorrect interpretation and see how they respond – if they agree then they are no good, if they explain why it is wrong then they are better.
• Remember your BEE verification agency is just one of your many suppliers. You do not need to be intimidated by your agency.

Here are some common interpretational differences between agencies:

1) You have not submitted your Employment Equity returns – Some agencies deny you all management and employment equity points, while others verify the actual people in your business (it is a legal requirement for all designated employers to submit their returns), but the codes do not demand you forfeit all points.

2) You have appointed an ED beneficiary, and made early payment on invoices. Some agencies recognise a maximum 15% of invoice value (as per ABVA Practice notes), while others follow the dti and SANAS notices recognising up to 100% of invoice value.

3) Your shareholding, directors or employment equity has changed dramatically since the end of your financial period. Some agencies verify you based on the situation as at the date of verification, which can be up to a year after date of measurement (your financial period). Others look at the situation that existed on the last day of your financial period.

4) You have made no profits for the past couple of years. Agencies have differing interpretations of how to calculate your ED and SED targets, based on an average profit or indicative profit.

5) You have a complicated ownership structure – e.g. trusts, holding company. You need to ensure the agency understands how to calculate your ownership.

Start shopping around for the best verification agency. The shopping should not be based on price – it should be based on getting the best result.

Your aim is to get the highest, legal level, and if an agency unfairly awards you lower points you should shop around for the agency that legally gives you the best result.

The approach we follow is to identify the crucial areas of our clients’ scorecards, and those that are most controversial. We then call in a selection of agencies and quiz them on how they interpret various aspects. This is not consultation with the agency which is not allowed – it is an interview. Based on the responses our client decides on the agency to appoint. If this initial interview is handled professionally it ensures a smooth verification with the most accurate scores.

It may sound ridiculous that a standard like the codes, that is regulated by a standards authority allows so much leeway on a scorecard. It may sound ridiculous that we recommend shopping around for the best result, but until SANAS and the dti take control of the verification industry we are forced to recommend this approach. The codes of good practice and any relevant sector code are the ultimate arbiter of your BEE scorecard.