Transcript Companies Act and Regulations: Implications for

Companies Act and Regulations:
Implications for Independent
Reviewers
Presentation by Jillian Bailey
August 2011
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Companies Act and Regulations
• Effective from 1 May 2011
• Ultimate goal in repealing the previous Act was to
ensure that the regulatory framework for all types
and sizes of enterprises promotes growth,
employment, innovation, stability, good governance,
confidence and international competitiveness
• Different types of companies must comply with
different rules as set out in the Act
Companies Act - Independent
Reviewers - August 2011
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Types of Companies
• State owned companies (SOC Ltd): enterprise
registered as a company and is either listed as a
public entity in terms of schedule 2 or 3 of the PFMA
or is a municipal entity
• Public companies (Ltd): listed and unlisted entities offer freely transferable securities to the public
• Private companies ((Pty) Ltd): may not offer
securities to the public and transferability of
securities is restricted
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Types of Companies
• Personal liability companies (Inc): private companies
where the directors jointly and severally are liable,
together with the company, for debts and liabilities
contracted during their period of office
• Non-profit companies (NPC): companies
incorporated for public benefit or an object related
to cultural or social activities and its assets and
income must be applied to advance its stated objects
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Audit
For all financial year ends after 30 April 2011, audit is
required by:
• State owned companies
• Public companies
• Any company who in the ordinary course of primary
activities holds assets in a fiduciary capacity for
persons not related to the company and the value of
such assets at any time during the year exceeds R5
million
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Audit
• Any non-profit company incorporated by the
State/foreign company or incorporated to perform a
statutory/regulatory function
• Any company with a public interest score of 350 or
more
• Any company with a public interest score of 100 or
more where the annual financial statements are
internally compiled
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Independent Review
For all financial year ends after 30 April 2011,
independent reviews are required by all companies
who:
• Are not required in terms of the Act to be audited
AND
• Do not choose to be voluntarily audited AND
• Do not meet the exemption criteria set out in the Act
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Exemption Criteria
• Companies will be exempt from independent review
if all shareholders in the company are also directors
of the company
• Cannot be exempt from audit if required by Act
• Cannot be applied by non-profit companies
• Cannot be applied in companies where shareholders
are juristic persons
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Who can perform audit/independent
review
Category
Qualification
Audit
• Registered Auditors
Independent Review of Companies
• Registered Auditors
with a public interest score of 100-349 • Members of IRBA accredited
professional body
Independent Review of Companies
with a public interest score of less
than 100
• Registered Auditors
• Members of IRBA accredited
professional body
• Accounting officers
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Members of IRBA accredited professional
body
At present the only professional body accredited by
IRBA is SAICA
Those members of SAICA who are not presently
registered with the IRBA, but who are in public
practice, and who qualified through the IRBA
accredited programmes and the Public Practice Exam,
may perform independent reviews of companies with a
public interest score of 100-349
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Proposed amendment to APA
Potentially all 9 professional bodies permitted to
perform accounting officer functions, may in future
seek IRBA accreditation to do independent reviews of
companies with a public interest score of 100-349
In order to allow for IRBA accreditation of other
professional bodies to do independent reviews of
companies with a public interest score of 100-349, the
Auditing Profession Act requires amendment
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Proposed accreditation model for
independent reviewers
These requirements will differ from the existing
accreditation model requirements for auditors
The accreditation model for independent reviewers of
companies with a public interest score of 100-349 will
be developed in consultation with the professional
bodies
These requirements will be less onerous than the
requirements for auditors
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Proposed step approach to regulation
Category
Regulator
Audit
IRBA
Independent Review of Companies
with a public interest score of 100-349
IRBA ?
