B-BBEE Sector Code Analysis: Accounting Sector – Ownership Element

1. Introduction and Applicability

• 1.1 Sector Code Overview: The Amended Code Series for the Accounting Profession sets out specific B-BBEE measurement principles for entities within the accounting and auditing profession in South Africa. It aims to accelerate transformation within this sector.
• 1.2 Scope of Application: This code applies to all entities that provide accounting, auditing, and related financial services, including:
  • Firms registered with the Independent Regulatory Board for Auditors (IRBA).
  • Firms providing accounting and bookkeeping services.
  • Firms providing tax advisory services.
  • Sole practitioners in the accounting profession.
  • This code does not apply to internal accounting departments within companies that are not primarily engaged in providing accounting services to the public.
• 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Code Series for the Accounting Profession (Government Gazette No. 42496, 07 June 2019).
• 1.4 Effective Date: 07 June 2019.
• 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

• 2.1 Ownership Scorecard: Indicator Weighting Target Voting Rights (Black People) 6 points 50% + 1 vote Economic Interest (Black People) 6 Points 50% Economic Interest (Black Designated Groups) 2 Points 10% Economic Interest (Black New Entrants) 2 Points 10% Net Value 9 points See Below Total 25 points Net Value Target: The target is linked to “years of recognition”, and is based on a percentage of the 50% target:
  * Year 1: 5%
  * Year 2: 10%
  * Year 3: 20%
  * Year 4: 40%
  * Year 5: 60%
  * Year 6: 80%
  * Year 7 onwards: 100% (i.e. 50%)
• 2.2 Priority Element Status: Ownership is a priority element.
• 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 40% of 9 points = 3.6 points, based on the time-based graduation factor). This is the same percentage as the Generic Codes, but applied to a different total point allocation.
• 2.4 Entity Size Thresholds:
  • EME Threshold: Annual Total Revenue of R2.5 million or less. (Lower than the Generic Codes’ R10 million).
  • QSE Threshold: Annual Total Revenue between R2.5 million and R35 million. (Lower than the Generic Codes’ R10 million – R50 million).
  • Generic Threshold: Annual Total Revenue above R35 million. (Lower than the Generic Codes’ R50 million).
• 2.5 Automatic Recognition for EMEs/QSEs:
  • EMEs:
    • Automatically Level Four (100% recognition).
    • 100% Black-owned: Level One (135% recognition).
    • At least 51% Black-owned: Level Two (125% recognition).
    • Same as Generic Codes.
  • QSEs:
    • 100% Black-owned: Level One (135% recognition).
    • At least 51% Black-owned: Level Two (125% recognition).
    • Same as Generic Codes.

3. Specific Ownership Requirements and Interpretations

• 3.1 Unique Ownership Targets: Significantly higher ownership targets than the Generic Codes. The targets for voting rights and economic interest are 50% + 1 vote and 50%, respectively (compared to 25% + 1 vote and 25% in the Generic Codes). There are also specific targets for Black Designated Groups and Black New Entrants. The Net Value target is effectively based on 50% rather than 25%.
• 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
• 3.3 Exclusion Principle: The code allows for the exclusion of the portions of ownership held by organs of state, public entities, and mandated investments. This is in line with the Generic Codes.
• 3.4 Treatment of Specific Entities: The code provides specific recognition criteria for trusts, stating that they must meet the requirements outlined in Annexe 100(A). This aligns with the general principles of the Generic Codes, but with a specific cross-reference.
• 3.5 Multinationals: The code does not include specific provisions for multinationals beyond what is in the Generic Codes. Equity Equivalents would likely apply as usual.
• 3.6 Qualified Professionals: While not an explicit requirement for ownership, the nature of the sector (accounting and auditing) implies that many participants will be qualified professionals. The code does emphasize skills development and management control for Black professionals.
• 3.7 Sale of Assets: The Code does not have specific deviations from the Generic Codes.
• 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible under the Accounting Sector Code, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10). There are no specific provisions in the Accounting Sector Code that would prevent or modify this.
• 3.9 Other Unique Provisions: The Code includes “Years of Recognition” to determine the applicable target for the Net Value calculation, which is distinct from the Generic Codes.

4. Areas of Uncertainty and Interpretation

• 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle in complex structures can be areas of interpretation.
• 4.2 Industry Practice: Industry practice will likely develop over time regarding the implementation of the higher ownership targets.
• 4.3 Potential Disputes: Similar to the Generic Codes, valuation disputes and challenges to the legitimacy of ownership structures are possible.

5. Deal Process, Parties, and Costs

• 5.1 Typical Deal Structures: Direct ownership by Black professionals, trusts, and potentially employee share ownership schemes (though less common in professional services firms).
• 5.2 Key Parties Involved: Accounting firms, Black accounting professionals, legal advisors, financial advisors, B-BBEE verification agencies.
• 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation.
• 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

• 6.1 Common Mistakes: Failing to meet the higher ownership targets, inadequate documentation, fronting, not understanding the “Years of Recognition” for Net Value.
• 6.2 Fronting Risks: High risk, particularly given the professional nature of the sector.
• 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance. Focus on attracting and retaining Black accounting professionals.

7. Alternatives to Ownership
The other elements of the Accounting Sector Scorecard are:
* Management Control: With a focus on Black representation at different management levels.
* Skills Development: With specific targets for spending on learning programmes for Black people, and particularly Black professionals.
* Enterprise and Supplier Development: With a focus on procuring from Black-owned accounting firms.
* Socio-Economic Development: Similar to the Generic Codes.

8. Conclusion

The Accounting Sector Code significantly raises the bar for B-BBEE ownership compared to the Generic Codes, with higher targets for voting rights, economic interest, and Net Value. The lower thresholds for EMEs and QSEs also reflect the structure of the profession, with many smaller firms. The focus is clearly on increasing Black ownership and participation within the accounting profession itself.

Please contact us for a confidential discussion around your unique BEE Ownership needs.

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