The Companies Bill is extremely topical and once you delve into it you realise that you cannot deal with all the interesting stuff but rather focus on one bit at a time. In this article, the author discusses the Bill and the different roles of some of the stakeholders.
On 27 June 2008 the Companies Bill was released for public comment. This article is based on that version of the bill.
The Companies Bill was drafted with the changing South African economic landscape in mind, encouraging entrepreneurship and enterprise efficiency, making it simpler to form and maintain a company, whilst at the same time promoting transparency and good corporate governance. It encourages the development of companies within all sectors of the economy, and thereby facilitates active participation in economic organisation, management and productivity; a consequence of which will be the eventual demise of the close corporation (yes, CCs will be a thing of the past somewhere in our distant memory, and just like cassettes and records – some people will still use them, but they won’t be very popular, and you won’t be able to buy any new ones).
Drafters of the bill intended for it to create optimum conditions for the aggregation of capital for productive purposes, and for the investment of that capital in enterprises and the spreading of economic risk. The bill further aims to increase accountability of non-profit companies and enhance the capacity of these companies to perform their functions.
A balance of the rights of shareholders and directors is emphasised as responsible management and accountability of companies is demanded. The Business Rescue provisions of the bill provide for financially distressed companies to be rescued without prejudicing relevant stakeholders.
The underlying purpose of the bill is to promote South Africa as an attractive investment destination and to enhance its economic welfare as a partner in the global economy with an efficient corporate regulatory environment. Once passed (expected to be 2010), the 1973 Companies Act and the 2007 Corporate Laws Amendment Act will be repealed.
That is the object of the bill in a nutshell. It would be rather ambitious of me to try to discuss every aspect of the bill in this article; instead I have chosen to focus on those pertinent issues affecting auditors.
A common theme that pervades the entire bill is the need to serve the public’s interest at all times.
The changing face of the South African Company
With all of the confusion created by the Corporate Laws Amendment Act, which introduced the concept of ‘widely held’ and ‘limited interest’ companies, the drafters of the Companies Bill do not provide for these concepts. Instead, provision is made for “non-profit” and “profit” companies. A non-profit company is essentially what we know as the traditional section 21 company, incorporated for a public benefit, any income or property of which is not distributable to its incorporators, members, directors, officers or related persons.
A profit company may either be a private company, personal liability company, public company or state owned enterprise. Each of these would be distinguishable by the words that follows its name, that is, (Pty) Ltd, Inc., Ltd and SOE Ltd. The name of a non-profit company would be followed by “NPC”.
As opposed to the Memorandum and Articles of Association, the governing document of a company will, once the bill takes effect, be a Memorandum of Incorporation. It shall be binding between the company and each shareholder, between or among the shareholders and between the company and each director or officer of the company and any person serving as a member of the audit committee or any other committee of the board. Amendments to the Memorandum of Incorporation may be effected in compliance with a court order or by virtue of a special resolution.
Annual Financial Statements
At the very mention of the concept of corporate law reform, SAICA members have been concerned with concepts of differential reporting requirements and the removal of the audit requirement, as we know it.
A personal liability company is exempt from producing annual financial statements. The Companies and Intellectual Property Commission may also exempt a company if it is satisfied that a company has not carried on business during that financial year. A private company may qualify for exemption if, firstly, only one person holds all of the beneficial interest in all of the securities issued by the company or, secondly, if every shareholder is also a director of that company. However, in the instance that the only director of a private company is classified as ‘disqualified’, the requirement of the production of annual financial statements prevails. The exemption may be reversed if preparation of the annual financial statements appears to be necessary for the protection of shareholders or in the public interest, with due regard being given to the company’s annual turnover, size of its workforce and the nature and extent of its activities.
The annual financial statements of a public company must be audited. At this point it is worth mentioning that the JSE is in the process of amending its listing requirements to provide for a Register of Approved Auditors, who would be allowed to perform statutory audits or other assurance engagements for JSE Listed Companies. Any other company may be audited if required by Ministerial regulations, audited voluntarily at the option of the company or subject to an independent review. Ministerial regulations are expected to prescribe the manner, form and procedures for the conduct of an independent review, other than an audit, as well as the professional qualifications, if any, of persons that may conduct such reviews. Clearly, members of the accountancy profession still have their work cut out for them. As the audited financial statements of a company serve as a reliable reference document to banks and other investors in present day South Africa, it would be interesting to witness the level of acceptance of independent reviews and whether companies would still prefer to volunteer for the preparation of audited financial statements and the security and assurance associated therewith.
A public company or state owned enterprise must, upon incorporation and at each annual general meeting, appoint a registered auditor. The bill precludes any of the following persons from being appointed as an auditor of a company:
- A director or officer of the company
- An employee or consultant of the company, who has or has been engaged for more than one year in the maintenance of any of the company’s financial records, or the preparation of any of its financial statements
- A director, officer or employee of a person appointed as company secretary
- A person that regularly performs the functions of an accountant, bookkeeper or secretary of the company
- A person that complied with any of the above categories during the five financial years immediately preceding the date of appointment.
A company is required to maintain a record of its auditors, including the name and former name of such person and date of appointment. Where a firm or juristic person is appointed, the record must include the name, registration number, registered office and the name and date of appointment of the individual determined by that firm to be responsible for performing the audit.
The Audit Committee must be satisfied with the Auditor’s independence.