Independent Review of Companies
CIPC
with a public interest score of less than
100
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Close Corporations
No longer possible to register new close corporations
nor to convert companies to close corporations
Existing close corporations are treated as private
companies in determining the need for
audit/independent review
Once an auditor/independent reviewer is appointed by
a close corporation the accounting officer role falls
away
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Subsidiaries of Listed Companies
In terms of the JSE listings requirements all subsidiaries
of listed companies must be audited regardless of the
classification within the Companies Act
The memo of incorporation must be amended to make
provision for the audit
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Public Interest Score
Is calculated by all companies at financial year end as:
• One point per employee for the average number of
employees during the financial year
• One point for every R1 million or portion thereof in
third party liabilities at financial year end
• One point for every R1 million or portion thereof in
turnover during the financial year
• One point for every individual who at financial year
end has a beneficial interest in issued securities of a
profit company or is a member of a non-profit
company
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Employees
Employee is defined in Labour Relations Act
Employee is any person, excluding an independent
contractor, who works for another person or the State
and who receives remuneration
Independent contractors are not subject to control or
supervision as to the manner in which their services are
performed. Amounts paid are not due at regular
intervals
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Third Party Liabilities
Any liability owing by a company to an outside party
Shareholders loans are excluded
Loans to Directors who are shareholders are excluded
Holding company loans to subsidiaries are excluded
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Turnover
Determine in accordance with the applicable financial
reporting standards
Turnover is revenue arising from sale of goods,
rendering of services, and use by others of entity assets
yielding interest, royalties or dividends
Revenue arises in course of ordinary activities of an
entity. Excludes taxes, rebates paid on revenue, gains
on non-current assets/foreign exchange transactions
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Beneficial Interest
Individual is a natural person
Beneficial interest is the entitlement to receive
distributions in respect of company’s securities and
exercise rights attaching to a company’s securities or
dispose of a company’s securities
As an example, in the case of a trust having a beneficial
interest in a company’s securities, the beneficiaries are
counted as one point per beneficiary and not the trust
as a single unit
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Members
Non-profit companies are not required to have
members but memo of incorporation may provide for
it
A member is a person who holds membership in and
specified rights in respect of a non-profit company
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Independent accounting professional
Are persons who are qualified to perform audits or
independent reviews and who:
• Do not have a personal financial interest in the
company or a related or inter-related company
• Are not currently, nor in the previous three years,
involved in the day to day management of the
company’s business
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Independent accounting professional
• Are not currently, nor in the previous three years, a
prescribed officer or full time executive employee of
the company or a related or inter-related company
• Related to any person set out above
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Independently compiled and reported
This means that the annual financial statements are
prepared:
• By an independent accounting professional
• On the basis of financial records provided by the
company
• In accordance with the relevant financial reporting
standards
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Accounting records
a) Record of company’s assets and liabilities
• Record of non-current assets
• Record of loans to shareholders, directors,
prescribed officers, employees, related persons
• Record of liabilities and obligations
b) Record of any property held by the company
c) Record of the company’s revenue and expenditure
d) Record of inventory where a company trades in
goods
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Financial reporting standards
Depending on type of company can be IFRS, IFRS for
SMEs, or SA GAAP
Applicable for all financial year ends starting on or after
1 May 2011
No prescribed accounting framework for internally
compiled financial statements on certain types of
companies with a public interest score of less than 100
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IFRS for SMEs
IFRS for SMEs should not be applied by entities having
public accountability
An entity has public accountability if:
a) its debt or equity instruments are traded in a public
market or
b) it holds assets in a fiduciary capacity for a broad
group of outsiders as one of its primary businesses
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Fiduciary assets
Examples of entities that hold assets in a fiduciary
capacity in the course of primary business : banks,
credit unions, insurance companies, securities
brokers/dealers, mutual funds, investment banks
Examples of entities that hold assets in a fiduciary
capacity for reasons incidental to primary business:
travel agents, estate agents, schools, charitable
organisations, sellers that receive payment in advance
of delivery of goods or services
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SA GAAP
SA GAAP is a replica of IFRSs but does not require the
application of IFRS1 – first time adoption of IFRS
The Accounting Practices Board is presently assessing
the need for SA GAAP to continue in its current form
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Financial statements
Financial statements must be prepared within 6
months after financial year end
On first page of financial statements disclose:
a) If audited/independently reviewed/exempt
b) Name and professional designation of individual
who prepared the statements
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Accounting duties
An auditor and the audit firm may not be currently
involved, nor in the five years preceding appointment,
in the maintenance of a company’s financial records or
the preparation of its financial statements or in
performing accountant/bookkeeper duties
An independent reviewer may not be involved in the
preparation of a company’s financial statements
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Secretarial duties
An auditor and the audit firm may not be currently
involved, nor in the five years preceding appointment,
in performing secretarial work for the company or be a
director/officer/employee of a person appointed as
company secretary
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Rotation
The same individual may not serve as auditor of a
company for more than five consecutive years
