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The principles contained in the Companies Bill 2007 will impact positively on business.
It should facilitate the improvement of governance and transparency in public interest corporations while reducing the unnecessary burdens currently being experienced by smaller business.
In July 2006 the South African Institute of Chartered Accountants (SAICA) sought its members’ views on the possible removal of the audit requirements for smaller companies.
SAICA received 140 submissions, the overwhelming majority of which maintained that there is a category of smaller companies that should not be required to be audited as the costs of an audit outweigh the benefits.
A small minority argued that SAICA should oppose any proposal to relax the requirements for companies to be audited because by reducing the number of audits, the profession’s ability to train chartered accountants and auditors would be restricted.
In preparing its comment on the Bill, SAICA considered the Department of Trade and Industry’s (dti) objectives of modernising the legislation to align it with international best practice and to promote entrepreneurship and enterprise development.
The Bill attempts to achieve this by reducing the costs of registering and maintaining a company and reducing the regulatory burden for smaller companies. At the same time, it is seeking to enhance the governance and accountability of large corporations.
SAICA strongly supports these objectives, having frequently urged government to make it easier to do business in South Africa and thereby to stimulate economic growth.
We also support the reforms to improve accountability and transparency, while, however, believing that such requirements should only be applicable to companies that meet the criteria to be classified as public interest companies.
In terms of the Bill, audits will no longer be mandatory for �closely held companies� that do not meet the threshold requirements to be designated as �public interest companies�.
SAICA supports:
- The relaxation of the audit requirement for companies that are closely held and do not have a high degree of risk to the public;
- The enhanced governance requirements for public interest companies; and
- The elimination of unnecessary barriers to business where there is low risk to the public.
SAICA acknowledges that the relaxation of audit requirements would affect the profession’s ability to train chartered accountants, but considers that this is an issue to be addressed by the profession.
In our submission to the dti, we shall ask that the changes be phased-in by setting lower thresholds to begin with and raising them over time.
We consider that the determination of the statutory requirement will not necessarily eliminate the demand for audits because many audits are carried out because of a market need � for example, where a company wishes to raise finance.
Should companies no longer requiring mandatory audits be required to undergo some other form of review?
We believe not, since the market would be confused over the level of assurance given. Also, such engagements would go against the principle of making it less burdensome for small businesses to operate.
The Bill requires companies to prepare annual financial statements except if the company can be defined as closely held and all the shares are held by one person, or by two or more persons who are related or inter-related.
This does not mean that companies will not have information available. Many prepare management accounts on a regular basis and, where appropriate, use firms of accountants to assist in preparing them.
The requirement for all companies to keep financial records remains.
SAICA supports this proposal on the grounds that annual financial statements should not be a statutory requirement for businesses that do not use or need them, or where there is no value in preparing them.
Market requirements will dictate when it is necessary to prepare annual financial statements.
How will it be possible to monitor when �closely held companies� meet the threshold criteria to be classified as a �public interest company�.
SAICA suggests that �closely held companies� should submit an annual declaration signed by a director stating that the company’s assets, turnover and employees had not exceeded the threshold levels.
This would draw the attention of directors to monitor the position, especially if there was some penalty imposed for failure to comply.
It is likely that the Bill, once approved, will only become effective in 2009; and that there will be another version of the Bill exposed for comment.
SAICA is aware that the changes will affect some of its members, especially those involved in smaller practices, who may lose audit engagements because audits will no longer be required.
Yet experience in other countries shows that:
- Many companies continue to have their financial statements audited;
- Companies that do give up the audit often continue to employ accountants to assist in accounting and consulting work; and
- There have been encouraging signs of client relationships improving because the service is seen as adding value rather than as a statutory imposition.
The greatest impact, however, will be felt in the area of training. If there are fewer audits, the profession will not be able to train as many chartered accountants and auditors.
SAICA is therefore reviewing its education and training model to look at encouraging smaller practices to train accountants.
Blog contributed by RV