When an auditor resigns, it is effective from the date that the notice was filed and a new auditor must be appointed within forty business days. The board appoints the auditor, subject to the provision that the audit committee may reject the proposed appointment. Stringent time lines apply in that the board ought to have made a proposal to the audit committee within fifteen business days of the vacancy arising, providing the audit committee with a further five business days to reject the proposed appointment in writing. Where a firm of auditors has changed its partners resulting in less than one half of its members remaining after the change, that change constitutes a resignation by the firm of auditors giving rise to a vacancy.
As provided in the Corporate Laws Amendment Act, rotation of auditors must occur every five years. It would be prudent for a company that has joint auditors to ensure that all of the joint auditors do not relinquish office in the same year.
The bill enshrines the right of the auditor to access to accounting records and all books and documents of the company at holding company and subsidiary level. The auditor is also entitled to require from the directors and officers of the company, any information and explanations necessary for the performance of the auditor’s duties. The auditor’s rights also extend to the right to receive notification of, attend and be heard at any general shareholders meetings. Clearly, it would be most appropriate for the auditor to prepare for the shareholders meeting and consult with parties such as the company secretary, chairman and investor relations manager prior to the meeting in order to manage appropriately the potential risk of shareholders and press receiving the wrong message or misconstruing the facts. Of course, an auditor should not be tempted where a breakdown in corporate governance, for example, is being covered up. The auditor’s rights are enforceable in a court that may make an order that is just and reasonable to prevent frustration of the auditor’s duties. The court may also make an order of costs personally against any director or officer whom the court has found to have wilfully and knowingly frustrated the performance of the auditor’s functions.
The provision of non-audit services by an auditor is limited, in that the auditor may not perform services that would create a conflict of interest in terms of the Auditing Profession Act, or as may be determined by the company’s audit committee.
At each annual general meeting a public company, state owned enterprise or other company that has voluntarily determined to have an audit committee must elect an audit committee comprising at least three members, unless the company is a subsidiary of another company that has an audit committee that will perform the audit committee functions on behalf of that subsidiary. This is a solution to the dilemma created in the Corporate Laws Amendment Act that required every widely held company to have an audit committee, which requirement extends to even the smallest of companies by virtue of the fact that they are subsidiaries of widely held companies.
Each member of the audit committee must be a director of the company. Provision is made for the Minister to prescribe minimum requirements with regard to the financial knowledge and experience required of a member of the audit committee. Clearly, this would create a greater demand for an already scarce resource. The audit committee member must also be what used to be classified as “independent”. Without referring to the term “independent”, the bill requires a member of the audit committee not to be:
- involved in the day-to-day management of the company or have been so involved at any time during the previous three financial years;
- a prescribed officer or full-time executive employee of the company or have been such at any time during the previous three financial years;
- a material supplier or customer of the company, such that a reasonable and informed third party would conclude in the circumstances that the integrity, impartiality or objectivity of that director is compromised in that relationship; or
- related to any person described above.
The terms of reference of the audit committee would include nominating the auditor for appointment. In nominating the auditor, the audit committee must consider the independence of the auditor, determine the auditor’s fees and terms of engagement and ensure the auditor’s appointment is in compliance with prevailing legislation. The rather contentious issue of the provision of non-audit services must be dealt with at audit committee level by the establishment of the company’s policy on the provision of non-audit services by the auditor and the pre-approval of any proposed agreement with the auditor for the provision of non-audit services. As opposed to previous practice where the audit committee, along with other board committees, would be reported on in the corporate governance section of a company’s annual report, the bill requires the audit committee to prepare a report for inclusion in the financial statements describing how the audit committee carried out its functions, stating its level of satisfaction with the independence of the auditor, and providing comment on the financial statements, accounting practices and internal controls of the company. The ambit of the audit committee also extends to the receipt, and dealing with, of any complaints around the accounting practices and internal audit of the company, content or auditing of the company’s financial statements, internal financial controls of the company or any other related matter. It is also a requirement that the audit committee provide submissions to the board on accounting policies, financial control, records and reporting. The board may also delegate further functions to the audit committee, including the development and implementation of a policy and plan for a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes within the company.
The power of the audit committee extends to the ability to reject an appointment of an auditor at an annual general meeting on the basis of lack of independence.
In its assessment of the independence of the registered auditor, the audit committee is required to delve into matters such as ascertaining whether any direct or indirect remuneration or benefit was received except in his/her capacity as auditor and in the provision of non-audit services; and whether the auditor’s independence may have been prejudiced as a result of a previous appointment as auditor or due to any other consultancy or advisory work undertaken for the company. Lastly, there must be consideration of other criteria relating to independence or conflicts of interest as prescribed by the Independent Regulatory Board for Auditors.
Where previously it was practice for a board to obtain external professional advice, this privilege is extended to the audit committee, the cost of which must be paid for by the company, to the extent that it is reasonable.
Having conferred such powers and duties on the audit committee, the drafters of the bill found it necessary to stipulate that the functions and duties of the board of directors are in no way reduced, except with respect to the appointment, fees and terms of engagement of the auditor. One wonders whether this statement is aimed at negating the created perception that the audit committee does seem more powerful than the board!
In increasing the accountability and reporting requirements of companies, the bill has also expanded the role of the auditor and the Audit Committee, increasing their powers and accountability. The Auditor now has a greater voice and must use it when necessary in order to fulfil its functions to the extent envisaged by the bill. The question is, are auditors up to the challenge?
We live in interesting times!
Melanie Naidoo, BProc, LLB, is an Admitted Attorney and the Head of Legal and Governance, SAICA.