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Polity
Article by: Jacqueline Holman
Published: 06 Nov 2009
Institute puts forward auditing and reviewing recommendations
The South African Institute of Chartered Accountants (Saica) has made a number of suggestions and recommendations to the Department of Trade and Industry (DTI) concerning the auditing and reviewing of companies, says Saica project director for governance and noninternational financial reporting standards Juanita Steenekamp.

She attributes this to the definitions of companies that have changed in the new Companies Act (No 71 of 2008) from widely held and limited companies to profit and nonprofit companies, including State-owned companies. Some profit companies will be audited, some not and some will be independently reviewed. Saica has made suggestions as to what a review should comprise.

Steenekamp explains that independent reviews will provide some assurance to users, such as the South African Revenue Service and banks, that companies are being run properly. The Act states that financial reporting standards will be set by the DTI Minister. Saica has sent documents to the DTI to try to influence these standards by suggesting different standards for different levels of companies. However, only when regulations are released, will the institute be aware of the standards that have been set in place.

The yearly financial statements of a public company must be audited. Private companies that meet the Act’s regulations based on size, turnover or nature of activities must be audited. Certain companies can choose to be voluntarily audited or independently reviewed in a manner that satisfies the regulations. A company can be exempted from audits if it is a private company and if one person holds all the securities, or if every person that is a holder of securities is also a director.

If close corporations (CCs) meet the requirements in terms of size, turnover or the nature of activities, they will have to be audited, which, Steenekamp says, is a change, as people have formed CCs because of the limited liability and lesser reporting requirements required from these entities. The Act will change this, and will do away with the formations of new CCs. CCs that are already established will continue to exist, but, says Steenekamp, the Act will take away many of the advantages of CCs owing to the DTI wanting to provide for a consistent regime for business incorporation.

She says that this will benefit certain groups of companies, such as those that will not have to be audited and will rather be independently reviewed, as they will have less costs to comply with the reporting requirements

Other changes in the Act, include the shortening of the retention time of documents from 15 years to 7 years and yearly financial statements will now have to be completed within six months after the financial year-end date, and not after nine months, and the maximum length of the financial year will now be 15 months, where it was previously 18 months.

The Act states that a financial year will be regarded to end on the next business day if it falls on a Sunday or public holiday. This, says Steenekamp, may affect businesses, as it may add extra days to a financial year.

Further, yearly financial statements will now have to be approved by a company’s board, signed by one authorised director and not just approved by directors. This is owing to the increased liability of directors in terms of the Act and will allow for increased awareness of all facts and information by all directors, she explains.

Previously, many actions of directors fell under common law, which is the body of law that is not necessarily legislated, that has developed over many centuries and forms the basis of a legal system, but these have now been included in the Act. Steenekamp says that the liabilities of directors have increased and are explicitly stated, with the penalties for noncompliance being quite strict.

She adds that the Act will change the way that companies are managed and that liability will move from criminal to civil liability. Alternative dispute resolutions will be used to avoid the clogging of courts.

Steenekamp points out that there is concern over how section 22 of the Act, which refers to reckless trading, will affect certain companies. This states that a company must not trade under insolvent circumstances, which is not defined in the Act, and directors could face personal liability.

The Act will also feature the introduction of business rescue, where, if a company is in financial distress, the stakeholders can apply for the company to be placed under super- vision and for business rescue proceedings to begin. The DTI Minister, through the courts, will then appoint a business rescue practitioner to manage the company and with the power to do everything necessary to rescue the company, including cancelling any affected loans or amounts owed to other companies. She comments that this may create a new category of employment for people that rescue companies.

Stakeholders, such as shareholders, creditors and employees, may demand that a company protects its interest or institute derivative action. Trade unions representing employees will be entitled to ask to see any company’s financial statements and can have a director declared delinquent and start the process of business rescue to protect employees.

Steenekamp comments that this is an issue for private companies that keep their financial statements private. She explains that if business rescue procedures take place, the directors must cooperate with the business rescue practitioner and their future at the company will be dependent on whether the business is rescued.

The Act also includes whistle blower provisions, which will protect stakeholders that report any suspicion of trouble to an authority.

Meanwhile, a memorandum of incorpor-ation (MoI) will replace its existing memorandum and articles of association, but this will change over a two-year transition period, where companies can change their MoI and articles at no cost. If certain aspects are not in line with the new MoI, a company will have to change these.

Steenekamp concludes that Saica is unsure of how the Act will affect the accounting side of the different types of companies and awaits the regulations for the accounting standards, which should be finalised by April next year.