Recent news to South Africa’s owner-managed companies has proffered relaxed rulings on audits. After a decade of redrafts, the latest Companies Act announces the audit exemption despite an outcry by accountants, auditors and tax authorities.
The nitty gritty
As covered in the Companies Act 71 of 2008 and its Regulations, it is stated that: ‘Every company must calculate its ‘public interest score’ at the end of each financial year, calculated as; (a) a number of points equal to the average number of employees of the company during the financial year; (b) one point for every R1million (or portion thereof) in third party liability of the company, at the financial year end; (c) one point for every R 1 million (or portion thereof) in turnover during the financial year; and (d) one point for every individual who, at the end of the financial year, is known by the company— (i) in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or (ii) in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.
It goes on to state: ‘An independent review of a company’s annual financial statements must be carried out (a) in the case of a company whose public interest score for the particular financial year was at least 100, by a registered auditor, or a member in good standing of a professional body … or (b) in the case of a company whose public interest score for the particular financial year was less than 100, by a registered auditor, or a member of a professional body or a person who is qualified to be appointed as an accounting officer of a close corporation (c) in the case of a company whose public interest score is > 350 and <100 if its annual financial statements for the year were externally compiled by an independent person.
Relax and rejoice?
The collective sigh comes from companies looking to celebrate being able to sidestep the meticulous process of an audit, the costs associated with it, the time that needs to be committed in order to comply with all associated requirements, and the in-depth detail necessary to meet the process and its criteria.
Small companies are celebrating because now it is free driven and for small businesses, the hassle may outweigh their priorities – as may the financial implications of running an audit. When cash flow is a concern, setting aside R20 000 for an audit may not be seen as commercial business sense at the time.
Why are the number-crunchers protesting? With merit, I assure you. These rejoicing business owners and their stakeholders alike should consider both sides of the coin. As a medium-sized company, the dynamic nature of your business, its cash-flow and how you choose to sustain or leverage your business dealings will almost certainly guarantee the need for a sound, thorough and professionally drafted set of financials which was at least reviewed or audited by a professional. The delay or complete avoidance of an audit or review is almost guaranteed to pose bigger problems down the line.
Straight off, the most immediate benefit is to have a solid understanding of what your business’ financial status is – at a glance – at any given time. An annual review (at the very least) guarantees your shareholders an authentic appraisal of how your annual figures have behaved – which may be used to leverage how you make internal strategic and operational decisions for the following financial year.
Furthermore, you may need finance to sustain or grow your business needs. To get the ball rolling, a bank will want to see your latest financials – an authentic assurance of the status of your business’ wellbeing. Using an auditing firm to compile these financials and perform an independent review will cost you nowhere near what an audit would.
Consider the big picture
It is important for companies looking to take advantage of the alleviations in the Companies Act not to see it solely as a headache they no longer need to suffer or a bill they no longer need to pay. Accounting professionals should be cognisant of educating their clients on the importance calculating their annual score, and that should they try to side-step or delay the audit and/or review, the time and costs invested in catching up are likely to exceed the initial industry-related costs suggested here.
In truth, the benefits attached to being able to confront your numbers on an annual basis speak for themselves. You may be surprised by realities you hadn’t yet considered, but with enough information to preempt any serious or long-term damage. Rather be afforded the opportunity to iron out small creases than face a potentially damaging likelihood when it is too late. A detailed review or an audit by experienced practitioners will mitigate risk while highlighting problem or questionable areas. Audited numbers could also lower your tax risk, as incorrect tax calculations could result in penalties much higher than your auditor’s bill
1: sections 26, 28 and 29 of the Companies Regulations, 2011 (GNR 351 of 26 April 2011) to the Companies Act 71 of 2008.