The Companies Act

Audit requirement and

other matters related to
the audit

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The Act provides the Minister of Trade and Industry with The inclusion of size criteria will inevitably mean that a
As stated above, the Act requires public companies and large number of private companies will be required to
state owned companies to have an audit. In addition, have their financial statements audited. All companies
the Regulations, which provide for both activity and size with a public interest score of more than 750 will be
criteria to determine whether or not companies require audited. For those companies with a score below 350,
audited financial statements, require any company an audit will nonetheless be required if the company
that falls within any of the following categories in any meets the requirements of the activity test.
particular financial year to have its financial statements
audited: Independent review
(a) Any profit or non-profit company if, in the ordinary All companies that are not required to have audited
course of its primary activities, it holds assets in a financial statements must have their financial statements
fiduciary capacity for persons who are not related independently reviewed (with the exception of
to the company, and the aggregate value of such companies where all the shareholders are also directors
assets held at any time during the financial year and therefore are not required to obtain an audit or a
exceeds R5 million; review).
(b) Any non-profit company, if it was incorporated––
The Regulations propose that an independent review of
(i) directly or indirectly by the state, an organ of a company’s annual financial statements must be carried
state, a state-owned company, an international out ––
entity, a foreign state entity or a company; or
(a) In the case of a company whose public interest
(ii) primarily to perform a statutory or regulatory score for the particular financial year was at least
function in terms of any legislation, or to carry 100, by a registered auditor, or a member in
out a public function at the direct or indirect good standing of a professional body that has
initiation or direction of an organ of the state, a been accredited in terms of section 33 of the
state-owned company, an international entity, or Auditing Professions Act (SAICA is the only body so
a foreign state entity, or for a purpose ancillary accredited at the moment); or
to any such function; or
(b) in the case of a company whose public interest
(c) Any other company whose public interest score in score for the particular financial year was less than
that financial year is 100, by ––
(i) 350 or more; or (i) a person contemplated in paragraph (a); or
(ii) at least 100, but less than 350, if its annual (ii) a person who is qualified to be appointed as
financial statements for that year were internally an accounting officer of a close corporation in
compiled. terms of section 60 of the Close Corporations
Act, 1984.
Financial statements will be internally compiled, unless it
was “independently compiled and reported”. In terms of The effect of this Regulation is that only registered
the Regulations “independently compiled and reported” auditors and CA’s may perform an independent review
means that the annual financial statements are prepared of companies with a public interest score of more
• by an independent accounting professional than 100.
• on the basis of financial records provided by the
company, and
• in accordance with any relevant financial reporting
standards.

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The Companies Act is effective from 1 May 2011. We Public interest score
provide a high level overview of some of the provisions The Regulations require that every company calculate
pertaining to the audit requirement, independent its ‘public interest score’ for each financial year. In terms
review, the audit committee and the financial reporting of this requirement every company must calculate its
standards. ‘public interest score’ for each financial year, calculated
as the sum of the following:
Classifying a company (a) a number of points equal to the average of
The new Companies Act prescribes a certain level of employees of the company during the financial year
oversight and audit or review based on the classification (“employee”, has the meaning set out in the Labour
of the company. Not all companies are required to Relations Act, 1995);
have their financial statements audited. Also, of
(b) one point for every R 1 million (or portion thereof) in
those companies that should have audited financial
third party liability of the company, at the financial
statements, not all are required to have an audit
year end;
committee.
(c) one point for every R1 million (or portion thereof) in
Different forms of companies turnover during the financial year; and
The Companies Act (the Act) provides for a new (d one point for every individual who, at the end of
classification of companies. The classification of the financial year, is known by the company —
companies as either widely held or limited interest, as (i) in the case of a profit company, to directly or
introduced in the Corporate Laws Amendment Act, indirectly have a beneficial interest in any of the
is discarded in favour of a new classification. In terms company’s issued securities; or
of the new Act, companies are classified as either
(ii) in the case of a non-profit company, to be a
profit companies or non-profit companies. Non-profit
member of the company, or a member of an
companies, which are the successors to the current
association that is a member of the company.
section 21 companies, have to comply with a set
of principles set out in Schedule 1 of the Act. These
The company’s public interest score will be used to
principles relate mainly to the purpose or objectives and
determine whether or not certain companies will require
policies of the company, matters related to directors and
audited financial statements, which financial reporting
members, fundamental transactions and the winding
standards should apply, and who may conduct an
up of non-profit companies. Also, the Act exempts
independent review for those companies that are not
non-profit companies from certain provisions of the Act.
subject to the audit requirement.
With regard to profit companies, the Act distinguishes
Should the company have audited financial
between four different types of companies, namely:
statements?
• Private companies (Pty)Ltd: A company that is not The Act requires public companies and state owned
a state owned company, and its Memorandum companies to have audited financial statements.
of Incorporation prohibits it from offering any The Regulations set out additional categories of
of its securities to the public, and restricts the companies that are required to have their annual
transferability of its securities. financial statements audited, which are discussed
• Personal liability companies Inc.: The company and below. Notwithstanding the provisions of the Act and
the directors are jointly and severally liable for any the Regulations, the provisions of the Act related to
debts and liabilities of the company. mandatory audits will also apply to any company that
• State owned companies SOC Ltd.: An enterprise, voluntarily choose to have audited financial statements,
registered as a company, which is listed as a public and provides for this choice in the company’s
entity in Schedule 2 or 3 of the Public Finance Memorandum of Incorporation.
Management Act, or is owned by a municipality.
• Public companies Ltd.) A company that is not a
state owned company, private company or personal
liability company.

