Comment on the Draft Regulations on the Companies Act, 2008
Professor Steven Firer - Technical Partner

The following are suggestions that would ensure the regulations are made more clear and concise:

1. There must be clear guidelines setting in exact terms which companies need to have an audit and which companies do not. The current regulation 29 which sets out the criteria for an audit is vague and open to manipulation. The question arises as to who is going to “police” the decision by the directors as to whether the company holds assets in a fiduciary capacity. Thresholds in this respect must be introduced in order to avoid any possibility of a misinterpretation of the term “fiduciary capacity”. Thresholds are used in Australia, Canada and the European Union. We suggest that a similar basis be adopted by these regulations.
2. The use of the Consumer Protection Act, 2008 in regulation 29 may inadvertently require a small private company who has only one or very few shareholders to have an audit. If this SME takes a deposit for goods sold – according to the regulations an audit would be required. However this company might have assets of only a few thousand rands and does a minimal turnover and the costs of an audit would most certainly outweigh its benefits. This supports the view of the need for thresholds as to which companies need an audit.
3. According to regulation 29 a company with a turnover of a one billion rand with international divisions and subsidiaries and does not satisfy the requirements of regulation 29 would not require an audit but a review. The objective an audit exemption is that while the audit adds value, there are, of course, associated costs, most obviously the cost of the audit itself. Typically, these costs are higher, proportionately, for smaller companies.  For such a large multinational private company surely cost is not a factor. These types of companies are of national and public interest and a review does not provide the public with the required assurance to protect their interests.
4. Regulation 29 (b) (ii) provides thresholds for an audit exemption – this is inconsistent with the requirements for profit companies.
5. Regulation 30 (2) – provides for thresholds which is inconsistent with regulation 29 (1) (a). However Nkonki fully supports such a regulation in respect of such small companies. It is suggested that the Independent Compilation be carried out as required by International Standard on Related Services (ISRS) 4410, “Engagements to Compile Financial Statements”. This would ensure that there is consistency as to the compilation process.
6. Regulation 30 (2) (b) (ii) – This regulation makes no sense at all. Is this regulation referring to those companies that do not have to either have an independent compilation or independent review? The objective of International Standard on Related Services (ISRS) 4400, “Engagements to Perform Agreed-upon Procedures Regarding Financial Information” is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. As the auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance is expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work. This is in essence no different from the independent compilation. The independent accountant does not publish the work carried therefore the users will never know what procedures were carried out and this ensures that the report has no information value.
7. It is suggested that all financial statements that do not need an independent review must have an independent compilation and Regulation 30 (2) (b) (ii) be removed from the final regulations.
8. There are many different accounting bodies that have membership of IFAC. However this does not in manner mean that they are able to perform an independent review. International Standard on Related Services (ISRS) 4410, “Engagements to Compile Financial Statements” has in South Africa only been practiced by auditors of listed companies in respect of the JSE listing requirements. To be able to use this ISRS it is our opinion that one needs to be a practicing auditor.
9. The IPR requires the same skills that are possessed by auditors – a reviewer should be able to do an audit if the client chooses to have a voluntary audit. If this is not the case a client might have many different accountants in a short space of time. Auditors are trained in asking the right questions and have vast experience in analysing the responses given by directors. Accounting professionals who have never carried out an audit will not be to spot implausibilities as enquiries of management is an audit tool not practiced by an accounting professional who does not conduct audits.
10. We suggest that accounting professionals other than auditors be able to conduct the Independent Compilation.
11. Further evidence in this respect is that accounting professionals other than auditors have no qualifications academic or professional in the application of IFRS. This has been the auditor’s domain due to regulatory requirements. One would not ask a general practitioner to do heart surgery even though they know much about the heart without the relevant academic and professional qualifications.
12. In respect of the academic qualifications auditors have completed 4 years of study plus two professional exams. If any professional body which is a member of IFAC can match this then they can conduct an independent review.
13. We do not agree that financial statements that must be Independently Compiled need not comply with any financial reporting standards.

Appendix 1 – Thresholds for the Audit Exemption

Suggestion:

To set the audit exemption threshold to not more than R120 million and total not more than R60 million). This audit exemption threshold level will relieve most small companies of the requirement to have their statutory accounts independently audited. The majority of companies with a turnover at or below R120 million are owner/managed with shareholders who have access to internal financial information. Shareholders who are also owner/managers with such access are less likely to require the reassurance of an external, independent audit. However companies that do require an audit will require either an independent compilation or independent review.

Appendix 2 – Thresholds for Independent Compilation

All companies that do not require an independent compilation must have an independent review. The threshold at or below which companies can be exempt from the requirements of the statutory audit and independent review be set at a turnover level of not more than R12 million and a balance sheet total of not more R15 million. 

In other words companies that have a turnover of between R12 million and R120 000 must have an independent review.

Concluding Remarks

We are in agreement that audited financial statements do not provide a ‘one size fits all’ solution to information needs. Nkonki is very supportive of the introduction of other alternative forms of assurance carried out in accordance with formal internationally accepted norms that may be provided by auditors (or external accountants) which, while not being a full statutory audit in accordance with ISAs, may fulfil the needs of the public interest and external stakeholders.

It is concluded that consideration should be given by the DTI to taking the following steps:

1. Introduce the audit threshold to allow the small companies to have the option to be exempt from an audit.
2. To ensure that only properly qualified accounting professionals with the relevant practical experience and academic qualifications be allowed to conduct the independent review.
3. To conduct a regulatory impact assessment on the possible effects of these regulations on the economy.