THE LAW: New Companies Act Points System Gives Useful Guidelines
Recent Gauteng Business News
Initial complications are to be expected as companies and close corporations (CCs) try to work out how to calculate public interest scores (PIS) in the New Companies Act and interpret the regulations.
That’s the view of Ian Scott, joint managing partner of the Grant Thornton Cape office.
“The new Companies Act, which came into effect on 1 May 2011, includes a PIS calculation which determines what report these entities need going forward, unless they hold assets in a fiduciary capacity with an aggregate value of over R5 million, in which case an audit is needed.”
“The new Act also brings increased regulation to close corporations as their PIS calculations are subject to the same criteria as companies, although the outcomes are different,” says Scott.
The Regulations provide for both activity and size criteria to determine whether or not companies or close corporations require audited financial statements. The Regulations state that every entity is required to calculate its PIS at the end of each financial year and the score is calculated as the sum of the following:
· A number of points equal to the average number of employees (as determined by the Labour Relations Act) of the company during the financial year;
· One point for every R1 million (or portion thereof) in third-party liabilities at year end (these exclude shareholder loans and intercompany loans with common shareholdings);
· One point for every R1 million (or portion thereof) in turnover during the financial year; and
· 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 the business.
If a close corporation has a PIS score below 100 it requires an accounting officer’s report just the same as it did previously.
"If the score is between 100 and 350, it would appear that close corporations need an accounting officer's report, if the financial statements were externally prepared, but these organisations will require an audit if statements are internally prepared," says Scott. "Whether this was intentional or not requires clarification by the authorities."
A close corporation with a score over 350 now requires an audit and these statutory audits are restricted to registered auditors only.
For companies with a score below 100 an independent review is required if it is not owner-managed. However, if the company is owner-managed then there is no requirement for outside professional assistance.
“Owner managed is when all shareholders are directors or in the case of a trust when at least one of the trustees is a director,” Scott adds.
If a company is not owner-managed and obtains a PIS score of 100 – 350 then an audit is required if internally compiled, or an independent review if externally compiled. On the other hand, if the company is owner-managed with a score of 100-350 no professional intervention is required if reports are externally compiled, but an audit will be needed if internally compiled.
If a company scores over 350 points, an audit is required regardless of whether the company is owner-managed or not.
“What this means has not been understood by many and it is going to cause some nasty surprises,” says Scott. “Internally compiled is being interpreted by experts as meaning the preparation of books up to trial balance, including determination of accounting policies, and not just the preparation of year-end financial statements.
“It would therefore appear that outside professional assistance is required in order to avoid having financial statements ‘internally compiled’,” he warns.
Companies subject to an independent review or audit need to ensure their financial statements are compiled based on International Financial Reporting Standards (IFRS) or IFRS for SMEs.
Close corporations and companies not requiring an audit or review will be subject to the reporting standard determined in the regulations attached to the Act.
Scott agrees that where there are only a few stakeholders in a business and the business is of a small size overall, no formal processes should be necessary.
“This assists with making South Africa more competitive and it will certainly relieve some of the burden for new start-up companies, the engine for employment.”
Whilst the concept of an audit is well-known, the issue of an independent review is new to South Africa. Scott stresses that executives faced with a choice between an audit or independent review should carefully consider the relative costs, benefits and level of comfort of each option before concluding a decision.
“Accessing additional finance from banking institutions is already difficult and may be even more so in the absence of an audit as banks cannot place the same level of reliance on an independent review," he warns.
It will also be important for companies to remember that the new Regulations state that businesses with year-ends before 1 May are still required to complete outstanding audits or accounting officers reports under the old Acts.
There are legal consequences associated with the new Act too. Almost a century’s worth of case law will need to be reinterpreted because of the new Act which inadvertently means expensive legal review processes and a greater need for guidance and advice.
“There will no doubt be stumbling blocks to overcome in the months ahead and it is clear that we urgently need guidance and answers from the authorities on a plethora of issues in order to give our clients the advice they need. We also hope that businesses consult and understand the increased liability of directors under the new Act,” he concludes.
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