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.
Can Your Words Be Used Against You?
Yes, they most certainly can. Here’s what the RICA Act has to say about recordings.
“This call may be recorded for quality control and records purposes…” Anyone who has been on hold with insurance companies would be familiar with these words — but what are the implications of a recorded conversation and when is it legal?
In essence, the Regulation of Interception of Communications and Provision of Communication-Related Information Act of 2002 (mercifully shortened to ‘RICA’) permits any person, who is a party to a conversation to record that conversation, provided that it is direct communication — which is defined as oral communication between two or more persons that occurs in the immediate presence of those persons.
Section 4 of the RICA Act governs this aspect of our monitoring law. What is unclear, however, is the degree to which this extends to legal persons, such as a company that monitors a call centre agent’s performance, for example.
Related: Understanding Shareholder Agreements
Evidence in legal cases
While limited to direct communications and not covered by third party interception, such as an eavesdropper, the lesson here remains pretty stark — you could legally be recorded during any conversation you have.
The implications of this are significant — just ask former Springbok player Luke Watson, who had a conversation recorded during a function in 2008 that was subsequently leaked to the media.
Furthermore, with the widespread use of smartphones, together with applications freely available on the relevant app stores, designed to record cellphone calls, the likelihood of you being recorded — whether you know it or not, is ever increasing.
Beyond the moral or ethical ambiguity of this, the legal ramifications of what is recorded are more certain — the recording may be used against you as evidence in any criminal proceedings, or equally as possible, in civil proceedings where, for example, agreement to a contract or term thereof is in question, or in the insurance company’s case, whether or not to repudiate a claim based on the information you provide to them.
Related: Protect Your SME From PoPI
Know the business exception
Section 6 of the RICA Act contains a course of business exception that allows the interception of indirect communication:
- a) By means of which a transaction is entered into in the ordinary course of business
- b) Which relates to that business
- c) Which otherwise takes place in the course of that business.
While there has not, to my knowledge, been a reported case that deals with this aspect of the RICA Act, the implications regarding the use of this information to evidence the valid conclusion of a contract or as to the intentions of the parties to a contract are significant, particularly given that the scope is relatively broad, although limited.
The matter has, however, come before the Constitutional Court in the 1999 criminal case of S v Kidson, where the court held, per Justice Cameron, that unless a “reasonable expectation of privacy exists” it would be difficult to prevent the recording or interception falling within the ambit of the RICA Act.
Where to from here?
From both a commercial and criminal perspective, this should serve to remind us all of our wise grandmother’s words — if you have nothing nice to say, rather say nothing at all (especially because you never know whether you are being recorded).
Why You Shouldn’t Be Sweating The Fine Print
Signing a contract is a big deal, and you never want to sign anything you don’t fully understand.
While it is almost always a grudge purchase, ensuring that you have had a legal eye cast over a contract you intend to conclude means that you are protected, that you understand the nature of the obligations you are taking on and perhaps, an even better deal for you.
Given that legal agreements are an important aspect of commerce, we have distilled key points for you to consider, before engaging with external counsel. This will make the process more efficient and, hopefully, less expensive.
Reviewing a contract is a tricky business, not entirely different from asking a builder to finish building a half built house. However, there are some useful techniques to ensure you get the most out of the exchange with your lawyer.
Always create a timeline
You have lived and breathed your business and this transaction, while your attorney is possibly hearing about the matter for the first time.
Setting the scene correctly puts your attorney in the picture and explains what you want out of the exchange. Print this out for your attorney.
It will help an attorney identify key areas of risk which you might not have anticipated. Be sure to also tell your external counsel how quickly you need the review to be done. Setting expectations means there is less chance of disappointment later.
Provide supporting documents
It wastes your time and money when your attorney has to come back to ask you for supporting documentation.
Try to anticipate which documents will be relevant to your transaction and bring copies of them to the meeting for your attorney to consider. If you have previous versions of the agreement, for example, bring those too.
Remember, the more background work you do, the simpler and more efficient the process will be.
Understand your needs
Are you looking for a high level overview of your document to highlight some key contractual risks or are you looking for a thoroughly sanitised document reviewed from every possible angle?
I recently had to look over Jim’s Sale of Business Agreement for the potential acquisition of his Technology Company. He came to me with limited areas of risk which he had identified and wanted me to look at these clauses.
I was able to advise him to push back on certain clauses he had already negotiated and the resulting document placed him in a stronger legal and financial position. It was easy to justify the costs associated with the review.
This is not always necessary though — where there is limited legal exposure, or you have no bargaining power, the role of the attorney can be restricted, but still worth the investment since you have assurance that your legal exposure is as restricted as possible.
Be guided by the relative value of the document and the ensuing legal responsibilities — is this a standard supply agreement with a strange payment clause or a multi-national acquisition of intellectual property? The type of expert you engage with will vary, as will the cost of the review.
Areas of concern
Directly related to knowing your business and understanding your needs, is your responsibility to communicate specific areas of concern to your attorney.
A recent client’s business processed a lot of personal information, in accordance with the Protection of Personal Information Act, but, the contractor they were about to sign a service supply agreement sought to have access to some of this personal information.
Seen alone, there was little risk, but within the context of this business, we were able to avoid this. A trusted and qualified expert will help you navigate the complex commercial world.
Are You Protecting Your Customer’s Data?
The collection, usage and sharing of personal information is regulated primarily by the Protection of Personal Information Act 4 of 2013. The Act was recently promulgated and is yet to be implemented. The Act seeks to give expression to the right to privacy provided for in the Constitution.
At the time of writing, the primary enforcement arm contemplated by the Act, the Information Regulator, has yet to be appointed. Once appointed, all businesses will be required to register with the Information Regulator to make public what personal information is being collected, and what it is being used for.
The Information Regulator will be empowered to enforce compliance with the Act, and able to investigate whether an entity is lawfully processing the public’s personal information.
Related: Protect Your SME From PoPI
How are privacy policies affected?
The Act defines the term ‘processing’ broadly, and includes “the collection, receipt, recording, organisation, collation, storage, updating or modification, retrieval, alteration, consultation or use of a person’s personal information”. To process a person’s personal information, the prior consent of the person (data subject) is needed.
The Act restricts a company’s ability to store personal information outside of the country by requiring that it be transferred only to countries in which comparable security laws and data protection measures exist.
A situation such as this arises more easily than expected. Consider the example of the humble contact form: Your website, with its local server situated in Midrand, utilises a plugin to create custom contact forms.
Although your server may be in Midrand, every person who completes the contact form on your website has their personal information transferred and stored on servers in the home jurisdiction of your plugin creator, which may be in the US. But the plugin creator may also make use of third-party service providers based in Vietnam. An in-depth investigation of all third-party plugins and processes of a website is therefore required to ensure that you comply with the Act.
Access by a data subject to personal information
A data subject is entitled to request a full disclosure of any personal information held by the company.
As the procedures governing access to personal information overlap, companies should also ensure compliance with the processes outlined by the Promotion of Access to Information Act 2 of 2000 (‘PAIA’).
In terms of PAIA, all companies are required to compile a manual that needs to be registered with the South African Human Rights Commission. This manual sets out the company’s contact information, what records are available for inspection, the identity of the leadership of the company, as well as the manner in which a person may request access to information held by the company.
However, the Minister of Justice and Correctional Services has exempted private bodies from complying with this requirement for a period of five years, starting from
1 January 2016.
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