The Minister of Trade and Industry has issued the final Companies Regulations 2011. They are available here: Companies act 71 of 2008 – Final Companies Regulations 2011. The purpose of the regulations are to determine 1) the functions of the Companies Commission, and 2) the functions of the Takeover Regulation Panel and the Companies Tribunal, and other matters relating to the regulation of companies. It will become effective at the time that the Companies Act, 2008 takes effect. This date has been set as the 1 May 2011.
The final regulations contain a number of significant changes that will impact the preparation of financial statements. An analysis is provided below:
Click here to access a PDF summary of the requirements to prepare and report on financial statement of companies and close corporations.
Summary – How to prepare and report on financial statements of companies:
1. Financial statements are required of all companies
2. Financial statements have to be prepared in accordance with financial reporting standards as prescribed. These standards include but is not limited to standards issued by the IASB, to ensure fair presentation the needs of users therefore determines the accounting framework level i.e. general (IFRS) or special (micro-gaap) purpose in a manner that is not false or misleading in a material aspect, in a manner that is not incomplete in a material aspect.
3. The regulations distinguish between persons that prepare financial statements known as “independent accounting professionals” and persons that issue reports on financial statements i.e. either an audit of independent review.
4. Review engagements are performed in terms of ISRE 2400.
* Review engagements may be issued by “independent reviewers”
* Financial statements may be prepared by “independent accounting professionals”
5. Reviews are required of non-owner managed profit and non-profit companies that:
* achieves a public interest score between 100 – 349 points – performed by a registered auditor or member of SAICA
* achieves a public interest score less than 100 points – performed by an accounting officer.
6. Owner-managed companies are exempt from the review requirement but not the audit. Will be audited if:
* public interest score is 350 points of more
* public interest score is between 100 – 349 and financial statements are internally compiled
7. Companies are not obligated to appoint a person to prepare their financial statements.
However if financial statements of some companies are internally compiled they will be audited. Companies that fall within the mandatory audit sphere will be subject to a “listed company” type of audit and auditors for these companies may not perform any additional services to the company.
8. Large or listed companies have to apply IFRS and be audited.
9. Medium sized companies may choose IFRS, IFRS for SME or SA GAAP.
10. Smaller companies may use their accounting policies to determine their reporting standard.
11. Owner managed companies are exempt from the independent review but not the audit.
Independent reviewer will have to report “reportable irregularities” to the Companies Commission. These relate to acts by management that: unlawfully has caused or is likely to cause material financial loss to the company or to any member, shareholder, creditor or investor of the company in respect of his, her or its dealings with that entity; or is fraudulent or amounts to theft; or causes or has caused the company to trade under insolvent circumstances.
Nicolaas van Wyk
Tel: 011 662 2095
It seems highly unlikely that independent review engagements will gain a lot of followers. The regulations are overly restrictive in setting the requirements for review engagements. For example a person performing the review may not also prepare the companies financial statements or be related to any person that has a financial interest of in the company or who is a prescribed officer (part of executive management) of a company of . This is even more onerous than the IFAC code of ethics section 290 and is more onerous than the independence requirements applicable to a voluntary audit of a private company. Furthermore the independent reviewer has an obligation to report irregularities consisting of: unlawful acts by management, fraud or theft and other actions by management that cause the company to become insolvent, to the companies commission. The independent reviewer has to apply the review standard, ISRE 2400. This standard limits the procedures to be performed to inquiry and analytical procedures. This is significantly less than the extensive procedures, including test of internal control, required in an audit. It is therefore likely that, in the absence of in depth procedures such as required in an audit, the independent reviewer will report events to the commissioner unnecessarily. If additional procedures where performed it may have indicated that no unlawful or other action actually occurred. The reasonable test for an independent reviewer is set much lower than for an auditor. The result may be a deluge of inaccurate reports causing damage to the reputation of companies and taking up unnecessary resources of the commission.
The regulations require the application of a very complex system to determine the level of financial reporting and the type of report to be issued. The system consists of a combination of size, ownership structure, function and whether the financial statements have been internally or independently compiled.
Practitioners will have to think carefully before advising clients as to the right approach. An incorrect decision can cost you dearly. Especially if one considers the enforcement powers of the companies commission and the potential criminal liability if financial statements do not meet the minimum criteria as set in the companies act.
Auditors will also be surprised to note the lower threshold above which an audit is mandatory. The Act and the regulations makes it clear that the mandatory audit takes the form of a “listed company audit”. This means that for all companies with a public interest score of more than 350 points the auditor will not be able to provide additional services such as advisory or tax services to the company. Such companies will also have to ensure auditor rotation, appointment of a company secretary, appointment of an audit committee, disclose all payments of whatever kind made to directors, and apply the highest form of independence as required for public interest entities. These requirement are now applicable to private companies even if they are owner managed.