Many questions have been asked and answered regarding how the New Companies Act is set to affect company audits, but many details remain so ambiguous that its real impact remains at least a year off.
What is clear is whether or not a business will continue to require a statutory audit, which is defined according to points scored against a new ‘public interest scorecard’.
Once mooted at 700, the points threshold was reduced to 350, and even at this level many companies will no longer require an audit, says Russell Fox, marketing director of auditing firm, BDO.
However, he cautions companies not to immediately see this as a cost saving and do away with audits. “The cost of an audit is usually money well spent, as often it is the only external assurance owners have that the business is being properly run.”
“Cancelling the audit opens up greater opportunities for fraudulent activity — as no one is providing a high level of assurance on the company’s financial status,” says Fox. An audit often serves as a deterrent to white collar criminals; and finally there are hefty fines and even imprisonment for directors under the new Act.
Andrew Hannington, national chairman of mid-sized audit firm PKF, points to the large expectation gap between audit and fraud detection.
“Traditional audits seldom detect fraud but the mere thought of an audit would be a deterrent. In the sub-350 points category, the auditor should conduct the review with a greater emphasis on fraud detection as a value-add service.”
An entrepreneur may find it better value to continue with the audit than later be forced to call in forensic auditors. In addition, should the exit strategy for the owners be a JSE listing then audited financials will be required. If no audit has been conducted, this could be a barrier to a listing.
As to how the scorecard is calculated, Fox says it is based on four criteria:
- One point for the average number of employees in the business
- One point for every R1 million or part thereof of third party liability at year-end (such as bank finance)
- One point for every R1 million or part thereof of turnover
- One point for every person who has a direct or indirect beneficial interest in the business, such as a shareholder
Therefore, even if a company has R100 million turnover and 100 employees that only adds up to 200 points. Most SMEs are unlikely to have so many employees or more than about five shareholders, so this means a business has to have at least R145 million in bank debt to qualify.
Thinglemony Pather, director of Big Four firm KPMG, believes that many companies will continue to enforce the optional audit. “A business will have to be evaluated each year as to whether or not it will require a compulsory audit. Many companies are wary of not having an audit one year and having to have it the next. Bouncing between the two will make a company very difficult to audit, so many will stick with it. Then there is also the factor that either SARS or the bank may still require an audit of a company.”
The new Act applies for companies with a year-end after 1 May 2011, so there is considerable behind-the-scenes activity in establishing the public interest score of client companies, as well as clarifying exactly who can perform the review, and whether they have to register with the regulator.
The thresholds are as follows:
- >350 requires an audit
- 100-350 (financial statements internally compiled) requires an audit
- <100 no review is required
Companies where all the shareholders are directors do not require an independent review.