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Categories: Auditing
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Separate audit ensures transparency

Article by Business Day

SECTION 90 of the new Companies Act throws up both challenges and opportunities for South African firms offering accounting, auditing and business advisory services to clients.

We received notice that the Companies Act would change four years ago and it became effective about two years ago. Section 90 states that, in certain circumstances, audit firms cannot provide other services to their clients. This means that if a firm did a particular company’s audit, they would no longer be able to provide secretarial, tax and internal audit services to that company as well, as they had done in the past.

Effectively, if a company requires an audit by law — and many do not — the additional portfolios must be given to another firm to ensure transparency. This only applies to companies that have a public interest score above 350 and mostly affects large listed companies and state-owned enterprises.

I am positive about the new scenario which, although it has some disadvantages for a firm like BDO, which ranks fifth in size among accounting firms in SA, also presents opportunities for acquiring new business.

On the negative side, we may lose a small percentage of our business if clients choose not to have an audit and instead opt for simply having a review, which can be done by a lesser qualified team — so is cheaper.

On the plus side, it opens new doors for us as we will now be able to bid for channel two work at companies currently having their audits done by the “big four” accounting firms.

We have already experienced a surge in secretarial work being allocated to us. This includes share registers, company registration, maintaining the company register for a change of directors, the preparation of financial statements and internal audits.

We appreciate the thinking behind the new legislation and it is fair to say that a lot of thought and work has gone into the impact it would have on professional services firms.

It was introduced as a result of the recent financial collapse experienced by the world economy, much of it driven out of Europe, and the feeling that the relationship between companies and professional advisers had become a little too close. It was felt that there was a need to break up the familiarity that had built up.

Essentially, it has been introduced to protect smaller companies. This means companies that buy in professional services will, to an extent, need to self-legislate.

Normally their audit committees are responsible for the various services that their professional services advisers offer and, if auditing and ancillary services are carried out by same firm, the committee is not carrying out its mandate effectively.

It dovetails with the overall corporate governance process and it would be flouting good governance not to comply with the Companies Act.

Our recommendations to companies would be to make sure you have evidence that you have considered that a particular service you are receiving complies with this section of the act. If not, change your service provider.

From the point of view of the professional services firms, implementation of the new act will require some reorganisation in terms of their offering to clients.

The situation is being monitored by the Independent Regulatory Board for Auditors who are looking closely at this type of conflict and we have no doubt that there will be disciplinary action and penalties for firms that don’t comply with the new act.

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