Small businesses find themselves in a catch-22 when it comes to BEE verification. Officially, they are exempt from the heavy red tape and costs involved in scoring a business’s BEE compliance. But, increasingly, they find that they have to submit to red tape and costs just to prove that they are indeed exempt.
Businesses with an annual turnover of less than R5million are exempt from BEE verification, but should the fact that they are exempt be verified? BEE verification agencies say yes, and charge R500 to R1Â 500 for officially confirming a business’s turnover.
The paradox is the result of a tussle in government between two divergent approaches to BEE implementation, and to business regulation in general.
On the one hand, there are those who believe BEE should be based on something similar to tax compliance, where businesses assess themselves but remain open to scrutiny and audit at the expense of whoever wants to verify it. This seems to be the stance of top officials from the treasury, the department of trade and industry and the office of the deputy president.
On the other hand are the BEE hardliners, who argue that BEE will collapse in a heap of fronting if it isn’t strictly and regularly audited.
Self-assessment by businesses of BEE scores is a threat to the project. Not surprisingly, the burgeoning BEE verification industry is pushing hard for independent auditing.
In aggressive marketing messages to small businesses, many verification agencies present a choice of either paying for an exemption certificate or having to submit a mass of paperwork, including full financial statements, every time someone asks for your BEE status. No mention is made of alternatives, such as a letter from an accounting officer or even the business owner, simply confirming a turnover of less than R5million a year.
Lionel October, the deputy director general at the department of trade and industry who oversees BEE and small business development, says a letter signed by the business owner is all that is needed.
But this stance is strongly opposed by the South African National Accreditation System (Sanas), an agency operating under the auspices of the department and which is charged with accrediting BEE verification agencies.
Christina Leballo, head of BEE verification at Sanas, is emphatic that a verification agency is not doing its job properly if it doesn’t collect solid evidence of the exempt status of a corporate’s small suppliers when assessing a company’s BEE procurement. A letter from a small business’s accounting officer is not enough — the verification agency has to scrutinise the business’s financial statements, she says.
With the weight of Sanas behind them, BEE verification agencies are refusing to authorise the BEE procurement score of large companies if their suppliers aren’t verified in turn. This means a lot of lucrative work for the verification agency and results in pressure on small businesses to buy exemption certificates.
October says the BEE codes make it clear that anyone who insists on an official BEE certificate from a supplier must pay for it, and the official position of government buyers is not to insist on official certification, but to accept self-assessed BEE scores or exemption statements from small businesses tendering for government contracts.
It is unclear to what extent these rules are followed. It is highly unlikely that a full understanding of the complicated BEE codes has taken root among all government buyers yet, and it is easy for private sector corporates to make their suppliers run off to verification agencies at their own cost by hinting at possibly ending contracts.
One solution is to get the South African Revenue Services (Sars) to issue tax-clearance certificates that state whether a business’s turnover is above or below R5million. The verification industry seems ready to accept this as evidence, although, ironically, it is ultimately based on the self-assessment of the tax-paying businesses.
October confirms that talks are under way between the department and Sars about the issue.