South Africa’s fledgling black economic empowerment (BEE) verification industry is being allowed to write the rules of BEE verification in its own favour, resulting in a closed shop of agents that benefit from keeping the costs of verification high, says Kevin Lester, owner of BEE consultancy Mohlaleng Transcend.
Despite the fact that the BEE codes state that independent BEE verification is optional for small businesses, verification agents make it compulsory by refusing to authenticate the BEE procurement scores of large companies unless all their suppliers also undergo independent verification.
”In their own rule-writing, they say that you have to have a verification certificate from all your suppliers if you want to be recognised as being BEE compliant, and if those suppliers want to do a self-assessment, or if they don’t want to go to verification agencies, they want to go to their auditors, [the verification agencies] say no, absolutely not, won’t allow it.”
Besides going against the BEE codes, it also results in a situation in which verification agencies come very close to ”marking their own work”. He sites the example of a verification agency that charged the SABC R1,5-million to verify its supplier database and then proceeded to verify the SABC itself.
One way in which verification agencies inflate the costs of BEE verification, says Lester, is that they sell their databases of verified suppliers to the corporates they are hired to verify, instead of making it available to them free of charge.
The original idea was that the government would keep a central, publicly accessible database with the names and BEE scores of all companies, says Lester. This was meant to keep the cost of BEE verification down, as companies could easily access the BEE score of their suppliers without having to pay someone to do it.
But, in the absence of such a central database, verification agencies are selling their own databases to their clients to make extra money, over and above their verifying work.
Chia Chao Wu, CEO of the verification agency Empowerdex, disagrees. He says Empowerdex would charge a company a fee to collate its supplier list with Empowerdex’s database, but if the company wants to do the collation itself, it has free access to the database.
Lester says he is in favour of independent verification of BEE compliance, especially of large corporations. ”But it should not be driven from a regulatory perspective. It should be driven internally from within the company on the basis of its commitment to good corporate governance. If you are a well-managed organisation with good corporate governance principles in place, you would be looking for somebody else to confirm that rather than yourself.”
The verification industry obsessively seeks to measure, in numbers, what is essentially a qualitative phenomenon, thereby threatening to miss the point of BEE altogether, says Lester. ”You get into the space where the rating is more important than the principle of BEE.”
Wu counters this by arguing that, before the introduction of quantifiable measures, BEE was slow and fraught with fronting, which is no longer the case.
Wu also argues against self-assessment, saying a business would score itself liberally, gaining an unfair advantage over a firm that puts itself through rigorous independent verification.
Measuring BEE
With the advent of the broad-based BEE codes a unique industry has sprung up in South Africa — a host of ”auditors” who go around to businesses, non-profit organisations, parastatals and even government bodies to measure how these organisations comply with the BEE codes.
After an initial mushrooming of the industry, the growth in the number of verification agencies was abruptly stalled when the codes came into effect at the beginning of the year, which started a process of accreditation by the South African National Accreditation System (Sanas).
The initial chaos in the industry, which had the usual crop of scare-mongers and fly-by-nights that accompany all new regulatory systems, seems to have been replaced by the strict control of the Association of BEE Verification Agents (Abva), which now has 41 full members and 25 associate members. They are all awaiting accreditation from Sanas, which, according to the latest estimates, will be completed at the end of this year.
Meanwhile, the association is not accepting any new members, a move that tends to enhance the impression that a closed shop is being formed in the industry.
Abva is run from the offices of one of the leading verification agencies, Empowerlogic. Other main players include Empowerdex, Emex, Verify Solutions and Nera. The big auditing firms with a finger in the pie include PricewaterhouseCoopers, Grant Thornton and SizweNtsaluba.
A strict principle of BEE verification is that the agencies may only measure BEE compliance, not advise on it. The verification agencies should therefore not be confused with the thousands of BEE consultants that have become of feature of the South African business landscape.