The South African Institute of Business Accountants has urged accountants to market themselves in accordance with legislation that requires their services more than ever before.

 

Accountants must familiarise themselves with Section 90(2)(b) of the Companies Act 2008 which presents significant opportunities for accountants to acquire business, says SAIBA CEO, Nicolaas van Wyk.  He explained that the Act prohibits auditors engaged to perform a statutory audit of a company or a close corporation from preparing financial statements for that same company, leaving the door open to accountants to do that work.

 

“Many accountants are unaware of or unclear on the advantages that this presents to them in the form of non-audit services that were handled by auditors previously.“ said van Wyk.  “Because auditors may no longer conduct both services for the same client, accountants should be actively looking to enter into agreements with auditors to prepare financial statements for that auditor's clients.”

 

In line with the Act, it would make sense for auditors to outsource accountants to produce annual financial statements.  In other cases, businesses themselves will have seen the need to restructure the way they work by outsourcing their preparation work to accountants or changing their audit function to independent review.

 

“Either way, the legislation is good news to accountants because companies are forced to accept that professionals who prepared their financial statements in the past, may no longer perform their audit as well. This brings accountants neatly into the loop.”

 

South Africa will reap the benefits already experienced in the United States as well as Europe where audit reforms announced last month strictly prohibit audit firms from providing non-audit services to their audit clients, including stringent limits on tax advice and services linked to the financial and investment strategy of their clients.

 

The European Parliament has also agreed that audit firms in EU member states will be required to rotate every 10 years. Public interest entities will only be able to extend the audit tenure once, upon tender, and auditors will not be allowed to perform tax work for public interest companies. Under this measure, joint audit will also be encouraged. Despite the extension of the rotation period, this principle will have a major impact in reducing excessive familiarity between the auditors and their clients and in enhancing professional skepticism.

 

Van Wyk believes consideration should be given to extending the South African legislation to other non-audit services in the interests of transparency and objectiveness around financial record keeping. “As in the case of European law, this would limit the risk of conflicts of interest which exists due to the fact that auditors are involved in decisions impacting the management of a company,” he pointed out.  “It would also substantially reduce the “self review’ risks for auditors”.

 

Besides the obvious advantage to accountants, there is the added societal benefit of increasing audit quality and investor confidence in financial information, an essential ingredient for economic growth.

 

“It is essential for accountants to understand their new role within the Companies Act. Accountants must use the opportunities presented to them by the Act.  We should run our practices like any other business, actively marketing our services and forming long lasting relationships, not only with auditors and financial advisors. We should also strive to work alongside one another for support and advice and even for referrals, as the market for Accountants in Practice is still unsaturated.” said SAIBA member, Karen De Villiers of Bizzacc Accountants.

 

In the meantime, SAIBA encourages accountants to make their services available to auditors and companies. Networking and actively seeking business should be a top priority for accountants seeking to establish themselves,” said van Wyk.  “It works in favour of clients too, who can shop around for lower fees in a more competitive environment.”

There has been a lot of media coverage in the past couple of years devoted to directors’ duties under the new Companies Act of 2008, and the fact that directors can potentially be held personally liable if they breach those duties. The effect can be fear and uncertainty – but the basic principles are easy to understand and live by.  There are five things every director should know:

 

1.     What exactly is a “fiduciary duty” anyway?

“Fiduciary” comes from the same Latin word for faith and trust that’s given us “fidelity” and “confidence” (it’s also why there’s a tradition of calling dogs Fido). Basically, if someone places their faith and trust in you – for example by giving you their money to invest or their company to manage – you have a duty not to betray that trust. You have to be loyal and act in their best interests, not your own. It’s really that simple. The moment you find yourself thinking in terms of what’s best for you personally, take a deep breath and think again.

 

2.     What is a “duty of skill and care”?

As a director, you don’t only have to act in good faith – you have to know what you’re doing. The expection is not that you should be an expert, or never make a mistake – but you should have the skills that can reasonably be expected of someone in your position, and apply those skills. You can’t, for example, approve a deal because it feels right in your gut or the other person is in your church and you’re sure you can trust them. You need to do all the due diligence required to make sure it will benefit the company.

 

3.     It doesn’t matter how big or small the company is

These duties apply equally to directors of small companies, large listed companies and non-profits. It gets more scary and complicated the more of other people’s money is at stake, but your basic duties and responsibilities to your shareholders remain the same.

