The Companies Bill: a challenge and opportunity

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The Companies Bill, due to be enacted into legislation by 2010, requires all public companies to have their annual financial statements audited. In the case of private companies, the Minister will issue regulations prescribing which categories of private companies require audits. Private companies that fall outside of these regulations may choose to have an audit or an independent review. Until the Minister issues his regulations it remains uncertain exactly which private companies will have to be audited.
Ian Scott, head of marketing business development at BDO Spencer Steward, believes there are many advantages to an audit as this means figures can be relied on by users such as banks, investors and so forth to make informed decisions…

The move in South Africa to adopt GAAP/IFRS as the reporting framework for financial statements means there is now one standard of reporting for companies from start-ups to listed companies. This is expensive, time consuming and unnecessarily complex for small companies where the directors are also the shareholders. The recently released Companies Bill has addressed this to a certain extent – going so far as to exempt certain companies from preparing annual financial statements, hence doing away with compulsory audits.

In a similar way, the Companies Bill aims to address the high cost of doing business in South Africa, lowering it in order to enable the local market to remain competitive. It has done this by simplifying the legislation for the formation and running of companies. These measures include removing the necessity to audit for certain companies. This has been done widely in America for non-SEC companies, in Australia for private companies and, to a lesser extent, in the UK where private companies below a certain turnover and asset level do not require an audit.

While affected companies will no doubt welcome this development, it must be noted that South Africa has the one of the highest incidences of fraud in the world. This makes audits critical for a number of reasons. An audit can expose material fraud for instance, and may also highlight weaknesses in systems of internal control which could subsequently result in financial loss to the company due to error, fraud or theft.

When viewed in this light, the new Companies Bill is far reaching. It arguably goes too far given our history of fraud, tax evasion, bribery and lack of accountability. This should be of great concern to stakeholders including creditors, banks, employees and minority shareholders, including many previously disadvantaged who are entering this market, who will consequently have little protection from the aforementioned.

BDO Spencer Steward therefore believes that every private company should at least produce financial statements, even if only to a lower standard or simplified framework such as those currently in place for close corporations (which will be phased out over the next 10 years).

The far reaching changes of the Companies Bill will additionally shake up the accountancy market in that many smaller practices will need to concentrate on services other than audit, such as accounting and tax, and may not be able to employ the large number of trainee accountants that they currently do. Clients of smaller firms may also need to seek the services of other practitioners if they require an audit and their current firm elects to no longer offer this service. BDO Spencer Steward is well positioned to work with firms and their clients that find themselves in this position, as it understands this market very well and caters for clients with growth aspirations from start-ups to large listed companies.

Going forward then, BDO Spencer Steward believes that most well managed private companies that may not require a statutory audit in terms of the revised Companies Bill will still insist on financial statements. Alternatively, these companies may opt for an agreed upon procedures report which will provide a lesser level of comfort at a lower cost.

The implications of the new legislation are as yet unknown and untested. BDO Spencer Steward therefore recommends that full and proper consultation with all relevant stakeholders should take place to avoid unintended consequences.