SOUTH AFRICA: Greater burden for CCs – but not all doom and gloom

Issued by on behalf of Ewald van Heerden, partner at global audit, tax and advisory firm Mazars

You may need to comply with new requirements depending on your public interest score.

Now that the new Companies Act is effective, existing close corporations (CCs) need to comply with a number of new additional reporting requirements which, depending on their public interest score*, may include audits or independent reviews.

Many experts speculated that the Act would see the end of CCs, but few predicted it would keep current ones in existence, but increase the burden of regulatory requirements. Yet this is exactly what happened.

Effective from May 1 2011, the Act has a number of sections that apply to CCs. The major ones relate to the financial statement requirements, people excluded from management and the business rescue provisions.

The requirements related to the financial statements are likely to have the greatest impact on a number of businesses.

Depending on their public interest score*, CCs are now required to have an independent review or audit for financial years ending on or after 1 May 2011. However, they’re exempt from the review if everyone with a beneficial interest in the CC is also a director. As this will usually be the case, they’re unlikely ever to be required to have an independent review.

CCs with a public interest score between 100 and 350 that compile their own financial statements, and all CCs with a public interest score of 350 or more, must be audited.

CCs will have to apply prescribed financial reporting standards unless they have a public interest score under 100 and compile financial statements internally. They can still choose between IFRS and IFRS for SMEs. Those that compile financials internally and have public interest scores under 100 can apply any financial reporting standards, as they do now.

This could mean that certain CCs will be in for extra costs, and some may even have to modify their accounting systems so that the right information is available to comply with the relevant standards. The requirements relating to financial reporting standards are applicable to years commencing on or after the effective date of May 1 2011.

An anomaly is the fact that the requirement for CCs to have an accounting officer, and for him or her to report in terms of their duties under the Close Corporations Act still stands. This means that CCs that need an audit will have an audit report and an accounting officer’s report in their financial statements, and will at all times have both an appointed auditor and an accounting officer.

The Act also dictates that CCs with a score of between 100 and 350 that compile financial statements internally must be audited. Many have accounting officers who are related to the CC in some way and this could mean that, by definition, the financial statements are ‘internally compiled’. The anomaly is that they could have their annual financial statements compiled by an Independent Accounting Professional, which provides no assurance, and therefore avoid an audit or review.

Avoiding an audit is a big saving in terms of cost and effort, but costs will still be higher than if the Act had not been changed.

* Calculating the public interest score:

Every company must calculate its ‘public interest score’ at the end of each financial year as the sum of the following:-

a) a number of points equal to the average number of employees during the financial year;

b) one point for every R 1 million (or portion thereof) in third party liability, at the financial year end;

c) one point for every R 1 million (or portion thereof) in turnover during the financial year; and

d) one point for every individual who, at the end of the financial year, is known by the company–

i. in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or

ii. in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.

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