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ANALYSIS: Independent reviewers and reportable irregularities: are you complying?

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Are you, as an independent reviewer, reporting identified reportable irregularities? Hayley Barker Hoogwerf gives an overview of the requirements contained in Regulation 29 of the Companies Regulation, 2011, and provides practical guidance on the application of these requirements

The Companies and Intellectual Property Commission (CIPC) has raised concerns that independent review practitioners are not complying with the requirements of Regulation 29 of the Companies Regulations, 2011. The concerns raised are twofold; independent review practitioners are either not reporting reportable irregularities as required in terms of Regulation 29, or practitioners send the first report but do not send the follow-up report as required in terms of Regulation 29(8)(c).

In response to the concerns raised, CIPC has issued a practice guideline which outlines the process to be followed by independent review practitioners in the performance of an independent review. This article aims to provide further practical guidance on the reporting requirements contained in Regulation 29 of the Companies Regulations, 2011, as well as highlight other practical difficulties being experienced in applying and complying with the reporting requirements.

WHO CAN PERFORM INDEPENDENT REVIEWS?

Regulation 29(4)(a) of the Companies Act Regulations, 2011 states that for companies with a public interest score of  100–349, an independent review must be carried out either by registered auditors or by members in good standing with a professional body accredited in terms of section 33 of the Auditing Profession Act 2005.

Legal opinion has confirmed that ‘members in good standing’ include members where there are no outstanding membership fees and there are no disciplinary proceedings pending against the member. The South African Institute of Chartered Accountants is accredited as a professional body in terms of section 33 of the Auditing Profession Act 2005 and therefore a Chartered Accountant (SA) (CA(SA)) as well as an Associate General Accountant (SA) (AGA(SA)) is permitted to perform independent reviews.

When a company has a public interest score of less than 100, an independent review must be carried out by a person contemplated above, or by a person who is qualified to be appointed as an accounting officer of a close corporation in terms of sections 60(1), (2) and (4) of the Close Corporation Act 1984.

Any person performing an independent review is required to ensure that they have the professional competence to carry out the engagement.

Responsibility of the independent reviewer to report reportable irregularities

An independent reviewer of a company that is satisfied or has reason to believe that a reportable irregularity has or is taking place must, without delay, send a written report to CIPC.

A reportable irregularity is defined in Regulation 29(1)(b) of the Companies Regulations, 2011 as follows:

‘… any act or omission committed by any person responsible for the management of a company, which:

  • unlawfully has caused or is likely to cause material financial loss to any member, shareholder, creditor or investor of the company in respect of his, her or its dealing with that entity; or
  • is fraudulent or amounts to theft; or
  • causes or has caused the company to trade under insolvent circumstances.’

What does all of the above mean?

A person responsible for the management of a company is interpreted as a person responsible for or who regularly participates to a material degree in the executive control over and management of the whole or a significant portion of the business. Examples of executive management’s responsibility include:

  • Setting the strategic objectives and operational policies of the company
  • Allocating resources within the company to achieve the strategic objectives and support the operational policies of the company, or
  • Selecting accounting policies, reviewing and authorising the financial statements, and authorising the personnel to act within predefined guidelines and frameworks

In assessing whether there has been material financial loss, the concept of materiality should be applied within the context of the absolute financial loss caused and not the level of materiality applied for the purposes of the independent review engagement. The independent reviewer is required to exercise his/her professional judgement and consider other factors, such as the relative size of the loss and the relevant nature and circumstances in setting the materiality level. The independent reviewer does not assess any loss on a net basis and therefore should not take into account any benefit from an unlawful act, such as obtaining the benefit of a lucrative contract after paying a bribe in order to secure the contract.

The is fraudulent or amounts to theft element requires that the independent reviewer exercise professional judgement to determine whether an unlawful act or omission constitutes fraud or theft, irrespective of whether the act or omission concerned has given rise to material financial loss or potential financial loss. Fraud would be considered in the context of the legal definition of fraud, namely the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another. Theft has been defined as the unlawful and intentional appropriation by a person of another’s property. In cases of uncertainty the independent reviewer should consider obtaining professional or legal advice.

The final reportable irregularity criterion is causes or has caused the company to trade under insolvent circumstances. It is important to consider the meaning of insolvent circumstances that has caused some uncertainty in practice. To date, CIPC has not issued any additional guidance (such as a practice note) in this regard. In the absence of such, insolvent circumstance must be interpreted to mean both commercial and factual insolvency and the independent reviewer is therefore required to report a reportable irregularity to CIPC if either of the insolvent circumstances exists.

I have identified a reportable irregularity, now what?

TIMEFRAME FOR REPORTING

The independent reviewer must, without delay, send a report. In interpreting the meaning of without delay, one would apply the reasonable reviewer test, that is, the time a reasonable reviewer would take to report the irregularity once he or she is satisfied or has reason to believe that the reportable irregularity has taken or is taking place.

Within three business days of the independent reviewer sending the report to CIPC, he/she is required to notify the members of the board in writing of the submission of such report, including the provisions of Regulation 29 of the Companies Regulations, 2011. This notice must be accompanied by a copy of the actual report submitted to CIPC. However, this is not the end of the reporting process. The independent reviewer is then required to send a second report to CIPC.

As soon as reasonably possible but no later than 20 business days of sending the first report to CIPC the independent review must take all reasonable measures to discuss the reportable irregularity with the members of the board and afford the members of the board an opportunity to make representations in respect of the report.

The independent reviewer is further required to send a second report to CIPC, which includes a statement that the independent reviewer is of the opinion that:

  • No reportable irregularity has taken place or is taking place, or
  • The suspected reportable irregularity is no longer taking place and that adequate steps have been taken for the prevention or recovery of any loss as a result thereof, if relevant, or
  • The reportable irregularity is continuing

The second report must contain detailed particulars and information supporting the statement so made.

IN CLOSING

The independent reviewer is not required to design procedures to detect reportable irregularities but must consider all information which comes to the independent reviewer’s attention from any source in considering whether a reportable irregularity exists.

All CAs(SA) and AGAs(SA) are required to comply with the SAICA Code of Professional Conduct. The Code describes five fundamental principles by which we as professionals are bound, including professional behaviour which imposes an obligation on all CAs(SA) and AGAs(SA) to comply with relevant laws and regulations and avoid any action that he/she knows or should know may discredit the profession. In the event of the independent reviewer not complying with Regulation 29 of the Companies Regulations, 2011 and any person lodges a complaint with SAICA, such complaint will be considered against the Code and may result in disciplinary action.

AUTHOR | Hayley Barker Hoogwerf CA(SA) is Project Director: Assurance at SAICA