The effect of COVID-19 on year-end audits
Author: Hayley Barker Hoogwerf , SAICA Project Director: Assurance as author for this article
Can year-end audits be postponed till the end of the isolation period, or is it mandatory that they continue even during the quarantine?
In answering this question, it is first important to understand the relevant reporting requirements.
In terms of section 30 of the Companies Act, 71 of 2008 (the Companies Act), a company must prepare annual financial statements every year within six months of its financial year end. In the case of a public company, the annual financial statements must be audited. In the case of companies that are not public companies, the annual financial statements must be audited if this is desirable in the public interest, having regard to the economy and social significance of the company as indicated by its turnover, the size of its workforce or the nature and extent of its activities. When an audit of the annual financial statements is not required, these need to be independently reviewed. Nevertheless, the requirement to have annual financial statements prepared within six months of the financial year end remains.
In the case of a company that has issued shares that are publicly traded on the Johannesburg Stock Exchange Limited (JSE), results must be published twice a year, within three months of mid-year and year-end. Within four months after the end of each financial year, the issuer shall distribute to all holders of securities and submit to the JSE, the annual financial statements for the relevant financial year, which must include the audited financial statements.
To the extent that the above reporting deadlines will still be achieved, year-end audits can be postponed until the end of the isolation period. However, missing reporting deadlines has significant consequences, as outlined below.
There is no legislative override that allows for the postponement of audits or independent review of the annual financial statements. Companies and close corporations would be dependent on the various regulators providing relief or informing companies and close corporations that they will not be penalised or fined for late submission.
The JSE are cognisant of the practical challenges that issuers are currently faced with and recognise that the measures implemented in South Africa and globally to deal with the pandemic may have an impact on the ability of issuers to meet their reporting obligations under the Listings Requirements. To this end, the JSE issued communication recognising that the impact of the pandemic will vary from issuer to issuer based on their specific circumstances and that the JSE will consider, on a case by case basis an extension to the prescribed reporting periods.
The Companies and Intellectual Property Commission (the CIPC) released a notice stating that in light of the COVID-19 pandemic and the declaration of a national state of disaster, the Commission is extending the submission of annual returns due between 25 March and 15 April 2020, to 30 April 2020. The extension of the filing period also has the effect of deferring penalties, submission of the compliance checklist and submission of annual financial statements accordingly.
In relation to other compliance requirements companies, close corporations and other entities will have to refer to the regulators for guidance.
What happens if an audit cannot be completed within the stipulated time frame?
The JSE Listings Requirements indicate that if an issuer fails to publish their results within 3 months, the JSE will send a letter or reminder advising that the issuer still has one month within which to submit its annual financial statements, failing which its listing may be suspended until such time as the annual financial statements have been submitted.
Four months after the listed company’s financial year end, the company’s listing will be annotated on the JSE trading system with “RE” to indicate that it has failed to submit its annual financial statements timeously. The JSE will release an announcement over SENS, informing holders of securities that the issuer has not submitted its annual financial statements and cautioning holders of securities that the listing of the issuer’s securities is under threat of suspension and possible removal.
If the issuer still does not submit its annual financial statements by the end of the fifth month after its financial year end, the issuer’s listing will be suspended and a meeting of the JSE will be convened to consider the continued suspension or removal of the issuer’s listing. The issuer’s suspension will be lifted after the JSE receives the issuer’s annual financial statements and the JSE is satisfied that these annual financial statements comply with the prescribed financial reporting requirements.
The CIPC has in the past utilised the provisions of section 175 of the Companies Act, which makes provision for an administrative fine to be issued for a company where a Compliance Notice has been issued for specific non-compliance with the requirements of the Companies Act. The administration fine to be paid by a company equates to 10% of their turnover for the period during which the company failed to comply with the compliance notice.
When a company is in breach of the requirements of the Companies Act for the company to prepare annual financial statements every year within six months of its financial year end, the auditor is required to consider their reporting responsibilities that may arise in terms of:
- Section 360 of the IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018) (the IRBA Code) relating to non-compliance with laws and regulations (NOCLAR); and
- Section 45 of the Auditing Profession Act, No. 26 of 2005, relating the reporting of Reportable Irregularities to the IRBA.
What happens when the business cannot provide information, despite its own best efforts to provide it, to its auditors?
In conducting an audit of financial statements, the auditor is required to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
The inability of the auditor to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement is commonly referred to as a limitation on the scope of the audit. Here, the auditor is required to modify the opinion in the auditor’s report. Depending on the severity of the limitation of scope, the auditor will either express a qualified opinion (except for opinion) or disclaimer of opinion, indicating that it is not possible to form an opinion on the financial statements.
What feedback have you had from your members regarding their difficulty when it comes to completing an audit?
The main concerns that auditors are faced with at present include:
- Whether COVID-19 is considered to be an adjusting or non-adjusting post balance sheet event. This is a critical distinction to be made because an adjusting post balance event will impact the numbers presented in the annual financial statements, while non-adjusting post balance sheet events will merely result in additional disclosure around such events by the directors in the annual financial statements.
- The operational and financial impact of COVID-19 and the ability of a company to continue as a going concern.
- Considerations relating to impairment of financial and non-financial assets, including accounts receivables, investments, intangible asset and goodwill.
- Ability of companies to meet commitments and the related consequences thereof.
- Breaches of loan covenants and the related consequences thereof.
- With the current lockdown that has been imposed, auditors are not going to be able to verify the existence of inventory by physically attending the stock count for March 2020 year ends. The auditor is therefore faced with the dilemma of finding other ways to obtain sufficient appropriate audit evidence relating to inventory and if this is not possible, they are faced with a limitation on the audit scope.
- In terms of obtaining general audit evidence, the auditor is also limited in terms of physically inspecting original documents, which brings into question the reliably of audit evidence, especially if it is electronically submitted to the auditor.
- With multinational companies that have global operations, travel restrictions together with laws that prevent the transfer of information may also have an adverse impact on the ability of the auditor to express an opinion on the financial statements.