Impact of the new Companies Act on the requirements of a CC
Close Corporations under previous company law legislation were never required to have an audit. However under the Companies Act, 2008, Close Corporations would be required to have a statutory audit if their public interest score deems the Close Corporation to be in the public interest.
The term “public interest” means the common wellbeing and general welfare of the business and investing community. The concept of public interest suggests that the manner in which the Close Corporation is managed could have an impact on the common wellbeing and general welfare of the business and investing community. In this context the Minister of Trade and Industry has determined that even Close Corporations could be large enough to have an impact on the business community.
There is no explanation given by the Minister as to what this impact could be and also no explanation is given as to why the size of an entity could deem it to be in the public interest. However no matter the reasons and explanations, Close Corporations with a public interest score greater or equal to 350 will require an audit. In addition, if a Close Corporations’ public interest score is greater or equal to 100 but less than 350 and their annual financial statements are not prepared by an independent professional accountant, they too would be required to have an audit. It is important to note that the independent professional accountant cannot be an employee of the Close Corporation or hold a financial interest in the Close Corporation. If the members of Close Corporations get this wrong they could end up having an audit instead of merely an accounting officer’s report.
If the Close Corporation has its annual financial statements prepared by this independent practitioner, then they will require neither an audit nor an independent review. This is based on the legal exemption that Close Corporations are owner managed. The Close Corporation must simply obtain the services of their current accounting officer to be the independent practitioner who may also be the accounting officer in order to avoid an audit, assuming their public interest points are greater or equal to 100 but less than 350. There is no way to get out of an audit if the Close Corporations public interest score is greater or equal to 350.
The question arises as to what happens if the Close Corporation is non owner managed. This can happen if the Close Corporation is owned by a trust and not all the trustees of the trust are members of the Close Corporation. This can happen unintentionally and could inadvertently require the Close Corporation being required to require an audit or an independent review. If the Close Corporations public interest score is greater or equal to 100 and less than 350 and their annual financial statements are prepared by this independent practitioner, the Close Corporation would be required to have an independent review instead of the duties of an accounting officer.
So it is important for the members of Close Corporations to structure the affairs around the public interest score and whether they are owner managed or not, as this could have a serious impact on their accounting and auditing fees.
See our Public Interest Score flowchart.
Professor Steven Firer
Developed by South Africans, for South Africans.