It has been said that accountants are in the enviable position where their business allows them to sell ice cream just as easily as they do umbrellas: In rainy weather, such as most businesses experienced in the recent economic downturn, the accountant offers the proverbial umbrella – whether it is in the form of assistance with finance applications, making sure that the financial statements reflect the truth and nothing but the rosiest truth, or in some unavoidable cases even liquidation services.
But if the sun suddenly happens to break through from behind the clouds the accountant takes that in his stride too, because he is likely be among one of the first to be called when the client wants to expand the business or even buy another.
If ever there was a time to keep an eye on the horison, sniff the breeze or consult whatever one's favourite weather forecast method would be, that time is now. All except the most ignorant weather prophet will undoubtedly have perceived a noticeable change in the weather for accounting practices, big and small.
The first of these changes is the economic downturn already referred to in the opening paragraph. This was followed by an upturn, which at the time of writing seems to be faltering and could be going anywhere in the next few months: Good growth seems to be a good bet, with slower growth, or even another recession is also among the possible outcomes.
As a result of this uncertainty you will find your experienced accountant, who has weathered many storms and droughts already, sporting a deep frown as he decides whether to start mixing the ice cream or to call the umbrella wholesaler.
But just before he makes up his mind, using a combination of sound strategic planning and completely unfounded guesswork (probably more of the latter than the former), he suddenly hears a rumble in the background – the thunderstorm that is the Companies Act of 2008 has suddenly been unleashed!
On the first of May 2011 the accountant looks out of a murky office window and is met by a brand new Companies Act which (although not completely unexpected as it has been hovering on the horison for several years) is accompanied by a set of regulations, with details that were never predicted by even the most reputable weather forecasts.
Two of the notable changes are audit exemption and the introduction of the independent review of financial statements.
From 1 May 2011, certain smaller owner-managed entities are completely exempt from audit or review in terms of section 30 of the new Act. In those cases where audits are still required, auditors can no longer assist with the preparation of the financial statements.
At first glance, this appears to be a blessing to all but the poor auditor who tries to make a living from auditing. But all is not as it seems: Accountants who prepare financial statements, whether they are in practice or employed in commerce, and who read as far as the new section 29 will realise with a shock that they may be guilty of a criminal offence if they don't comply with the Act's requirements. Unless you are an expert in IFRS (as we all are, obviously!) you could find yourself yearning for the days when you could rely on auditors to cast a wary eye over your handiwork, if not even to prepare the financial statements.
Another (hopefully unintended) consequence of the abolition of the audit requirement is the effect it will have on the much vaunted skills shortage. It is an undisputed fact that the excitement of the auditing field has been the training ground for some of the most brilliant accounting minds, whose contributions to our economy today speak for themselves. Reduce the size of that training ground by up to 90%, as some have predicted, and where will tomorrow's academics, auditors-general, bankers and small business advisors come from? What about the thousands of trainees, learners and students who are already at different stages of the development pipeline? What are the options for the audit firms who have signed contracts and are obliged to provide training and employment?
If the financial statements are not completely exempt from audit, they may be subjected to the much less stringent requirement of an “independent review” instead.
Considering that the review standard, when viewed next to the auditing standards, reminds you of an eleven-year old ballerina standing next to Bakkies Botha, this also appears to be godsend for all concerned.
Now, consider that a review may cost up to 80% of an audit, the reviewer is not allowed to prepare the financial statements and the review standard itself is about as clear as a politician's election promises, and you will realise that the prospect of a review becomes less attractive to reviewer and reviewee alike.
The reviewer, when he was still acting as auditor under the old Act, was understandably nervous to sign an audit opinion because of the well-known limitations of an audit. He became even more edgy when an irregularity was suspected, thanks to the reporting obligations imposed by section 45 of the Auditing Professions Act. Now consider his surprise when he turns to Regulation 29 of the new Act and notices that he is still required to report irregularities, only this time he will be armed only with review evidence and not the more in-depth audit work to back his report!
A review is not only different to an audit in terms of the amount of work to be performed, but also in terms of the level of such work. Where an audit combines careful planning, risk assessment and interpretation with good old-fashioned “ticking and bashing”, a review dispenses with the latter in favour of higher level analysis and discussions. The consequence is that the work needs to be performed by a much more experienced and qualified calibre of professional, obviously at a higher hourly cost. The effect on the auditor/reviewer's business model and staffing of his practice is profound.
The client accountant on the other side of the table, who is being reviewed and who was preparing herself for a much lower bill than last year's audit fee, is not much more comfortable. Because she can no longer just ask the trusty auditor to prepare the financial statements, she realises that she will either have to do it herself from now on (in accordance with a prescribed and increasingly complex framework), employ someone to do it, or to pay another firm of accountants to prepare the financial statements.
The previous paragraphs reflected on some of the more obvious effects of the new Companies Act that will impact auditors and accountants, especially those in smaller practices. But there are others that may be equally unsettling:
The introduction of the Memorandum of Incorporation, a single founding statement for companies. There are significant differences between this new document and what it is allowed and not allowed to contain. It is absolutely critical that every company's existing Memorandum, Articles of Association, shareholders' agreements, rules, etc. be reviewed and adjusted where necessary to avoid some very far-reaching and unpleasant consequences. The many accountants who provide company secretarial services need to familiarise themselves with these new provisions and assist their clients where necessary.
A new business rescue system, chapter 6 of the Act, changes forever the way distressed organisations are administered. Practitioners have developed individuals or departments with specialised skills to deal with these kinds of situations – the new Act presents a new business opportunity to the bold and a threat to those who are not ready for the changes.
The form and standards of company records that are prescribed by sections 24 to 28 of the Act are different and more onerous than was previously the case. Practitioners need to be aware of this and ensure that their clients' records are amended accordingly.
Space does not permit an exhaustive list of the impact of the Companies Act changes on the audit or accounting practitioner. Suffice to say, if you meet your accountant auditor in the street today, please offer him an umbrella for it is a foul and fair day indeed. asa
Henk Heymans CA(SA) is the Managing Director of ProBeta Accountancy Development (Pty) Ltd. and a member of the Committee for Auditing Standards.