Providing Accounting Services to Audit Clients
Many audit firms provide financial statement preparation services to voluntary audit clients through accounting staff and engagement partners that do not form part of the audit engagement team. However, practical problems arise when these audits are required by the Companies Act and, therefore, fall within the ambit of the enhanced independence requirements of this Act.
Companies Act requirements
To be appointed as an auditor of a company, in terms of Section 90(2)(b) of the Companies Act, a person or firm should not be:
(i) A director or prescribed officer of the company
(ii) An employee or consultant of the company who was or has been engaged for more than one year in the maintenance of any of the company’s financial records, or the preparation of any of its financial statements
(iii) A director, officer or employee of a person appointed as company secretary
(iv) A person who, alone or with a partner or employees, habitually or regularly performs the duties of an accountant or bookkeeper, or performs related secretarial work for the company
(v) A person who, at any time during the five financial years immediately preceding the date of appointment, was a person contemplated in any of sub-paragraphs (i) to (iv)
(vi) A person related to a person contemplated in sub-paragraphs (i) to (v).
With the Companies Amendment Act of 2024, Section 90(2)(b)(v) has been revised to reduce the period preceding the date of appointment from five years to two years. The Amendment Act was gazetted on 30 July 2024, but will only become effective once a commencement date of the Amendment Act has also been gazetted.
These prohibitions apply to all statutory audits of companies and CCs.
Voluntary vs. statutory audits
Should a company or CC decide to voluntarily have an audit performed by a board, or shareholders’ or members’ resolution, the provisions of Section 90(2) do not apply.
However, the provisions of Section 90(2) do apply, should the company or CC meet the requirements of a statutory audit, according to Section 30(2) of the Companies Act. For example, the public interest score is 350 or more, or an audit is required by its Memorandum of Incorporation (MOI). Only audits exempted from the audit requirement based on Section 30(2A) may otherwise be exempt from Section 90(2).
Performing accounting work prior to appointment as auditor
Section 90(2)(b)(v) prohibits the auditor from filling the positions contained in provisions (i) to (iv) during the previous five years. This means that the audit firm may not perform accounting work, including preparation of financial statements, for statutory audit clients, and is also prohibited from providing such services during the five years preceding their appointment as auditors for a statutory audit.
The implication of this is that, if the firm normally provided such accounting services to a voluntary audit client before, and the audit of the client becomes a statutory audit in the current year, the firm is not allowed to perform the audit for the current year. The firm would have to step away from the client and allow another audit firm to perform the audit for five years, while also not providing such accounting services to the client, to be allowed to perform the statutory audit again.
The Companies Amendment Act of 2024 reduces this period to two years, but the requirement remains. Therefore, firms will still have to step away for two years before being able to perform the audit again.
In summary
Audit firms must consider closely what services they provide to auditing clients, as the implications of Section 90(2) of the Companies Act are far-reaching and may have a significant impact on the firm.
References
1. Companies Act, 71 of 2008
2. Companies Amendment Act, 16 of 2024
3. IRBA and SAICA Guidance on Section 90 of the Companies Act, 2008
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