At the time of publication, the South African cabinet had (AT LAST!) approved the final revised form of the Codes of Good Practice on Black Economic Empowerment (the Codes). Whilst going through a number of incarnations, periods of public commentary and reviews, the final form still holds the potential to yield its fair share of surprises. This also holds true for the structuring and position of the verification industry, leading to at least one prominent financial publication incorrectly suggesting that formal verification may be totally done away with.

According to Robert Thorburn of NERA (National Empowerment Rating Agency), this suggestion is rooted in a misinterpretation of a potential new approach to verification. “Given that this approach has not as yet been formally confirmed by government, it is not surprising that there are misconceptions,” he says. The issue here is that of self assessment, sometimes also referred to as self verification. (The latter is however, an oxymoron since verification is by definition a function performed by an entity that is totally independent of the party being assessed.)

“The case for self assessment is intimately coupled with the current drive to simplify the Codes and lower the difficulty and associated cost of compliance, says Thorburn. As such, it is suggested that businesses may be allowed to determine their own score using the Codes. How exactly this will work is not known at present, but it has been suggested that smaller businesses (Qualifying Small Enterprises) will be allowed to simply work out their own scores using commercial software. Larger businesses falling under the generic scorecard will have the option of either getting a Verification Agency to determine their score or doing so themselves and then having their CEO sign it off. This possibility has given rise to the idea that Verification will no longer be needed.
“This is a rather short sighted conclusion, especially if one considers three critical issues, namely liability, cost and application,” he told Smart Procurement.

Liability
“It is highly unlikely that any CEO will accept the personal liability associated with such a statement, specifically if one considers that the score would have been determined by in-house personnel, who do not conduct Verification activities and are therefore not intimately acquainted with all the complexities of such an exercise. To fully appreciate this point one need only view the scorecards which businesses are currently releasing themselves. It is not uncommon to find scores calculated on outdated provisions, containing gross misinterpretations of the Codes and connected legislation as well as mathematical errors. ”

“The risk associated with such a statement lies therein that once it has been made and found to be incorrect it could be regarded as a misrepresentation of such a business’s BEE credentials for which any party that acted upon such misrepresentation by, for example having awarded a tender to the measured entity based on the misrepresented score, would have recourse to the remedies in our common law for misrepresentation. This includes cancellation of the tender/contract and a claim for damages.”
“Companies would therefore be well advised to outsource verification because of the independent validation it provides of their BEE status. If proven that a Verification Agency incorrectly determined the BEE status of an assessed entity then the assessed entity would have recourse to the Verification Agency for any damages that it may suffer as a result thereof,” says Thorburn.

Cost
He continues: “This is of course not to say that it is impossible for businesses to accurately determine their own scores. Instead one typically finds that businesses can only commit so much by the way of resources to the exercise, meaning that the personnel either do not have sufficient time or are not sufficiently qualified. This point was recently raised by a high profile client, with a board member pointing out that having a formal Verification done was significantly cheaper than committing the in-house resources needed to have it done correctly. ”

Application
“The final point here is that of application. As it stands, the Codes will be directly applicable to all branches of government, public entities and certain other enterprises totally or partially owned by government, as well as any entity wishing to conduct business with government. This means that government will have to accept any certificate or scorecard produced inline with that what is required by the Codes. What it does not speak to, is the ability of any private entity to determine its own standards, baring in mind that if these standards are lower than that required by the Codes, it will have a negative impact on the entity’s score. Higher standards will however not have a negative impact and are not prohibited, implying that a private business will be well within its rights to request that its suppliers provide Verification Certificates and not self assessed scorecards. ”

“It would therefore be safe to say that although the number of businesses eventually obtaining Verification Certificates may be lower than some thought when the Codes were first published two years ago, Verification will still be here through the lifetime of Broad-based Black Economic Empowerment, as governed by the Codes of Good Practice,” says Thorburn.