Section 90(2) of Companies Act, 2008: Its Impact on Audit-Related Services
An audit on a set of annual financial statements can be either voluntary or statutory. A voluntary audit is where a South African company is not required to be audited by the law or regulation. Rather, the audit decision is made by the directors, stakeholders, or members. On the other hand, a statutory audit requires the company to be audited by the law, its Memorandum of Incorporation (MOI), or an Association Agreement (for a close corporation).
Section 90(2) of Companies Act impact on Audit Related Services in South Africa
Section 90 of the Companies Act only applies to statutory audits. It prohibits an auditor from providing certain services to the company or close corporation for which a statutory audit is performed. Let’s delve deeper to understand the impact of Section 90(2) of the Companies Act on audit-related services.
Application of Section 90
Section 90 does not apply to independent audits. The only requirement for independent audits, as per the Companies Regulations, 2011, states that the audit of the company’s annual financial statements must not be performed by the independent accounting professional who was involved in preparing its financial statements.
Section 90(2)(b) provides the conditions for a person or firm to be appointed as an auditor for statutory audits of a company:-
Conditions for a person or firm must not be:-
(i) a prescribed officer or director of the company;
(ii) a consultant or employee of the company engaged for over one year in the maintenance of the financial records or preparation of the company’s financial statements;
(iii) a director, officer, or employee appointed as company secretary;
(iv) a person or firm that regularly or habitually performs the duties of bookkeeper or accountant for the company or performs related secretarial work
Learn More – Guidance Section 90(2) of Companies Act
Examples of activities classified as maintenance of financial records
Maintaining Fixed Asset Registers: Ensuring accurate tracking of the company’s fixed assets, including acquisition dates, depreciation, and disposals, which is crucial for both financial reporting and asset management.
Compiling Purchase Orders: Managing and recording purchase orders to ensure proper documentation of all transactions related to procurement, which aids in maintaining accurate financial records.
Compiling Customer Orders: Keeping detailed records of customer orders to ensure accurate billing and inventory management, contributing to overall financial accuracy.
Assisting Clients with Outsourced Payroll Systems: Providing support to clients in managing their payroll systems, ensuring timely and accurate payment to employees, and compliance with tax regulations.
Preparing Time Records for Payroll: Recording employee working hours accurately to ensure precise payroll calculations and compliance with labor laws.
Examples of activities classified as preparation of financial statements
Preparing the Income Statement, Balance Sheet, and Cash Flow Statement: Creating comprehensive financial statements that provide a snapshot of the company’s financial performance, position, and cash flows over a specific period.
Preparing Notes to the Financial Statements: Drafting detailed explanatory notes that accompany the financial statements, providing additional context and information to enhance transparency and understanding.
Converting Financial Information from a Trial Balance to Financial Statements: Transforming trial balance data into formal financial statements, ensuring accuracy and compliance with relevant accounting standards.
Using Automated Software to Produce Financial Statements: Leveraging technology to streamline the production of financial statements, improving efficiency, accuracy, and reducing the risk of human error.
Posting Journal Entries to Comply with IFRS: Recording financial transactions in accordance with International Financial Reporting Standards (IFRS), ensuring consistency and compliance with global accounting practices.
Examples of activities classified as related secretarial work
Being Appointed as the Company Secretary: Taking on the official role of company secretary, responsible for ensuring that the company adheres to statutory and regulatory requirements and maintaining high standards of corporate governance.
Providing Constant Advice on Compliance with Legislation: Offering ongoing guidance to the company on compliance with relevant laws and regulations, helping to navigate legal complexities and avoid potential penalties.
Key Impacts
Enhanced Auditor Independence: By restricting auditors from providing certain non-audit services to their audit clients, Section 90(2) ensures that auditors remain unbiased and independent, thereby increasing the credibility and reliability of the audit process.
Limitations on Non-Audit Services: Auditors are prohibited from offering services such as bookkeeping, financial statement preparation, and certain consulting services to their audit clients. This ensures that auditors do not audit their own work, which could compromise the integrity of the audit.
Increased Compliance Requirements: Companies and auditors must carefully navigate the compliance landscape to ensure adherence to Section 90(2) regulations. This may involve seeking alternative providers for non-audit services and enhancing internal controls to manage compliance effectively.
Separation of Duties: The act encourages the segregation of duties within the organization, ensuring that the roles of financial record maintenance, financial statement preparation, and secretarial work are distinctly separated from audit functions.
Impact on Service Providers: Service providers must adapt to these regulatory changes by clearly defining and separating their audit and non-audit service offerings. This may involve restructuring service agreements and adopting new business models to comply with the legislation.
To Sum Up!
The major effect of Section 90(2) of the Companies Act is that an auditor cannot provide iXBRL services to a South African company if they provide audit services to that company. Solution? If you got an auditor to audit your company’s financial statements, you could outsource your iXBRL preparation to DataTracks! With an experience of over 17 years, 220,000 reports, and 21,500 clients, the professionals at the company can help you prepare error-free reports in compliance with CIPC regulations. Contact an expert @ +27-10-446-9061 or send an email to enquiry@datatracks.co.za TODAY!
FAQs
What specific non-audit services are prohibited under Section 90(2) of the Companies Act for auditors in South Africa?
Under Section 90(2), auditors are prohibited from providing services such as bookkeeping, financial information systems design, valuation services, actuarial services, internal audit outsourcing, management functions, investment advisory services, and legal services unrelated to the audit.
How does Section 90(2) of the Companies Act impact the relationship between a company and its auditor?
Section 90(2) enhances auditor independence by restricting auditors from offering certain non-audit services to their clients. This ensures the audit is objective and free from conflicts of interest, requiring companies to seek alternative providers for these services and comply with separation of duties.
What are the consequences for a company if it fails to comply with the restrictions imposed by Section 90(2) of the Companies Act?
Non-compliance can result in regulatory sanctions, fines, reputational damage, legal liabilities, and potential financial restatements. Ensuring compliance is crucial for maintaining auditor independence and the integrity of financial reporting.