The five year period commences on 1 May 2011
No rotation requirements for independent reviewers
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Ethical requirements
The IRBA Code of Professional Conduct applies to all
registered auditors
Please note that section 290 addresses independence
requirements for audit engagements and for review
engagements
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Annual returns
File annual return within 30 business days after
anniversary date of incorporation
Companies requiring audit must file copy of latest
audited financial statements with the annual return
Companies not requiring audit must file a financial
accountability supplement with the annual return
CIPC will review a sample to monitor compliance
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Reportable irregularities on independent
reviews
Any act or omission committed by any person
responsible for management of a company which:
i) Unlawfully has caused or is likely to cause material
financial loss to the company or any member,
shareholder, creditor, or investor of the company
in respect of their dealings with that entity or
ii) Is fraudulent or amounts to theft or
iii) Causes or has caused the company to trade under
insolvent circumstances
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Existing ISRE 2400
In terms of the Act, independent reviews must be
performed in terms of the existing ISRE 2400 (effective
for reviews of financial statement for periods beginning
on or after 15 December 2006)
Provides negative assurance
Independent reviewer requires good working
knowledge of ISAs and accounting frameworks
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Revised ISRE 2400
Exposure draft issued in December 2010 by IAASB
Expect to issue finalised standard in first half of 2012,
effective for financial periods ending on or after 31
December 2013
Enables more effective and efficient review
engagement
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ISQC 1
Practitioner’s firm must establish and maintain a
system of quality control that addresses:
a) Leadership responsibilities for quality
b) Relevant ethical requirements
c) Acceptance and continuance of client relationships
d) Human resources
e) Engagement performance
f) Monitoring
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Objectives
a) To conclude, through performing primarily inquiry
and analytical review procedures, and evaluating
the sufficiency and appropriateness of evidence
obtained, whether anything has come to the
practitioner’s attention that causes the practitioner
to believe the financial statements are not fairly
presented, in all material respects, in accordance
with an applicable financial reporting framework
and
b) To report on the financial statements as a whole
and communicate as required by the ISRE
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Preconditions for a review engagement
a) Determine whether the financial reporting
framework applied in the preparation of the
financial statements is acceptable
b) Obtain agreement of management that it
acknowledges and understands its responsibilities:
• For preparation of financial statements
• For internal controls to enable preparation of
financial statements free from material
misstatements
• To provide practitioner with all relevant info and
access to info
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Terms of engagement
a)
b)
c)
d)
Objective and scope of the review
Responsibilities of the practitioner
Responsibilities of management
Identification of the applicable financial reporting
framework
e) Statement that the engagement is not an audit
f) Intended use and distribution of financial
statements
g) Expected form and content of the report to be
issued by the practitioner
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Communication with management and
those charged with governance
Practitioner should communicate all significant matters
concerning the review on a timely basis with
management and those charged with governance
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Materiality
Practitioner should determine materiality for the
financial statements as a whole
Apply this materiality in designing the procedures and
evaluating the results obtained from those procedures
Assess the impact of unadjusted misstatements on the
financial statements as a whole
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Understanding
a) The entity and its environment, including the
entity’s accounting system and accounting records
relevant to the review
b) The applicable financial reporting framework,
including its application in the industry in which the
entity operates
Sufficient to identify areas in the financial statements
where material misstatements are likely to arise, and
be able to design procedures to address those areas
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Inquiries
a) Significant accounting policies used and their
application
b) Development of significant accounting estimates
c) Identification of related parties and transactions
d) Significant, unusual or complex transactions
e) Actual, suspected or alleged fraud or illegal acts or
non-compliance with laws and regulations
f) Management’s assessment of ability to continue as
a going concern
g) Management’s assessment of events occurring
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Analytical procedures
a) Expand the practitioner’s understanding of the
entity by identifying areas where material
misstatements are likely to arise
b) Identifying inconsistencies from trends, values or
norms
c) Providing corroborative evidence in relation to
other procedures performed
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Additional procedures
If the practitioner becomes aware of a matter that
causes him/her to believe the financial statements may
be materially misstated, the practitioner designs and
performs such additional procedures as the
practitioner considers necessary
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Written representations
a) Management has fulfilled its responsibility for the
preparation of financial statements in accordance
with the applicable financial reporting framework
and has provided the practitioner with all relevant
info and access to info
b) All transactions have been recorded and reflected
in the financial statements
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Conclusion
Unmodified opinion in the practitioner’s report on the
financial statements as a whole when the practitioner
concludes, based on the evidence obtained, that
nothing has come to the practitioners attention that
causes the practitioner to believe that the financial
statements are not fairly presented, in all material
respects, in accordance with the applicable financial
reporting framework
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Documentation
a) Nature, timing and extent of procedures performed
to comply with the ISRE
b) Results obtained from procedures and conclusions
reached
c) Significant matters arising and conclusions reached
and significant professional judgements made
d) Discussions held with management, those charged
with governance and others of significant matters
arising
e) How inconsistent info was addressed
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Reviewers - August 2011