Section 90(2) changed auditing in South Africa

Under the ‘old’ Companies Act No. 71 of 1973 section 270 (1), every registered company had to appoint an auditor at its annual general meeting. This was a burden on smaller companies, which did not necessarily benefit from having an audit.

On May 1, 2011, the new Companies Act No. 71 of 2008 came into effect and with section 90(2) the auditing environment in South Africa changed greatly. Under the Act, section 84, every public company and state-owned company has to have an audit. However, each for-profit company may now choose to have an audit, independent review or a compilation, subject to its Memorandum of Incorporation and Public Interest Score (PIS) and whether it holds assets in a fiduciary capacity exceeding R5 million. If a company’s PIS is 350 or more, or at least 100 and its financial statements internally compiled, a mandatory audit is required in that year. A mandatory audit requires a company to comply with Chapter 3 of the Act in full and thus section 90(2). However, should a company voluntarily elect to have an audit, it need not comply with Chapter 3 of the Act. Under the provisions of the new Act a for-profit company subject to section 84(1)(c) may now in its Memorandum of Incorporation include that it voluntarily elects not to comply with Chapter 3 of the Act and as such would not be subject to section 90(2) of the Act or a mandatory audit. Should a for-profit company include in its Memorandum of Incorporation that it elects to have an audit, the company is subject to Chapter 3 of the Act and as such, section 90(2).

Chapter 3, section 90(2) prohibits the auditor of a company having a mandatory audit to perform certain services for 5 immediately preceding years as of May 1, 2011. As a result some auditors might find that they could be in contravention of section 90(2). The Companies Intellectual Property Commission, however, granted an implementation date of January 1, 2014. Any prohibited services rendered after this date will result in the auditor being in contravention of section 90(2). In the past, auditors provided various services to clients, for example preparation of annual financial statements, secretarial or tax services or any related bookkeeping or consulting services. Section 90(2) not only affects that firm, but could also affect a network of firms.

The Independent Regulatory Board for Auditors has elaborated in their section 90(2) guidance document the extent of the services being rendered. For example, ‘Maintenance of any of the company’s financial records’ would include performing payroll services, maintaining the fixed asset register or compiling customer orders. It excludes suggesting adjusting journal entries as a result of audit findings, completing compensation commission forms or keeping records of the client at the auditor’s office. ‘Preparation of any of its financial statements’ would include preparing any of the statements included in a set of financial statements, thus a Statement of Financial Performance, Statement of Financial Position, or posting journal entries to ensure compliance with International Financial Reporting Standards (IFRS).

Conducting business in South Africa can be made simpler with professional advice and will ensure compliance but also avoid having to obtain professional services from various providers or unwanted compliance burdens. A number of complexities are involved and companies should ensure that their intentions are clearly reflected in their Memorandum of Incorporation.

Conducting business in South Africa can be made simpler with professional advice and will ensure compliance.

Author
Rossouw Pieterse