| Summary: | The deregulating electricity industry is a capital intensive and political sensitive industry (Pretorius, 1998:3). All the deregulation and privatisation incentives are, and continue to be hotly discussed topics by various stakeholders across the world. At the same time, the auditing profession has been the subject of scrutiny specifically after several corporate failures that noticeably include Enron Corporation, one of the world’s largest companies that operated in the deregulated electricity industry in the United States of America (hereafter referred to as the USA). As a result, the auditing profession has been reviewing many audit procedures and core aspects of the profession that has remained contentious issues over a number of years. This study is focussed at the definition and application of engagement risk within the auditing profession and aims to identify those factors present in the current deregulating electricity industry in South Africa that should be considered in the evaluation of engagement risk by the independent auditor. An error in the evaluation of engagement risk of a client can be, and is most likely to be a costly error. Settlement of legal claims may be very costly both in monetary terms and in damage to a firm’s reputation (Odendaal, 2002). Although most claims are successfully defended, the cost of defence is typically very high, including legal costs and the time of senior professionals. Odendaal (2002) refers to “the international liability crisis” as a rise in legal litigation and competition amongst auditing firms have lead auditors to progressively place greater reliance on the client acceptance stage as the first step in their risk control programme. This study continues to focus on engagement risk, specifically within the deregulating electricity industry in South Africa, an industry that is undergoing rapid change. The South African electricity supply industry is currently in the midst of a transition from a vertically integrated and regulated monopoly to an entity that will operated in a competitive market where retail customers will choose the suppliers of their electricity (South Africa, 2000). The old school of thought that considered electric utility power generation, transmission, and distribution a “natural monopoly” has given way to a new school of thought. There is a widespread view among legislators, regulators, industry analysts, and economists that the Electricity Supply Industry (hereafter referred to as the ESI) and Electricity Distribution Industry (hereafter referred to as the EDI) would be more efficient and economical in a competitive market (Energy Information Administration, 2000). The objective is the consolidation of the EDI into Regional Electricity Distributors (hereafter referred to as REDs), created from the distribution assets and operations owned by municipal local governments (Municipalities) and Eskom (Yelland, 2002). From a generation perspective, Eskom is expected to run out of excess generating power in 2006 (Eskom, 2003:57). This means that independent power producers (hereafter referred to as IPPs) are likely to be licensed in the next two years in order to meet South Africa's future electricity requirements. Eskom’s Transmission Group is likely to be the Independent System Operator (hereafter referred to as ISO), a not for profit state owned entity which effectively would manage the Southern African energy market, buying from Eskom and other electricity generators and selling to REDs and neighbouring countries at prices determined by a market pricing mechanism (NER, 2001). As a competitive market for electricity trading has not yet been established in southern Africa, a number of foreign electricity markets have been studied by entities such as the National Energy Regulator (hereafter referred to as the NER) in order to research best practice in formulating a draft energy-trading model for South Africa (NER, 2001). Accordingly this study also focuses on providing the auditor with and understanding of the current and future structure of the electricity industry as well as the regulatory framework and suggested developments. === Mr. A. van der Watt
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