Important Summary:
Companies Regulations, 2011
May 2011
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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 of 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
Authors' Comment:
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.
In brief:
-
Financial statements are required of all companies
-
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.
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
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"
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.
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
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
Large or listed companies have to apply IFRS and be audited
Medium sized companies may choose IFRS, IFRS for SME or SA
GAAP
Smaller companies my use their accounting policies to
determine their reporting standard
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.
I trust that you find the above valuable.
The article was initially
published by
Nicolaas van Wyk
of The SA Accounting Academy,
jm@accountingacademy.co.za
|
Alexis Sacks
|
|
Dave Rich
|
Important Note:
The information contained in this newsletter is of a general nature, and may in certain circumstances be subject to misinterpretation. Consequently, we recommend that our advice be sought when acting upon the information contained herein. Whilst every care has been taken in the compilation of this Newsletter, no responsibility of any nature whatsoever shall be accepted for any inaccuracies, errors or omissions.
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