 

4.     It doesn’t matter what it says on your business card

You don’t have to carry the name of Director to bear these responsibilties. The law puts it in more complicated terms, but basically: If it looks like a duck, and walks like a duck, and quacks like a duck, it’s a duck. So if you act like a director (by attending board meetings, making important management decisions, signing off on deals and doing other things that directors do), the law will regard you as a director. You can’t avoid the responsibility by steering clear of the name.

 

5.     When in doubt, always opt for more transparency

The law is absolutely clear that you may not use your position to make any kind of secret profit, whether the company loses out or not. If you set up your own new company to take advantage of a major opportunity offered by a client, that’s a clear breach of your duties. But things that seem more innocuous can also be breaches: What if a major supplier offers you a discount when you renovate your house? Even if there’s no expectation of reward, this could still breach your duties. Honesty, as always, is the best policy: Disclose material interests to the board and let them decide.

 

In many ways, the Companies Act just codifies in law what most people regard as basic ethics and common sense. If your habit is to act in good faith and care, you’re unlikely to have any problems. But anytime you’re in doubt, seek advice - - it’s always better to know what you’re getting into.

The scrapping of verification fees will promote entrepreneurship and economic growth

The South African Institute of Chartered Accountants (SAICA) welcomes the initiative by Government to reduce the red tape that has been hindering small business from prospering.

SAICA recommends that careful considerations should be made regarding mandatory rotation of audit firms

The objective of the EU Green Paper is to enhance the regulation of the audit function in order to contribute to increased financial stability. It proposes measures to stabilise the international financial system as a direct aftermath of the international financial crisis. 

 

Auditors have an important role to play and are entrusted by law to conduct statutory audits. This entrustment responds to the fulfilment of a societal role in offering an opinion on the truth and fairness of the financial statements of audited entities. One of the main aims of the EU Green Paper is to probe the true fulfilment of this societal mandate.

A company’s brand and reputation is its most valuable asset and consumers will more readily buy products from a company they trust and even pay more for it. Managing and protecting the brand and reputation of a company is an onerous task and a responsibility that falls within the gambit of its directors. A company’s reputation can be ruined overnight as countless ready meal and processed meat brands have recently shown.

The promulgation of the (“the Act”) on 1 April 2011 presumably made it easier for companies, especially private companies, in South Africa to do business. However, when it comes to unusual transactions involving private companies there is potentially a whole new set of Companies Act rules that must now be complied with.

 

As an example, enter Part B of Chapter 5 of the Act that deals with the Takeover Regulation Panel (“TRP”) and so called affected transactions. The definition of an affected transaction is found in section 117(1) and generally refers to transactions involving share buy-backs, the disposal of the major part of the business of a company, mergers and amalgamations to name a few.

 

However, for a transaction to qualify as fundamental one of the parties in the transaction must be a regulated company. One can be forgiven for considering it safe to assume that private companies are not regulated companies and therefore the provisions of Part B of Chapter 5 do not apply.

 

Unfortunately it’s not that easy. Section 118 of the Act deals with which companies the provisions relating to the TRP are applicable to.  In terms of Section 118(1)(c) private companies are regulated companies under the following circumstances:

1. The private company has had a share transfer between shareholders within 24 months of the transaction;
2. The share transfer did not occur between related persons; and
3. The shares involved exceeded the minimum number set by section 118(2) – 10%.

 

It therefore means that where a company’s shareholders changed within 24 months prior to a fundamental transaction, the share transfer was not between related shareholders and the shares transferred exceeded 10% of the shares issued,  then the private company affecting the transaction is a regulated entity and Part B of Chapter 5 will apply.

 

The transaction must then either be reported to the TRP in terms of section 119 (1) or the company must make application to the TRP for an exemption form reporting under section 119(6).  Nonetheless, the TRP must be involved in this instance.

 

Apart from the above, there may also be various stand-alone sections of the Act that must be complied with in order to ensure that the transactions are concluded in a legal manner. Non-compliance to any of these provisions, even inadvertently, may have material consequences to the company or directors subsequent to the transaction. 

 

Therefore, it is recommended that when any company wishes to enter into an extraordinary transaction serious consideration must be given to all the provisions of the Companies Act.  While this may increase the administrative burden on the companies it also reduces the risk that the transaction can be successfully challenged at a later stage.  Rather be safe than sorry.

