Compilation of financial statements and related matters
Question
Regulation 27(1) to the Companies
Act determines that a company’s financial statements may be compiled internally
or independently. A company’s financial statements must be regarded as having
been compiled internally, unless they have been “independently compiled and
reported”, as defined in regulation 26 [Reg 27(2)].
Therefore, there is an
assumption of “compiled internally”, if not “independently compiled and
reported”.
Regulation 26(1)(e)
defines “Independently compiled and reported”: It means that the annual financial
statements are prepared by an independent accounting professional on the basis
of financial records provided by the company, and in accordance with any
relevant financial reporting standards.
“Compile”, or in the
specific context, “Compilation of financial statements” are not defined in the
Companies Act or in the Regulations to the Act. One could refer to relevant
pronouncements of the IAASB, including the Glossary of terms to the IAASB
Engagement Standards, ISRS 4410, par. 3-4 and Proposed revised ISRS 4410, par.
15(b) and 15(c). It would appear that “compilation of financial statements” is
interpreted in a broad sense and may include varying scopes. It relates to any
engagement where a practitioner assists management with the preparation of
financial statements in accordance with an applicable financial reporting
framework. Furthermore, the compilation is distinct from an assurance
engagement and does not entail the type of procedures that provides a
practitioner with assurance.
Consider: XYZ (Pty) Ltd is a private company with a
public interest score of 120 and does not have the internal expertise to
prepare its financial statements in the format and in accordance with the
requirements of IFRS for SMEs. In the past (under the 1973 Companies Act) they
have always provided their auditors (Firm Q) with a trial balance at the end of
the financial year. The auditor, apart from performing the audit in accordance
with International Standards on Auditing, has always assisted management with
the compilation of the annual financial statements in accordance with IFRS for
SMEs.
The auditor has always
(in the past) considered this to be acceptable for two main reasons:
(a) The auditor wasn’t disqualified under the
Companies Act – Section 275 of the 1973 Act. “Bookkeeper” (and “accountant”)
has been interpreted as entailing services distinct from the compilation of
financial statements. In this regard, Section 44(5) of the Auditing Profession
Act determines that a person must NOT be regarded as responsible for keeping
the books, records or accounts of an entity by reason only of making closing
entries, assisting with any adjusting entries or “framing any financial
statements” from existing records.
(b) In terms of the Code of Professional
Conduct for Registered Auditors (the Code), providing an audit client with
services relating to the preparation of financial statements creates a
self-review threat. However, if the audit client is not a public interest
entity and the services are of a routine or mechanical nature, there are
safeguards that could be applied to reduce the self-review threat to an
acceptable level (Code, Section 290.167-171).
Under the provision of
the Companies Act, 2008, the Memorandum of Incorporation (MOI) of XYZ (Pty) Ltd
requires the audit of the company’s financial statements. XYZ (Pty) Ltd wishes
to continue with the “normal” arrangement; i.e. providing Firm Q with a trial
balance at the end of the financial year and requesting assistance with the
compilation of its annual financial statements. Consider the following
questions under the Companies Act, 2008:
1 Is the auditor disqualified in terms of Section 90(2) to
accept the audit engagement of XYZ (Pty) Ltd?
2 Assume that the MOI does NOT require an audit, but that the
director’s have resolved that the annual financial statements are to be
audited. Is the auditor disqualified in terms of Section 90(2) to accept the
audit engagement?
3 Assume that the auditor is not disqualified and accepts the
audit engagement, as well as providing assistance with the compilation of the
financial statements (as in the past; providing specified non-audit services).
Are these financial statements compiled internally or independently?
4 Assume that the Public Interest score of XYZ (Pty) Ltd is 400.
Is the auditor disqualified in terms of Section 90(2) to accept the audit
engagement?
My opinion
1 The audit in these circumstances is
considered to be a voluntary audit (as apposed to a compulsory audit) in terms
of Section 30(2)(b)(ii). However, since the audit is required by the company’s
MOI, Section 90 with respect to the appointment of the auditor still applies
[refer to Section 90(1) and 90(2), and Section 34(2)].
The disqualification in terms of
Section 90(2)(b)(iv) does not apply, since Firm Q, or the individual engagement
partner, is clearly not habitually or regularly performing the duties of
accountant or bookkeeper.
The disqualification in terms of Section
90(2)(b)(ii) does not apply, since Firm Q, or the individual engagement
partner, is not an employee or consultant of the company within the meaning of
that section.
