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1 Presented by: Henk Heymans, Managing Director of Probeta Accountancy Development Web: Tel: (011) , Twitter: Owner managed companies must be audited if the public interest score is between 100 and 349 and financial statements are internally compiled. What constitutes financial statements? Is it a trial balance or a balance sheet and income statement or a complete set of financial statements? Section 29(a) of the Act says that what constitutes financial statements is as it is defined in the applicable reporting framework. I.e. if you use IFRS, a complete set of financial statements is as defined by IFRS. If it is IFRS for SMEs, you look at that definition for what would constitute a complete set of financial statements. I have read the whole act and realise that the South African dream of increasing a number of Qualified Chartered Accountants will be shattered with this new Company's Act because small and medium Audit Firms are going to have less audit= less revenue and less audit clerks will be employed / even retrenched for that matter. What s your take on this, are we not going to loose our jobs as clerks. Don t you think this new act will increase unemployment and less CAs? I think this is one of the reasons why SAICA has introduced the new 2010 training model. They realised that not enough CAs(SA) will be trained through the auditing route, therefore other elective routes were made available. Is it going to e more beneficial for a person to have SAIPA in South Africa because of this new Act. I know SAICA is higher but with the new act, many companies will use SAIPA members to have their financial statements done because is cheaper than using a CA SAIPA/CIMA/SAICA. which one will be in demand the most? Your question about SAIPA/CIMA/SAICA is a difficult one to answer because we simply don't know what the market will require. Remember that companies with Public Interest scores still have to be reviewed by Registered Auditors and at the moment those have to be CAs(SA). What is the feeling about companies that don't require an audit under the new act, but we still have to do audits for the Feb2011 year ends? this feels like a complete waste of time and money The new Act is effective from 1 May All year-ends until and including 30 April 2011 still have to be audited, thereafter companies can change to reviews or nothing at all if they qualify. Unfortunately there is no "retrospective" application so some may consider it a waste of time. Most financial statements are prepared on caseware belonging to the audit firm. Can you confirm that this way of producing the financial statements does not disqualify the auditor? If the auditor prepares the financial statements on CaseWare, i.e. imports the TB, does the mapping and switches on or off the notes and accounting policies I believe the auditor prepared the financial statements.

2 Its says in para 90 (1) that if we have been involved in the preparation of the financial statements at any time during the past 5 years then we are not allowed to accept the appointment of auditor. What does preparation mean and does this purely relate to the audit partner or the firm as a whole. Our client prepared up to trial balance level and we would draft the annual financial statements in accordance with IFRS. To my knowledge there is no definition of "prepare" in the Act. We looked at the standard for compilation engagements as an indication and it appears that it may include everything from actually passing some closing entries through to almost just printing those financial statements. We are allowed to start measuring from 1 May So you can do the audit this year if you prepared the financial statements last year, but obviously not after that. Are banks still going to require audited annual financial statements if the a private company is applying for a loan?/ they will need a reviewed once. Is it not going to be beneficial to a company is it continues to be audited that avoiding an audit It appears that at the moment banks will still continue to require audited financial statements but that obviously depends on a lot of other things, such as the security, amount of the loan, the bank's own policies, etc. In time they will probably accept reviewed statements also for certain facilities. What is the effective date of the regulations, other than being 1 May In other words, can I apply the new regulations to year ends of say 28 Feb 2011 or before The regulations only came into effect when the Act came into effect, legally they couldn't exist before that date. A subsidiary of a listed company is non-owner managed and have a public interest score of less than 100 points. Therefore the company must be reviewed. IRBA requires a firm inspection (quality control review) for this company. If this company do not have to be audited, will IRBA still do a firm inspection? IRBA can only inspect firms in so far as they do audit work and the regulations state specifically that a review is not the same as an audit. Regulation 26(1)(d) refers to "person" in the definition of Independent Accounting Professional - does it refer to practice or individual? SAICA's interpretation is that Regulation 26(1)(d) applies to the individual and not the firm. Just remember then that both individuals have to qualify as independent accounting professionals, so they must be members of the appropriate bodies.

