What has been of concern or at least served as consideration when electing which business vehicle to apply in running your business was the audit requirement. Previously companies (whether private or public) had no option but to audit, which was financially out of reach for many businesses whereas close corporations did not have to be audited.
Audits no longer compulsory
With the enactment of the Companies Act of 2008 (as amended), the audit requirement is no longer compulsory. The audit requirement is based on the calculation of the public interest score – which applies to both companies and existing close corporations – which is calculated annually (at financial year end) as the sum of the following:
- A number of points equal to the average number of employees of the company during the financial year
- One point for every R1 million (or portion thereof) in third party liability of the company at the financial year end
- One point for every R1 million (or portion thereof) in turnover during the financial year
- One point for every individual who, at the end of the financial year, is known by the company to directly or indirectly have a beneficial interest in any of the company’s issued securities (for profit companies), or who is known to be a member of the company or of an association that is a member of the company (for non-profit companies).
The question now arises: is it really better to audit or not or is the independent review an appropriate alternative?
Independent review vs the audit
According to Professor Steven Sirer in Independent Audit v Independent Review published in the March 2013 edition of Without Prejudice, “The independent review is an alternative assurance engagement where the independent reviewer provides limited assurance on a set of annual financial statements when compared to that of the reasonable assurance provided by the external auditor.
“Assurance is the degree or level of trust the users can place on the credibility of the information contained in the annual financial statements. This implies that the external audit will provide the users with a higher level of confidence that management have disclosed all the necessary information via the annual financial statements so that they can make informed business decisions regarding the entity.”
This is thus important from the perspective that the level of trust or confidence instilled by financial records by the manner in which the external auditor or independent reviewer verifies or substantiates the assertions made by management.
How is data integrity verified?
The conceptual difference between an external audit and independent review is in the procedures to verify data integrity as supplied by management or the relevant person designated to produce such information and approved by management.
The auditor verifies data by comparing it to voucher evidence. Thus the process instils credibility and serves as proof of the authenticity of financial data contained in the annual financial statements.
Limited assurance on the other hand, suggests that independent review is not obliged to acquire such evidence. Accordingly, the independent review only proves that the annual financial statements are credible as long as they appear plausible in the circumstances.
According to Professor Steven Sirer “the word plausible is often defined in terms such as the information being credible, appearing worthy of belief, or seemingly or apparently valid, likely or acceptable.”
Thus the independent reviewer only provides a limited level of confidence that information contained in the annual financial statements is actually credible.
Therefore the processes and levels of confidence instilled by them are very different.
Cost versus credibility may be the real issue
The independent review is a more cost effective option, but it is apparent from the above that it is less credible due to the level of investigation and testing followed in establishing data integrity.
The company should therefore assess whether the cost saving is aligned with the compromise on the confidence and in-depth analysis of data integrity done by virtue of an audit.
In many industries such as the financial industry where confidence of annual financials are of the utmost importance or in instances where stakeholder or investor confidence is based on the accuracy and credibility of financial records, the decreased cost of independent review may not be a sound business decision.
Seeking the appropriate professional advice is therefore fundamental.