Section 186 of the Companies Act No. 71 of 2008 (“Companies Act”) stipulates, amongst other things, that one of the main objectives of the Companies and Intellectual Property Commission (“CIPC”) is the efficient, effective and widest possible enforcement of the Companies Act. In order to achieve such objective, section 187 of the Companies Act states that CIPC must promote the reliability of financial statements which companies lodge by, among other things, monitoring patterns of compliance with, and contraventions of, financial reporting standards. This raises the question what, if any, are the consequences for those companies which fail to comply with the aforementioned financial reporting standards? This question as well as the relevant provisions of the Companies Act pertaining annual financial statements (“AFS”) will be explored in this article.

Companies Act provisions relating to AFS

Section 30 of the Companies Act provides that a company must, each year, prepare AFS within 6 (six) months after the end of its financial year, or such shorter period as may be appropriate to provide the required notice of an annual general meeting.

Regulation 28 of the Companies Act further provides that, in addition to public companies and state owned companies, any company that falls within any of the following categories in any particular financial year must have its AFS for that financial year audited:

  1. any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million; and/or
  2. any non-profit company, if it was incorporated:
    • directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company;
    • primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or
    • any other company whose public interest score in that financial year is
      • 350 (three hundred and fifty) or more; or
      • at least 100 (one hundred), but less than 350 (three hundred and fifty), if its AFS for that year were internally compiled.

Furthermore, regulation 30 of the Companies Act provides that a company which is not required to have its AFS audited in terms of Regulation 28 may do so at its election (which is usually reflected as a provision in the memorandum of incorporation of such company).

Once it is established that a company is required to have its AFS audited, regulation 30 of the Companies Act requires that the company must file a copy of the latest approved audited AFS on the date that it files its annual returns.

Failure to prepare and file AFS

Failure by the company to comply with the aforementioned financial reporting standards will be considered a reportable irregularity in terms of the Auditing Professions Act No. 26 of 2005 which will require the auditor, that is satisfied or has reason to believe that a reportable irregularity has taken place or is taking place in respect of the company, to send a written report to the Independent Regulatory Board of Auditors (“IRBA”) with the particulars of the reportable irregularity (“Reportable Irregularity Notice”). CIPC also receives all Reportable Irregularity Notices submitted to the IRBA.

In terms of Section 171 of the Companies Act, once the Reportable Irregularity Notice is received, CIPC may then issue a compliance notice in the prescribed form to the company to take the necessary action and rectify the irregularity (“Compliance Notice”). Section 171(7) of the Companies Act provides that should the company fail to comply with the Compliance Notice, CIPC will be entitled to apply to a competent court for the imposition of an administrative fine (“Administrative Fine”).

Administrative Fines are regulated by section 175 of the Companies Act which provides that a court may grant Administrative Fines of up to 10% (ten percent) of the company’s turnover during the period which the company was non-compliant or R1 million, whichever is greater.

South African courts have, as recently as 2018, granted orders for Administrative Fines to be paid by no less than 3 (three) non-compliant companies, which Administrative Fines were equal to 10% (ten percent) of the companies’ turnover during the period for which they were non-compliant.

Concluding remarks:

In light of the stringent measures place on companies as outlined above, it would be prudent for the board of directors of companies to familiarise themselves with their financial reporting requirements – as a failure to comply with such financial reporting obligations can lead to severe and irreparable harm for the company.

VDMA’s team of experts are available to assist you and your business with any administrative and company secretarial attendances, including providing expert advice in respect of Companies Act.

Published 20 July 2022