Therefore, the auditor is not
disqualified in terms of Section 90(2).
2 The audit in these circumstances is
considered to be a voluntary audit (as apposed to a compulsory audit) in terms
of Section 30(2)(b)(ii). Chapter 3 of the Act only applies to the extent
required by the company’s MOI [refer to Section 34(2) and Section 84(1)(c)].
Provided the MOI does not determine the
application of any of the provisions in Chapter 3 of the Act, Section 90 will
not apply to the company and the auditor will not be disqualified in terms of
Section 90(2).
3 Regulation 27(2) specifically refers to “independently
compiled and reported”. Firm Q, or the individual engagement partner, has not
been engaged to compile the financial statements and report on the financial
statements; as would be the case when a practitioner is engaged in terms of
ISRS 4410 and issues a compilation report on the financial statements.
The auditor will only issue an
independent auditor’s report, although the auditor has also been requested to
assist the company in making closing entries, assisting with any adjusting
entries and “framing” of the financial statements (as contemplated in Section
44(5) of the Auditing Profession Act).
Therefore, since the financial
statements are not “independently compiled and reported” they are regarded as
having been compiled internally in terms of Regulation 27(2). The implication
of this is that since the company’s Public Interest score is within the 100 to
350 range, the company will be required to have its financial statements
audited (i.e. a compulsory audit).
4 The company’s Public Interest score
exceeds 350 and is therefore required to have its annual financial statements
audited (i.e. a compulsory audit). Section 90 is applicable to the company.
Similar to the answer in 1, above, the auditor is not disqualified in terms of
Section 90(2).
However, the auditor must still comply
with the profession’s ethical requirements. In terms of the Code of Conduct, a
company with a Public Interest score that exceeds 350 is by definition a
“public interest entity” (as determined by laws or regulation). Therefore, the
auditor shall not provide the audit client with any accounting or bookkeeping
services, including the preparation of financial statements (Code, Section
290.172 and the definition in the Code of “Public interest entity”).
Response
received
With regard to your view
1
I note that a voluntary
audit is one which is not required by the MOI or the Act. Therefore in my view
this is not a voluntary audit. We are interpreting section 90(3) as clarifying
that s90(2) applies to the individual audit partner where a firm is appointed.
Therefore if it is the same auditor performing the assistance with the TB then
he cannot be the engagement partner or auditor relating to this audit.
With regard to your
second question
s90(2) does not apply to
voluntary audits. I therefore agree with your view.
With regard to your
third question
There is no definition
other than those you have outlined. Obviously this is still subject to case
law, but our interpretation is that if a company provides a trial balance and
all the auditor does is put that TB into a format for AFS, then it is still
internally compiled, if no decision making is involved. However, as soon as
decisions are being made and entries passed, I would view it as independently
compiled. I therefore suggest you obtain a legal opinion in this regard.
Unfortunately SAICA does not have such resources available. However, I agree
that if it is seen to be internally compiled then an audit will be required.
With regard to your
fourth question
I agree that if the
company's Public Interest score exceeds 350 it is therefore required to have
its annual financial statements audited (i.e. a compulsory audit). And also
that it should comply with the Code. I agree to with your view as to the
applicable sections of the Code although note the following:
"290.173 Despite
paragraph 290.172, a firm may provide accounting and bookkeeping services,
including payroll services and the preparation of financial statements or other
financial information, of a routine or mechanical nature for divisions or
related entities of an audit client that is a public interest entity if the
personnel providing the services are not members of the audit team and:
• The divisions or related entities for
which the service is provided are collectively immaterial to the financial
statements on which the chartered accountant will express an opinion; or
• The services relate to matters that are
collectively immaterial to the financial statements of the division or related
entity.
Emergency Situations
290.174 Accounting and
bookkeeping services, which would otherwise not be permitted under this
section, may be provided to audit clients in emergency or other unusual
situations when it is impractical for the audit client to make other
arrangements. This may be the case when:
(a) only the firm has the resources and
necessary knowledge of the client's systems and procedures to assist the client
in the timely preparation of its accounting records and financial statements,
and
(b) a restriction on the firm's ability to provide
the services would result in significant difficulties for the client (for
example, as might result from a failure to meet regulatory reporting
requirements).
In
such situations, the following conditions shall be met:
(a) Those who provide the services are not
members of the audit team;
(b) The services are provided for only a short
period of time and are not expected to recur; and
(c) The situation is discussed with those
charged with governance."