1 May 2013 is deadline to update details free of charge

The deadline of 1 May 2013 for incorporated companies to amend their set of articles of association and memorandum of association (articles and memorandum) to a Memorandum Of Incorporation (MOI) free of charge is fast approaching and companies are only left with six months to ensure they meet the deadline.

 

Juanita Steenekamp, Project Director: Governance at the South African Institute of Chartered Accountants (SAICA), confirms that the Companies Act, 2008 (the Act) which became effective on 1 May 2011 introduced a number of changes to the South African business landscape. “One of the most significant changes is that the requirements for incorporated companies were amended and what were previously known as the articles and memorandum, were changed to the new MOI”. 

 

As per the Act, all incorporated companies have to comply with the new law. The transitional provisions provided that for a period of two years after 1 May 2011, a company could amend its MOI free of charge to bring it in line with the requirements of the Act.

 

Steenekamp observes that there seems to be uncertainty from companies on the implications of them not amending their articles and memorandum. “During the 24 months, from 1 May 2011 to 1 May 2013, the old articles and memorandum remain in effect for companies unless there are specific transitional provisions that override the articles and memorandum of association.”

 

“After the 24 months period (from 1 May 2013), the previous articles and memorandum will continue as the MOI of the company. If there is any requirement in the articles and memorandum that is in conflict with the Act, then those requirements will automatically be void from 1 May 2013,” Steenekamp confirms.

 

The transitional provisions are captured in Schedule 5 of the Act and include requirements such as the duties, conduct and liabilities of directors as well as approval of financial assistance or distributions. “It is imperative that companies are aware that the requirements set out in Schedule 5 therefore apply to companies with effect from 1 May 2011, even if the articles and memorandum had stated any other requirements”, Steenekamp advises.

 

It is the responsibility of companies to review their memorandum and articles and identify any possible conflicting provisions. The decision to amend the articles and memorandum is ultimately the company’s and should be based on the review of the company documents.

 

An example that companies need to consider is the fact that the current articles and memorandum require a company to prepare annual financial statements that are required to be audited at the end of each financial year. However, in terms of the Act, not all companies require an audit of their annual financial statements.

 

Companies should therefore take note that this is one of the requirements included in their articles and memorandum that should be adhered to. Although this is not in conflict with the Act, nor a requirement of the Act, it should still be adhered to post 1 May 2013. “It is also important to note that companies can alter their MOIs to impose a higher restriction or more onerous requirements on the company, which it has to adhere to”, says Steenekamp.

 

Steenekamp states that companies should take note that it is not compulsory to amend their articles and memorandum which will now be known as the MOI, but it would be a prudent business decision to review the current articles and memorandum requirements in line with the requirements of the new Act and to take note that any conflicting provisions, not already included in the transitional provisions, will not be valid after 1 May 2013.

Companies listed on the JSE have faced significant changes in the way they report. The Companies Act has allowed for summarised financial statements to be sent to shareholders, and the listings requirement for integrated reporting (through King III) has resulted in the traditional lengthy annual report being reduced into a concise, understandable report on material connected issues.

 

And the good news for users of company reports – who have faced increasing volumes of financial and non-financial information over the years making it difficult to distil the key information – is that the integrated reports of companies are likely to slim down even further as companies place more of their detailed topic-specific information on their websites with links from their integrated reports.

 

The Integrated Reporting Committee (IRC) of South Africa commissioned a research survey of the 2011 integrated reports of the top 100 companies listed on the JSE. The objective was to examine the status of integrated reporting in South Africa given that most listed companies have produced at least one integrated report with many releasing their second. The research survey was undertaken by the College of Accounting at the University of Cape Town.

 

Professor Mervyn King, the chairman of the IRC, says that the uptake of integrated reporting in South Africa is very encouraging and that South Africa can be proud that it is leading the world in this area. “Integrated reporting is designed to give a better and more holistic view of a company than historical financial statements alone. An integrated report shows the connections and inter-relatedness between a company’s strategy, essential resources and stakeholder relationships, risks and opportunities, performance and its future outlook.”

 

The research found that 78% of the companies had changed the name of their annual report to ‘integrated report’. Dual listed companies, in general, did not call their reports ‘integrated’, but many included integrated information. Five local companies continued to call their report an annual report.

 

Of the companies that produced an integrated report, 60% included a statement that the report had been endorsed by the board, although in many cases this endorsement should have been given more prominence in the report given its importance.

