Changes to Companies Act have profound implications

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Section 90(2) of the Companies Act 2008 states that an auditor engaged to perform a statutory audit of a company or a close corporation may not provide certain non-audit services to the same client. Work previously done by the auditor will now have to be referred to accountants. This law became effective on 1 January 2014.

Wendy Smith, director of Accounting and Financial Advisory at Deloitte, explains that the implementation of Section 90(2) will have a significant impact on the auditing profession and auditors will be required to evaluate their own independence in terms of the legislation before accepting an appointment. The Independent Regulatory Board of Auditors (IRBA) will rely on the integrity of the auditor, but will monitor compliance and, if a breach is suspected, will instigate disciplinary proceedings.

This prohibition applies to all companies who are required to be audited in terms of the Companies Act (statutory audit), as well as companies whose Memorandum of Incorporation specifically requires an audit. Heads of finance may be well advised to engage the services of independent professionals - other than their own auditors - who have the necessary technical knowledge and skills and are up to date with International Financial Reporting Standards (IFRS).

Outsourcing is recommended

"The SA Institute for Chartered Accountants as well as IRBA have made it clear that, in terms of Section 90(2), auditors may recommend adjusting journal entries or suggest improvements to financial statements, but are not permitted to prepare income statements, balance sheets, cash flow statements or notes to the financial statements," says Smith. "Furthermore, no firm or person may be appointed as a company's auditor if they have been involved in the preparation of the company's financial statements five years prior to their appointment as auditors."

For their part, heads of finance are advised to outsource the compilation of their financial statements to an independent firm or undertake the job themselves. The latter is a daunting option in view of the time pressures typically encountered at year end by finance teams and the constant need to remain up to date with IFRS amendments.

"My advice would be to look for a firm who has the resources and technical knowledge to develop a comprehensive project plan, manage the receipt of data from various sources and facilitate the query resolution process between client and auditor. Few finance teams have the resources to ensure consistency in preparing annual financial statements, which is all the more reason to appoint an independent firm," concludes Smith.