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Tuesday, April 1, 2008
Broad canvas

The revised Corporate Laws Amendment Act (the ‘Act’) introduces far-reaching amendments to the 35-year old Companies Act.

“Company directors and auditors should closely study the new provisions if they are not to be in breach of the legislation,” urges Sue Ludolph, Project Director: Accounting at the South African Institute of Chartered Accountants (SAICA), at a CLAA media briefing in Johannesburg last month.
The Act, which became law at the end of last year, has introduced the concept of a “widely held” company together with certain compliance requirements which must be met should a company be categorised as widely held. In terms of the Act, a company will be widely held if:
• its articles provide for the unrestricted transfer of its shares, in other words the shares of the company are not subject to pre-emptive rights in favour of all shareholders in every proposal to sell to a third party; or
• it is permitted by its articles to offer shares to the public; or
• it decides by special resolution to be a widely held company; or
• it is a subsidiary of a company which falls into one of the categories above.

Comments Stephen Kennedy-Good Associate, Commercial Department
Deneys Reitz, “Since all public companies must be permitted by their articles to offer shares to the public, it follows that public companies will be classified as ‘widely held’. However, management of private companies will need to review their company’s articles of association to see whether they contain the pre-emptive rights described in order to determine whether their company is ‘widely held’ or a ’limited interest’ company.”
The Act provides that ‘widely held’ companies must meet additional compliance requirements. For example, the company will have to appoint an audit committee which will be responsible for a number of issues such as the appointment of an auditor, auditor independence and the approval of fees to be paid to the auditor. The company will also have to report in accordance with International Financial Reporting Standards.
He adds, “We recommend that senior management review the articles of association of their company and, if necessary, take steps to ensure compliance with the Act or evaluate whether it would be desirable, and possible, to amend their company’s articles for that company to fall outside the definition of a ‘widely held’ company.”
Linda de Beer, Independent Corporate Governance and Financial Reporting Specialist, refers to the relevant provisions of the Act’s section 269A:
• Annually, the board of a widely held company must, with few exceptions, appoint an audit committee for its following financial year;
• The committee of at least two must comprise of only non-executive directors who act independently; and
• To qualify, a director must demonstrate integrity, impartiality and objectivity and not be involved in the day-to-day management of the company or have any relationship with the company that could call ‘independence’ into question.

De Beer added that there were now stringent requirements for appointment to the audit committee. “In particular, employees of a company’s holding company will not be eligible for appointment. An important decision for the audit committee of a widely held company is whether it should perform the functions defined in the Act on behalf of subsidiaries itself, or appoint audit committees with independent directors for each subsidiary. Interpretation of the requirement for acting independently might require expert advice.”
The Act requires an audit committee to perform the following functions annually:
• Nominate an independent registered auditor for appointment for that financial year;
• Determine the audit fee and the terms of engagement;
• Ensure that the appointment complies with the Act and with any other Act;
• Define the nature and extent of non-audit services which the auditor may provide;
• Pre-approve any proposed non-audit services by the auditor;
• Include in the financial statements a report from the audit committee on how it performed its work and whether it is satisfied with the auditor’s independence;
• Handle any complaints relating to the internal or external audit, the financial statements or any related matter; and
• Perform other functions determined by the board.

“While the fees can only be determined at the conclusion of the audit, the terms of engagement must be determined in advance,” said De Beer. “Importantly, the audit committee may not limit the auditor’s statutory duties.
“In addition to pre-approving any non-audit services the audit committee must define the nature and extent of such services. Presumably ‘nature’ means the type of service, while ‘extent’ may refer to the value of the time involved.”
She emphasised that the appointment of an audit committee relieved the board of its responsibility for appointing the auditor and for determining its fees and terms of engagement.
The new Act formalises the requirements around the auditor rotation issue, which period commences for financial years beginning after 14th December 2007.
When it comes to widely held companies, the same individual may not continue as auditor for more than five consecutive financial years. An individual who ceases to be an auditor after two or more years may not be re-appointed until a further two years have elapsed.
“The Act does not, however, require audit firms to rotate,” said De Beer. She stressed that careful succession planning would be required for audit firms with widely held audit clients.
Another new provision applicable to all companies deals with financial reports that are false or misleading. It states that anyone who is a party to the preparation, approval, issue or supply of a false or misleading report and who knew or ought to have suspected that it was false or misleading is guilty of an offence. And the canvas is wide, including as it does designers, preparers or recommenders of schemes or structures that result in false or misleading reports.
Phillip Austin, a partner at Deloitte, pointed out that in addition to discouraging dishonest reporting, “This section creates a potential hazard for those who design or implement elaborate financial or tax avoidance structures.”
He drew attention to a further duty required of the auditor of widely held companies, namely mandatory attendance at the company’s annual general meeting (AGM). “Care should be taken by an auditor in responding to questions at an AGM not to divulge confidential information about the company without its consent.”
As a corollary, he said an auditor who failed to attend an annual general meeting is also guilty of an offence.
Limited interest companies will welcome the relief the Act grants them by introducing differential reporting standards for them, which should save them a great deal of time and money.

Copyright © Insurance Times and Investments® Vol:21.3 1st April, 2008
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