3 When do the Financial Reporting Standards as per the Companies Regulations, 2011 become effective? Regulation 27(5) states: The Financial Reporting Standards prescribed by this regulation apply to every company with a financial year end starting on or after the effective date of the Act. Therefore Companies (and CC's) whose financial years start after 1 May 2011 (year end of 30 April 2012) will have to apply to prescribed Financial Reporting Standards to the end of the 2012 financial year. However - the Companies Amendment Act, 2010 states that:- 1. If immediately before the effective date a pre-existing Company has passed its financial year but has not completed the requirements in terms of the pre-existing Act for publishing, audit and approval of its AFS for that financial year: a. The provisions of the previous Act will continue to apply with respect to the publishing, audit and approval of those statements; b. The provisions of the new Act will apply to each subsequent financial year end and AFS of the company; The Companies Amendment Act reads differently and implies that where a financial year end falls after 1 May 2011 (i.e. year end 31 May 2011) the Company will be required to apply the Public Interest Score Test and possibly be audited or independently reviewed. Regulation 27(5) applies only to the financial reporting standards being used, not to the rest of the act or regulations. There is therefore no contradiction between the Amendment Act and the Regulations. Could you provide a bit more clarity on how you see the exemption in section 30(2A) of the Act applying to companies and CC's with a family trust as the sole shareholder/member, particularly from the point of view where the trust's beneficiaries are mom, dad and 3 minor kids. Does the fact that the parents are the guardians/representatives of the minors until they reach emancipation age sufficient to qualify the company/cc for this exemption so long as both parents are also directors. Please respond both from company and CC point of view. SAICA has obtained a legal interpretation, which we haven't seen yet, that a company or CC that is held by a trust will still be exempt as long as one of the trustees is a "professional trustee", i.e. someone that does it as part of his/her business, like an accountant, auditor or attorney. If a company is exempt from an independent review in terms of the shareholding criteria etc Sec 30 (2A). Do they compile AFS as if it were a compilation report? Presently there is no requirement for independent compilation, but if the financials are not independently compiled and the company is not owner managed and the score is over 100 you don't qualify for a review and have to be audited. So, in a way independent compilation is strongly encouraged for some entities. Does reviewing and reporting under the New Companies Act using the IFRS approved format also means that the reviewer must be conducting his review under the ethical requirements applicable to members of SAICA and IRBA? The ethical requirements for a review would be the IESBA's requirements. If you are also a member of SAICA, IRBA, CIMA, etc. you have to apply their requirements as well.

4 Do the exemptions re the preparation of the financial statements, reviews etc apply regardless of what the scorecard indicates? The exemptions are subject to the scorecard in one respect only: If the score exceeds 350 the company has to be audited regardless of anything else. So if there is only "Reviews", is there an independent regulator that will inspect your review working papers, and the financials? At the moment the regulator for reviews is the dti. Remember you are also subject to your own professional body's requirements so SAIPA may start inspecting its members, SAICA its own, etc. It is their prerogative, but their IFAC membership compels them to do some form of monitoring. Could you provide some clarity on the submission of annual returns insofar as which revenue figures need to be used. If the company's year end is 28 Feb 2011 and annual return anniversary date is 30 April 2011, it is highly unlikely that financials for 2011 will have been finalised yet, so is it acceptable to submit 28 February 2010 revenue figures? Regulation 30(2) refers to the "latest" approved financial statements, so 2010 will then be acceptable in your example. When you say the reviewer cannot be the one that prepares Financial Statements, does that mean that one partner in a firm can prepare the AFS and another partner review? It is SAICA's interpretation that one partner in a firm can prepare the financial statements and another partner can review it. With most questions posed so far, it seems that the main uncertainty revolves around the prohibition to perform accounting (incl tax & preparation of financial statements) as well as the review function. This appears to have adverse practical implications. In your, opinion, what are the chances of these prohibitions being amended, or alternatively what are the chances of the new legislation being practically accepted I can also only speculate on the chances of this legislation being amended. Personally, I expected a legal challenge shortly after Easter but to my knowledge nobody is considering it yet and everyone seems to be accepting it. I have heard rumours but also no confirmation that any of the professional bodies will be challenging it yet. At the moment everyone is just struggling to understand this. Will a CC (with PIS < 100 and FS independently compiled) now be required to comply with IFRS for SME's where in the past, no reporting framework had to be complied with? That CC can use IFRS or IFRS for SMEs or SA GAAP (which is essentially the same as IFRS!)

