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Bodies disagree on removal of audit requirement
SA’s accounting and auditing regulators are at loggerheads over proposed changes contained in the new Companies Act that will see the audit requirement for the financial results of smaller businesses done away with.
The proposals will see independent professional accountants — who the South African Institute of Chartered Accountants (Saica) says should be “self- regulated” — now reviewing the financial statements of small companies. On the other hand, the Independent Regulatory Board for Auditors (Irba) says “self-regulation is no longer acceptable in terms of international trends” and that Irba has the experience and infrastructure to assist with regulation.
The proposals contained in the new Companies Act introduce a new report to be issued on the financial statements of smaller businesses by independent professional accountants.
The report, which is called an independent review, is an alternative document to the traditional audit report issued by a registered auditor.
Bernard Agulhas, CEO of Irba, says professionals such as auditors registered with the regulatory board are qualified to carry out the review process. “If other players enter the market, this will increase competition, which is not a bad thing if we want to maintain standards and ensure high quality assurance services,” he says .
He also says the proposals have yet to lay out the standards and qualifications of those who may carry out the review process. “We still have yet to see the detail,” he points out.
“It’s vital that the public is still able to have confidence in the financial statements of private companies.
“If (we are to be the appointed regulator), we will have a different level of regulation than for auditors, without compromising standards.”
However, Ewald Müller, senior executive of standards at Saica, says an independent review is not in the “public interest” if there is regard for the provisions contained in the new legislation. “The objective of the Companies Act is not to push up the costs of compliance, and regulation will do that,” Mr Müller insists.
Mr Agulhas says the removal of the audit requirement is likely to have an effect on the training ground for future auditors. This is because some accountancy firms may find a decrease in their audit business.
There are about 4500 auditors in SA. As it is, that pool of professionals has been stagnant for some time, he says.
Mr Agulhas says mid-tier and smaller firms may also be affected by the removal of the audit requirement of private companies. “However, as a business, they need to be responsive to the changes and adapt accordingly.”
John Spencer, chairman of BDO Spencer SA, says that mid- tier firms need to look again at their business advisory models in the wake of the proposed amendments. “Mid-tier audit and accounting firms need to grab the bull by the horns — it is a very exciting time.”
Kariem Hoosain, a director at Mazars, says the proposed legislation could have an effect on the audit fee by at least 50% on the smaller firms.
However, it is unlikely to affect those companies that have funding vehicles in place such as private equity, as the banks still require an audit to be carried out, Mr Hoosain says.
Andrew Hannington, a director at PKF, says there may be more consolidation in the market as a result of the proposals.
There are about 450000 private companies and 2-million close corporations in SA.
Recent regulations in the Companies Act provide that owner-managed companies (close corporations) are not required to be reviewed or audited. However, these regulations are contrary to the wording of the legislation, says Mr Müller.
He says there may well be more audits of companies in the future if the government introduces thresholds relating to company turnover, assets, employees or even liabilities.
The law is expected to be implemented in the fourth quarter of the year.