Pulling the PIS out of auditors

When the new companies act was signed into law, effective May 2011, there was great relief from many small business owners, as it greatly reduced the requirement for audits, on the one hand, and on the other hand, close corporation owners were able to easily convert to what traditionally have been more respectable business vehicles, without having to incur large annual auditing costs. They could now run their businesses within the limited liability vehicle of a (Pty) Ltd, but not get bogged down by annual audit requirements.

Let’s rewind a bit:

In the “olden days” all companies were required to have an audit conducted annually. Close corporations (CCs) could submit themselves to an audit, but it was not required. so if a businessman wanted to be left to his own devices, he opted for the CC route. The problem was that only natural persons could be members, until a few years ago when trusts could become members through nominees.

So when we sold a business, companies were pretty much assured of an easier route to market, and a higher price, unless all sorts of warranties were agreed to by the seller members. That is all very much understandable – why would anybody toss more money at a dark hole?

Then along comes the “new companies act” (Companies Act No 71 of 2008). This decrees that there shall be no more CCs registered; only companies. To alleviate the compliance issues, it further directs that only companies with a public interest score (PIS) of 350 or more, need submit themselves to an audit. Below PIS350, the other threshold is 100, below which the old close corporation standard holds. From 100 to 349, an audit is not necessarily required, and unlikely, but the person conducting the review has to have certain qualifications. With obvious relief, many small company shareholders and directors¬†gave the archers’ salute to their auditors, and made friends with a friendly accounting officer to review and sign off their much simpler statutory annual reports.

 

Just as an aside; here is how you calculate your public interest score:
    • The average number of employees in the company for the last financial year (or part thereof). So an answer of 7.8 would give a score of 8. Directors are employees.
    • One point for every R1M of third party debt at the end of the financial year.
    • One point for every R1M of sales turnover during the last financial year.
    • One point for every natural person who at the end of the financial year has a direct or indirect beneficial interest in any of the company’s issued securities (shares). So if shares are owned by a trust, then add up all the beneficiaries for the score.
So you see, it is PIS easy to calculate, and it is only significant businesses who are going to get to 100 or more.

 

This creates an issue for buyers of businesses, because they have little to hold onto in reaching a value. Somehow “trust me, I’m a seller” has less value than a positive bank balance.

So we have started suggesting to companies that intend to sell their businesses, or to shareholders that intend to sell their shares that they maintain their audit record and pay the extra cost each year, in order to make for more successful sales in the future. But things are likely to go a bit further than this, I think:

A lot has been made of business rescue – chapter 6 of the new companies act. It is in these processes that certain abuses are unearthed, which would not have been missed in an audit. I think that creditors in general are likely to get a lot more sticky about certain misdemeanours in the not too distant future, having burned their fingers through not fully understanding the business rescue process.

In particular I wonder

  • how far away we are from banks only extending over draft facilities to companies who are audited annually
  • how many car loans are going to be extend to companies which have not been audited
  • how many company credit cards will be handed out, similarly
  • for how long suppliers are going to allow credit facilities to be extended to companies which have not been audited.

Under the old act there were criminal sanctions in place for directors who flouted the rules. With the advent of the new act, those criminal liabilities which could never be policed and prosecuted effectively, have been replaced with allowing the corporate veil to be pierced by the creditors of a company. So no matter how deep the level of trusts, the housing of assets and the flimsiness of your trading company, an upset creditor with means, can make life very unpleasant for you if you have been silly.

I think though, that they are going to be taking a different view – lend or extend credit only to those companies which are audited – just to add another layer of accountability when the business is put into business rescue.


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