5 Are you aware whether the RFfNPE project is now continuing and whether we can expect this micro- GAAP to be available for use any time soon? Also, has there been any indication whether South Africa will early adopt the exposure draft version of ISRE2400? The RFfNPE project is continuing and the next version will be sent out shortly. If a person is currently registered with SAIPA. What additional registration requirements should be complied with in order to qualify for performing review engagements The Act does not prescribe additional registration requirements for SAIPA members, but SAIPA themselves require their members to comply with certain additional requirements. I am not completely familiar with that but I know there is a course and some form of assessment involved. You can ask SAIPA directly. All future shares do not have par values. So all shares issued would be the value paid. There is therefore no share premium account any longer. According to the Companies Act 1973, shares may be issued at a premium and at any time during the life of the company, such premium may be repaid (obviously if the company is solvent and has ample liquidity) by simply passing special resolution at special general meeting of shareholders to repay the share premium account to shareholders and this repayment of 'capital' does not have to go through the process of application to the High Court for a capital reduction ito the old Act. what is the position with the new Act in this respect? I can't see anything in the transitional arrangements about pre-existing share premium accounts. But from reading schedule 5 I guess that the requirements of the 1973 Companies Act will continue to apply with respect to these shares. Again, somebody with a better legal background can probably correct me. With regards to the owner managed concept, S30(2)(ii)(bb) provides that every person who has a beneficial interest in the Company must be a director of that Company. It does not state that every director must be a shareholder of that Company. Would you agree that owner-managed companies can appoint other directors who do not hold shares in the Company? I agree with your statement that owner managed companies can appoint directors that are not shareholders without losing their exempt status. When calculating the Public Interest Score, does one count the beneficiaries in a discretionary Trust or are only the trustees counted? The calculation of the public interest score refers to all holders of beneficial interests in the company's issued securities, so I assume you have to include all beneficiaries with vested interests. But I may be wrong, does anyone else know if it has to be a vested interest before the beneficiary is counted?

6 What are the reporting requirements of companies/cc's scoring less than 100 points? All companies (and ccs) must prepare financial statements, but if they score less than 100 points and compile their own financial statements there are no reporting standards prescribed at the moment. If their financial statements are independently compiled they must use IFRS, IFRS for SMEs or SA GAAP. If a company has to be audited (more than 350) or voluntary audited, must such a company in both instances then comply with the King Code? Compliance with the King Code is recommended but only compulsory for listed entities. However, remember that a lot of King's recommendations were included in the new Chapter 3 of the Act. Chapter 3 applies to all companies that have to be audited, but some parts don't apply to private companies. If a trust is the sole member of a CC or the sole shareholder of a company and the trustee the director, will the exemptions still apply? I think your question regarding the trust being the sole shareholder is probably the same as above - if the trustee is a "professional trustee" the company is still exempt. Remember the part about sole shareholders that was in s30(2)(b)(ii)(aa)(aa) has now been deleted. Please advise notice period required to amend directors of non-profit company. Can this be done electronically? The meeting for amending directors - would this be an ordinary meeting of directors. Can this be adopted electronically and if so will CIPC accept copies of s for effecting amendments? The questions about secretarial don't relate to reporting specifically and in the interests of those who joined us to ask about reporting I am going to leave the questions about appointment of directors. Tickmarkers will be scheduling other sessions for those aspects of the Act that we don't cover here. Thank you for the questions anyway, if in doubt just ask the question! Where a Company has not yet removed the audit requirement in its current Articles of Association (not yet converted to MOI), does it automatically default to the more onerous compulsory audit or can it pass a resolution after the year end to opt for the voluntary audit? I think it automatically becomes a voluntary audit by virtue of the fact that the audit is not prescribed by the Act but the company has chosen to be audited. When in doubt I would still recommend that they publish an amended MOI, which they can do for two years without incurring any fees.