 

The research found that most companies (82%) have not yet availed themselves of the Companies Act concession to publish summarised financial statements, opting to include the full annual financial statements in their reports. This is expected to change, though, as some companies have been held back by the necessity to change their founding documents to allow for summarised financial statements.

 

There is a wide range in the length of the reports. The longest was 456 pages and the shortest was just 46 pages, with the average being 179 pages. The average length of the reports of the 18 companies that included summarised financial information was much shorter at 124 pages. The length of the summarised financial statements ranged from one page (both Kumba Iron Ore and AngloGold Ashanti) to 34 pages (Imperial Holdings) with the average length being 11 pages. This should be compared to the average length of 70 pages for the full annual financial statements.

 

40% of companies make reference in their integrated reports to the availability of detailed sustainability information that can be found either in a separate publication or online. This approach goes some way to achieving the desired conciseness of an integrated report. An area that is crucial to achieving a concise report is the company’s determination of materiality. This aims to ensure that only information important to an assessment of how the company made its money and its ability to sustain value creation is included in the report. These are crucial factors in deciding what information should go into the integrated report or should rather be included in one of the more detailed topic-specific reports. Only eight companies explained their materiality process in their reports.

 

The research found that a wide diversity exists in the nature of the integrated reports. While guidance is available there appears to be some confusion on the shape and format of an integrated report. In January 2011, the IRC issued a discussion paper on a report framework. This paper fed into the discussion paper issued by the International Integrated Reporting Council (IIRC) in September 2011. A final framework is expected from the IIRC in late 2013, with a draft framework being issued early in 2013 which will be open for public comment. The IRC has said that its future local guidance will be in line with that of the IIRC.

The researchers found that while the vast majority of companies switched to calling their reports ‘integrated’, this did not necessarily mean that the report complies with the principles of integrated reporting or that the company practises integrated thinking (connecting financial performance to the key non-financial drivers, for instance natural resources and employee stakeholder relationships, on which the performance depends).

Some of the companies stated in their reports the benefits they had received from integrated reporting, including:

• Santam integrated report 2011

“Integrated reporting has improved our awareness of the opportunities for stakeholder engagement that could benefit the business and contribute to sustainability.” 

 

The research survey made no attempt to evaluate the quality of the 2011 integrated reports issued by the listed companies.

As the 30 September 2012 deadline granted by the Estate Agency Affairs Board (EAAB) for Estate Agents to file their audit reports draws closer, the South African Institute of Chartered Accountants (SAICA) is reminding auditors that it's their duty to report any reportable irregularities that they might encounter when conducting the audits.

Ashley Vandiar, Project Director: Assurance at SAICA warns that failure for the Estate Agent to have both trust and business accounts audited would result in a contravention of Sec 29 of the Estate Agents Act.

"The Act simply states that both the business and trust accounts of an Estate Agent need to be audited. Yet, for an unknown reason, this is not being practiced. Estate Agents only submitted their trust accounts to be audited and not their business accounts. The EAAB is now enforcing this legislative requirement."

It is important to note that this is not new and the legislation did not change. The requirement has always been there but it has unknowingly been overlooked by both Estate Agents and their respective auditors. This wrong doing would constitute to a malpractice which could mean a reportable irregularity has taken place.

Auditors are regulated by the Auditing Professions Act (APA) who define reportable irregularities as "any unlawful act or omission committed by any person responsible for the management of an entity, which has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity; or is fraudulent or amounts to theft; or represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or the conduct or management thereof".

Vandiar confirms that the decision not to have the business account audited would mean that it is an unlawful act committed by management. The auditor must apply professional judgement and evaluate if a reportable irregularity needs to be reported.

"I would like to caution auditors who are aware that their Estate Agent clients only have their trust accounts audited and not their business accounts, to carefully consider whether or not a reportable irregularity has occurred and if so, to follow the duties placed on them in terms of the APA.

"I would like to bring their attention to Section 52 of the APA that states that any auditor who fails to report a reportable irregularity would be guilty of an offence and that under this section, he/she could face a fine, imprisonment not exceeding 10 years or both."

When conducting an audit, auditors are required to constantly consider and evaluate management's integrity as this would increase the risk involved in the audit and will affect the reliance that can be placed on management. Knowing of management's decision to not comply with Section 29 of the Estate Agents Act should be factored into the assessment of management's integrity as the management of the client is knowingly choosing to not comply with legislation.