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Financial reporting standards
The Regulations prescribe the application of International Financial Reporting Standards (IFRS), International Financial
Reporting Standards for Small and Medium Enterprises (IFRS for SMEs) or South African Statements of Generally
Accepted Accounting Practice (SA GAAP) depending on the classification of the company.

State owned and profit companies

Category of Companies Financial Reporting Standard

State owned companies. IFRS, but in the case of any conflict with any requirement
in terms of the Public Finance Management Act, the
latter prevails.

Public companies listed on an exchange. IFRS.

Public companies not listed on an exchange. One of —

(a) IFRS; or
(b) IFRS for SMEs, provided that the company meets the
scoping requirements outlined in the IFRS for SME’s.

Profit companies, other than state-owned or public One of ––

companies, whose public interest score for the (a) IFRS; or
particular financial year is at least 350.
(b) IFRS for SMEs, provided that the company meets the
scoping requirements outlined in the IFRS for SME’s.

Profit companies, other than state-owned or public One of ––

companies –– (a) IFRS; or
(a) whose public interest score for the particular (b) IFRS for SMEs, provided that the company meets the
financial year is at least 100 but less than 350; or scoping requirements outlined in the IFRS for SME’s;
(b) whose public interest score for the particular or
financial year is less than 100, and whose (c) SA GAAP.
statements are independently compiled.

Profit companies, other than state-owned or public The Financial Reporting Standard as determined by the
companies, whose public interest score for the company for as long as no Financial Reporting Standard
particular financial year is less than 100, and whose is prescribed.
statements are internally compiled.

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Non-Profit Companies

Category of Companies Financial Reporting Standard

Non profit companies that are required in terms of IFRS, but in the case of any conflict with any
Regulation 28 (2)(b) to have their annual financial requirements in terms of the Public Finance Management
statements audited. Act, the latter prevails.

Non profit companies, other than those One of ––

contemplated in the first row above, whose public (a) IFRS; or
interest score for the particular financial year is at
(b) IFRS for SMEs, provided that the company meets the
least 350.
scoping requirements outlined in the IFRS for SME’s.

Non profit companies, other than those One of ––

contemplated in the first row above–– (a) IFRS; or
(a) whose public interest score for the particular
(b) IFRS for SMEs, provided that the company meets the
financial year is at least 100, but less than 350; or
scoping requirements outlined in the IFRS for SME’s;
(b) whose public interest score for the particular
or
financial year is at less than 100, and whose financial
statements are independently compiled. (c) SA GAAP

Non profit companies, other than those The Financial Reporting Standard as determined by the
contemplated in the first row above, whose public company for as long as no Financial Reporting Standard
interest score for the particular is prescribed.
financial year is less than 100, and whose financial
statements are internally compiled.

Transparency and accountability

The Act requires companies to adhere to a number of Enhanced transparency and accountability
measures to ensure transparency and accountability. Although all companies are subject to the general
These include requirements for a company to: all transparency and accountability requirements as set out
companies are required to: above, only certain companies are required to comply
• Have at least one office in the Republic, and to with the enhanced accountability and transparency
register the address of such office (or its principal requirements as set out in Chapter 3 of the Act:
office) with the Commission; • All public companies and state owned companies
• Keep certain records in written or electronic form for must appoint an audit committee and a company
a period of seven years; secretary.
• Keep accurate and complete accounting records; • All companies that must be audited (as discussed
above) are obliged to appoint an independent
• Prepare annual financial statements; and
auditor.
• Submit an annual return, including a copy of
• Any company that is not obliged to comply
its annual financial statements and any other
with these requirements may choose to include
prescribed information. The content of this return
the enhanced transparency and accountability
will be prescribed in Regulations to the Act.
requirements in its Memorandum of Incorporation.