7 Could you please confirm my understanding that only those companies that must have a mandatory audit are expected to comply with the requirements for audit committee, company secretary, preparation of AFS within 6 months of year end date, audit partner rotation, etc? In other words, companies that voluntarily opt to be audited do not need to comply with these requirements. I agree with your interpretation regarding audit committees, etc. These requirements are all found in Chapter 3 which only applies in certain circumstances. I have heard contradictory views, but this sounds right to me. In calculating the public interest score - only the beneficiaries that have vested interest are counted. Vested interest: the last presentation I attended it was stated that the interest had to vest before it could be counted as a beneficial interest in the companies securities. Does one count the Trustees then, seeing as you can only count natural persons? I would think the Trustees certainly have a beneficial interest, as they are the ones who have a fiduciary duty to uphold. That is a bit of a legal question but I don't think you count the trustees because they don't have a "beneficial interest". Please correct me if someone is more certain of trust law than I am. Under the new Companies Act, is a CC regarded as a company for financial statement purposes? Yes, CCs are brought into the Companies Act for financial reporting purposes. I also understand that the references in the Act to SA GAAP has been made specifically to cater for the RFfNPE when this becomes effective, is that correct? I also think they were trying to refer to RFfNPE but in that case they got it horribly wrong! An amendment will be necessary if this is what they meant. Fortunately an amendment to the Regulations can be made by the Minister and it doesn't have to go through the whole Parliamentary process. Not really a reporting question but since things have quietened down a bit, your thoughts on liability of auditors in terms of the new Act? At least you have someone to share the liability with, now that preparers of financial statements are also liable :) But seriously, although the legal principles around auditor liability haven't changed (yet) I can see a couple of potential problems. For example, how do you report an irregularity if you have only done a review and not an audit?

8 If I understand it correctly, in terms of Regulation 29 the Reviewer must now report a reportable irregularity to CIPC. Yes, reviewers must report irregularities. It is similar to the requirement in the Auditing Professions Act but slightly different in some respects. Are all intra-group loans void with effect from 1 May 2011? If yes how can this be rectified? Paragraph 11 of schedule 5 specifically says that these loans will still be valid. What about existing closed corporations? Does this mean that after 30 April 2012 there will be no more accounting officers reports? The question about accounting officers reports is one we have also been grappling with. I couldn't see any place where the requirement to have an accounting officer's report was removed. If I am wrong, please correct me, but in the mean time we have the ridiculous situation where some CCs have to get review reports as well as accounting officer's reports. However, if it is the case I am sure it is just an oversight and will be corrected soon, which means that the last accounting officer's reports would be dated 30 April 2011 (not 2012). If in a group structure some of the subsidiaries and possibly the holding company qualify for reviews etc and not audits, will we still be required to perform audits on these entities for consolidation purposes, especially where the consolidated group would qualify for an audit? Your question is an auditing one rather than a Companies Act one. Here you will need to look at the new ISA 600 which requires that some components will need to be audited. But that depends on the significance and risk attached to the specific component. All companies with a PIS of more than 350, the auditor cannot provide advisory or tax services. Is this correct? And can audit firms still be the company's secretary? The auditor can provide advisory, tax and secretarial services but not accounting work (section 90(2)) And just to clarify my previous answer, most secretarial work would be allowed but the secretarial work relating to the maintenance of the accounting records is not allowed. We need to wait to see exactly what this means, maybe all secretarial work could be excluded? But I don't think so. Would you agree that where one partner heads up the audit of a company required to have a compulsory audit (and is therefore precluded from providing value added services to that same company), that another partner in the same firm can be responsible for the same client's accounting, taxation and secretarial services? I would be concerned if the second partner provided accounting services because the firm is appointed as auditor, not the partner. The other services should be OK, but not the accounting work.

9 If the company wants to be voluntary audited, can we then do accounting work? Yes, voluntary audits are not included in Chapter 3 so you can do the accounting work and prepare the financial statements. Remember the ethics code still applies as it always did. Doesn't s90(2)(b)(iv) also preclude the auditor from performing secretarial work? It depends how you interpret the word "related". Is it related to the accounting work or anything related to the company? I used the former interpretation in my answer above.