Companies Act relating to Estate Agents Act

Vandiar observes that many Estate Agents are also getting confused with the requirements of the Companies Act because, while under the provision of the Companies Act, some of these Estate Agents may qualify for an independent review, the Estate Agents Act requires an audit. As such, Estate Agents who are defined as companies would need to comply with requirements of both the Companies Act and the Estate Agents Act.

While Section 5(4) of the Companies Act addresses clashes with the provisions of the Companies Act and any national legislation, "I would like to confirm to Estate Agents and auditors that the audit requirement in terms of the Estate Agents Act is not in conflict with the Companies Act. It just places a more onerous requirement on such companies," advises Vandiar. As such, by having trust and business accounts audited, Estate Agent companies would be able to comply with both the Companies Act and the Estate Agents Act.

"Should Estate Agencies not lodge the 2012 audited business and trust account financial statements, the EAAB will not renew estate agencies and principals Fidelity Fund Certificates for 2013, which are essential to conduct business. On the other hand, auditors who fail to report reportable irregularities could be guilty of an offence and punished accordingly." concludes Vandiar.

A global outcry against high executive pay packages has put remuneration under the spotlight.

The real question is whether we are paying executives for a job well done, not whether we are paying them too much.

Economic Development Minister Ebrahim Patel, supported by the trade unions, is committed to levelling pay from lowest to highest paid workers, and has suggested putting a cap on executive pay. Much has been made of the Gini coefficient, the income ratio measuring the disparity in pay between highest and lowest paid employees. This is not the right yardstick for determining salary structures.

Companies need to pay top executives for performance. The challenge is: What key drivers are we measuring and how do we measure them? We need to measure performance that guarantees the viability of the organisation in the long term and doesn't simply focus on short-term profits.

Bad leaders can inflict untold damage on an organisation, damage that often manifests itself only long after the executive has left the building. If a CEO delivers solid profits, develops skills and safeguards the future of the company – why should he not get a top package?

Too often, however, there is an adverse relationship between executive remuneration and company performance. We need to reward the right drivers. Instead of the relentless pressure on short-term performance and bottom-line profit, we need additional focus on issues such as safety, welfare of employees, skills development and the long-term sustainability of the company.

In countries across the globe, from the US and the UK through Australia and Japan to South Africa, there have been shareholder revolts over pay increases in the private sector. However, it's not clear yet whether shareholders are taking more accountability and showing a greater commitment to the business, or are simply continuing to demand quick returns, measured in quarterly or six-monthly financial results, in which case any reduction in executive pay could result in increased shareholder profits.

In the UK, pending legislation gives shareholders considerable power. It proposes that shareholders should have an annual binding vote on a company's remuneration policies. These include composition and pay levels for each director, how proposed pay structures reflect and support company strategy, what the performance criteria are and how performance will be assessed. Investors want to know how their money is being spent. Creating a direct link between business strategy and reward is a positive step.

According to the 2012 PwC Executive Directors Remuneration Report, the median increase in the past year for total guaranteed remuneration for executive directors of JSE-listed companies was between 6% and 8% – in line with or slightly higher than the inflation rate.

"This reflects the stringent economic conditions that businesses have faced," says Landelahni director Alan Witherden. "However, bonuses seem to be out of proportion and not commensurate with responsibility and long-term achievement.

The new Companies Act and King III have increased the say of shareholders on how the board rewards company executives, but it is still too early to tell whether this will address golden parachutes, guaranteed bonuses or pay for failure.

We have seen some cases of deferred pay and bonuses as a consequence of non-performance. The question is why is the board awarding them in the first place?

Business Unity SA recently announced it is compiling a code of conduct on remuneration and labour practices that will include 'sacrifices by management'. If management is performing above par, it should receive its due reward. However, if Busa's code of conduct establishes some benchmarks regarding remuneration, that could be very valuable.

In the face of growing scrutiny, transparency around reward policies – particularly in regard to awarding bonuses against performance – is critical.

Ultimately, remuneration levels are market related. Despite the recession, the global shortage of highly-skilled leaders is driving up demand. We are looking at an international market where pay levels far exceed those in South Africa. Let's not drive away SA's scarce leaders and curtail our ability to attract the best talent by putting an artificial cap on earnings.