“I’ve just started my own private IT company. As a new business, I want to limit unnecessary expenses. I know there will be accounting costs but am not sure if I already have to appoint an auditor for the business. I would like to avoid this cost if I can?”
To answer your question, one must look at what the Companies Act 71 of 2008 (“Companies Act“) determines in respect of auditing and accounting requirements for a private company like yours. Unlike the previous Companies Act of 1973 which required all companies to be audited, the current Companies Act is less onerous in that it only requires certain categories of companies to be audited.
Whether a company must be audited by a registered auditor or simply be independently reviewed by an accountant will depend on the type of company. The Companies Act classifies companies as either profit companies or non-profit companies. With profit companies, the Companies Act further distinguishes between four different types of companies, namely, private companies, personal liability companies, state owned companies and public companies. In your case, we are dealing with a private profit company, which is a company that is not a state-owned company, has a Memorandum of Incorporation (“MOI”) prohibiting it from offering any of its securities to the public and restricts the transferability of its securities.
So the question then is - when will a private profit company need to appoint an auditor?
The Companies Act states that private companies must have their financial statements audited if it is in the ‘public’s interest’ to do so. Regulation 28 of the Companies Act provides the framework to determine when it is in the public’s interest to have the financials of a company audited, by requiring that a private profit company must be audited if it meets any one of the following criteria:
If such a company, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million; or
- Any other company whose public interest score in that financial year is 350 or more; or
- Any other company whose public interest score in that financial year is at least 100 (but less than 350) and whose annual financial statements for that year were internally compiled.
The Companies Act provides for a public interest point system which is aimed at calculating the extent of the stake which the South African public holds in a company and in turn determines whether the company should be audited or not. A company scores one point for every employee, one point for every R1 million in turnover, one point for every R1 million in third-party debt and one point for every shareholder it has.
The lower level of the threshold provides for those companies that do their accounting internally and specifically employ their own accountant for this purpose instead of outsourcing it to an independent firm of accountants. Such companies must have their books audited if they score at least 100 public interest points. Companies that use external accountants to do their books only have to undergo annual auditing if they score 350 public interest points or more.
A company may voluntarily elect, either by a directors’ resolution or a shareholder resolution depending on its MOI, to have its annual financial statements audited or include an express audit requirement in its MOI.
In contrast, some private companies may purely be required to have their annual financial statements independently reviewed. This is the case for private companies whose public interest score in a specific financial year is at least 100 (but less than 350) and whose annual financial statements for that year were independently compiled, as well as companies whose public interest score in that financial year is less than 100.
It is important to also note the provisions of section 30(2A) of the Act, which provides an exemption to both audit and independent review. Should every person who is a shareholder of a company also be a director of that company, such company is exempt from the requirements to have its annual financial statements audited or reviewed, provided it does not fall into a class that is specifically required to do so in terms of the Act or other legislation or any agreement to which it is a party. If a company is not required to be audited but is not exempt in terms of section 30(2A), then its annual financial statements must be independently reviewed.
What should be clear from the above is that not all companies need to be audited or possibly even independently reviewed. Our advice is to consult an attorney or auditor to help you obtain certainty about your auditing requirements if you are unsure.