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Audit committee The audit committee can consist of an unlimited
The King Report on Governance for South Africa 2009 number, but each member must meet the criteria in
(King III) emphasizes the vital role of an audit committee the Act and each member must be a director of the
in ensuring the integrity of financial controls and company. The audit committee would be entitled to
integrated reporting (both financial and sustainability utilise advisors and assistance from other persons inside
reporting), and identifying and managing financial risk. and outside of the company and would be able to
This sentiment is confirmed in the Companies Act. The invite knowledgeable persons to attend its meetings.
appointment of an audit committee is regulated as However, the formally appointed members of the audit
part of the enhanced accountability and transparency committee entitled to vote and fulfil the functions
requirements set out in Chapter 3 of the Regulations. of the audit committee will have to meet the criteria
Although the Companies Act only requires public (non-executive independent directors) in accordance
companies and state owned companies (as well as other with the prescribed requirements.
companies that voluntarily include this requirement in
their Memorandum of Incorporation) to appoint an In this regard, cognisance should be taken of the
audit committee, King III proposes that ALL companies position of shareholders as potential members of
should have an audit committee. the audit committee. The Act makes no reference
to shareholders, and the value judgement pertaining
The Companies Act determines that the audit to independence relates only to suppliers and
committee for public companies and state owned customers. The mere fact that a person holds shares
companies must be appointed by the shareholders in the company (or meets any of the other factual
at every annual general meeting. This requirement tests such as being related to a supplier) would not,
highlights the importance of the Board’s nomination on its own, preclude such a person from serving on
committee. As all audit committee members must be the audit committee. It is proposed that, in line with
directors (members of the Board), it is important that the best practice principles set out in King III, the
the nominations committee identifies suitably skilled and appointment of shareholders to the audit committee be
qualified individuals to nominate for appointment to carefully considered. A judgment on the effect of the
the audit committee. Of course, the shareholders may shareholding or other relationship is required in order to
appoint anyone they deem fit and proper. establish the likely factual impact on the independence
of a particular person.
Section 94 of the Companies Act determines that the
audit committee must consist of at least three members The legislative duties of the audit committee include:
who must be directors of the company and not: • Nominating an auditor that the audit committee
• Be involved in the day to day management of the regards as independent;
company for the past financial year; • Determining the audit fee;
• Be a full-time employee for the company for the • Ensuring that the appointment of the auditor
past 3 financial years; complies with the Companies Act and other relevant
• Be a material supplier or customer of the company legislation;
such that a reasonable and informed third party • Determining the nature and extent of non-audit
would conclude in the circumstances that the services;
integrity, impartiality or objectivity of that director is
• Pre-approving any proposed agreement with the
compromised by that relationship; and
auditor for the provision of non-audit services;
• Be related to anybody who falls within the
• Preparing a report to be included in the annual
above criteria.
financial statements describing how the committee
carried out its functions, stating whether the auditor
The requirements of section 94 are prescriptive. If the
was independent, and commenting on the financial
company appoints an audit committee with persons
statements, accounting practices and internal
other than those prescribed, it would not be an audit
financial control measures of the company;
committee as required by the Companies Act. As a
result, any functions undertaken by a non-compliant • Receiving and dealing with relevant complaints;
(that is an “incorrectly constituted”) audit committee will • Making submissions to the board regarding the
be regarded as not performed by the audit committee company’s accounting policies, financial controls,
as required by the Companies Act. records and reporting; and
• Any other function designated by the board.

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Since the Act prescribes the appointment process, Ethical leadership and social responsibility is highlighted
composition and functions of the audit committee, it in King III. These same sentiments are echoed in
can now be described as a statutory committee. The the Companies Act. Although it may be argued that
audit committee will bear sole responsibility for its the provisions of the Companies Act are onerous
decisions pertaining to the appointment, fees and terms and prescriptive, it should be acknowledged that the
of engagement of the auditor. On all other matters it intention is for the audit committee to play a key role
remains accountable to the board and, as such, it will in ensuring accountability and transparency. As an
function as a board committee. independent, objective body, it should function as
the company’s independent watchdog to ensure the
An interesting development is the fact that the audit integrity of financial controls, combined assurance,
committee is now obliged to also report to shareholders. effective financial risk management, and meaningful
The audit committee will report to shareholders by integrated reporting to shareholders and stakeholders
including the audit committee’s report in the annual alike.
financial statements. The report should describe how
the committee carried out its functions, state whether
the auditor was independent, and comment on the
financial statements, accounting practices and internal
financial control measures of the company.

In addition to the legislative duties set out in the Act,

King III proposes a number of additional functions,
including:
• Overseeing
- Financial risks and reporting;
- Internal financial controls;
- Fraud and IT risks as they relate to financial
reporting;
• Ensuring that a combined assurance model is
applied to provide a coordinated approach to
all assurance activities (in terms of this model,
assurance should be done on three levels, i.e.
management, internal assurance providers and
external assurance providers);
• Overseeing integrated reporting (both financial and
sustainability reporting);
• Satisfying itself with regard to the expertise,
resources and experience of the finance function;
• Overseeing the internal audit function;
• Playing a key role in the risk management process;
and Queries:
• Overseeing the external audit process. Dr Johan Erasmus – jerasmus@deloitte.co.za

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