FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Not completed within six months – reportable irregularity or not?

There is currently a debate on whether the fact that a company’s annual financial statements are not completed within six months as per requirement in the Companies Act, No 71 of 2008 (“Companies Act”) is a reportable irregularity (“RI”) in terms of the Auditing Professions Act, No 26 of 2005 (“APA”), section 45 or a reportable irregularity in terms of the Companies Regulations, 2011, Regulation 29 to be reported by the independent reviewer.

The answer depends. The APA states in the definition section that a reportable irregularity is an unlawful act or omission committed by any person responsible for management of an entity which:

has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity; or is fraudulent or amounts to theft; or represents a material breach of any fiduciary duty owed by such a person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or conduct or management thereof.

The Companies Regulations, Regulation 29 have a similar, but not exactly the same, definition for a reportable irregularity to be reported by an independent reviewer. A RI means any act or omission committed by any person responsible for management of a company, which-

unlawfully has caused or is likely to cause or is likely to cause material financial loss to the company or to any member, shareholder, creditor or investor of the company in respect of his, her or its dealing with the entity; or

is fraudulent or amounts to theft; or

causes or had caused the company to trade under insolvent circumstances

The Companies Act requires in section 30(1) that the annual financial statements of companies must be prepared within six months after year end. Section 30(3) of the Companies Act then states that the annual financial statements must include an auditor’s report if the statements are audited.

In practice in many instances the annual financial statements, including the audit or review report, is not completed within six months due to a variety of reasons.

The question has arisen whether the fact that the annual financial statements are not completed within six months is a reportable irregularity that must be reported in terms of section 45 of the APA to IRBA or Regulation 29 of the Companies Act to CIPC.

UNFORTUNATELY THERE IS NO STANDARD ANSWER TO THIS QUESTION.

The guidance available to registered auditors is the guide. Reportable irregularities: A Guide for Registered Auditors, issued by IRBA. The Reportable irregularities Guide does contain the principles that auditors should consider when they are evaluating whether the fact that annual financial statements are not completed within six months is a reportable irregularity or not. As there is no other guidance available to independent reviewers they can possibly consider the IRBA guidance or they will have to take a decision on what principles will be considered in making this decision.

Where the annual financial statements are not completed within six months, an auditor or independent reviewer will be required to consider if the relevant definition of an RI is met, which will depend on the specific situation that the company is facing and that the auditor or independent reviewer identifies.

Auditors/independent reviewers must ensure that they document the process that they follow in considering whether they believe the fact that the annual financial statements is not completed within six months is a reportable irregularity or not. This documentation will be crucial should the decision by the auditor/independent reviewers ever be investigated or questioned.

Reference:

Juanita Steenkamp – SAICA Newsletter