Private companies that are owner-managed no longer need to be audited.
This is according to Professor Geoff Everingham of UCT, co-author with Bowman Gilfillan corporate lawyer Carl Stein of The New Companies Act Unlocked, who adds: “The purpose of an audit is to protect the interests of shareholders. But when the shareholders also manage the company and sit on its board, that protection isn’t really needed. It makes good sense to lift the legal requirement that such companies be audited every year.”
But, warns Everingham, there are some tricky questions of interpretation. “In practice many companies have a trust as a shareholder, typically a family trust. Does that mean the company must be audited? Ultimately this will have to be tested in the courts
Everingham says that a desire for greater disclosure and transparency is a general theme in the new Act.
“The requirement now is that if you do have an audit, you must file the financial statements with the Companies Commission and any member of the public may have the right to access this information. This creates a huge incentive to companies not to have their accounts audited if they can, so in some ways the provisions are counter-productive.”
Other significant changes in the new Act include a provision that public companies may issue summarised annual financial statements. “This will save a lot of paper,” says Everingham. “Instead of having to send a 300-page annual report to every shareholder, public companies can now send a summary statement in electronic form with a link to further information.”
The problem, adds Everingham, “is that nobody knows quite what is meant by summarised financial statements. In practice that means there is going to be some variety in what companies’ issue and it will take some time for a common best practice standard to emerge.”
He does note, however, that “the quality of financial reporting in South Africa is actually quite exceptional on a global scale. We are in the forefront when it comes to integrated reporting of financial, environmental and social results. So we already have a mindset where listed companies strive to produce a really useful annual report; that isn’t going to change.”