To audit or not to audit in terms of the Companies Act No. 71 of 2008?

In the article by Sanchia Temkin’s Danger of new Companies Act leading to ‘significant rise in fraud, the concern is raised that by doing away with audits for medium size and large companies opportunities for fraud may be created.

In another article of note, namely Law may reduce accountability by Ann Crotty the same concerns are raised.

The Draft regulations state that the following companies must be audited:

  • all public and state-owned companies;
  • any profit or non-profit company if they hold any assets in a fiduciary capacity (eg. an Asset management company) in the ordinary course of business for any financial year exceeding R5 million;
  • any non-profit company incorporated by an organ of the state, a state-owned company, international entity, foreign entity;
  • non-profit company performing a statutory or regulatory function; or
  • any other company with a public interest score in that financial year which is 750 or between 300 and 750, if the financial statements were internally compiled (the calculation of the public interest score is explained in Regulation 26(2) of the Draft Companies Regulations).

Notwithstanding the above provisions of the Act and the Regulations, the provisions related to mandatory audits will also apply to any company that voluntarily chooses to have audited financial statements, and provides for this choice in the company’s Memorandum of Incorporation.

Companies that are not required (either in terms of the Act, or by Regulations) to have their financial statements audited, may opt to either have their annual financial statements audited voluntarily or to have them independently reviewed.

Private companies with only 1 (one) shareholder and private companies where all of the shareholders are directors of the company are exempt from the requirement to have their financial statements audited or reviewed. The exemption applies regardless of the value of the assets or turnover of such a company.

Interesting times ahead of us in this regard.

It will be important to see how financial institutions and banks will deal with this.

I am of the view that financial institutions and banks will certainly require audited financials for the provision of credit, and that financial covenants will play a bigger role in sizable loans.

03 February 2011