Home Accounting and Auditing Arguments in favour of extending the CIPC compliance checklist to small companies

Arguments in favour of extending the CIPC compliance checklist to small companies

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Earlier this week Adv Rory Voller, head of the Companies and Intellectual Property Commission (CIPC), confirmed to Accounting Weekly that the decision had been taken to abolish the proposed implementation of the compliance checklist for small businesses. However, the CIPC is leaving the door open for the introduction of some form of compliance checklist in the future, although it is likely to be in a simplified form so as not to burden small businesses with unnecessary compliance costs. You can read our original story here.

Not everyone is in agreement with the CIPC on this. Here we present two well-argued motivations for maintaining the requirement for small businesses to complete the compliance checklist. One is from Marc Silberman of Accfin Software, and the second is from Dr John Hendrickse and Adv Leigh Hefer-Hendrickse of Genesis Corporate Services.

From Mark Silberman of Accfin Software:

Lack of Company law knowledge

It’s true that there is a lack of company law knowledge in the accounting profession. I know this for a fact as I have been teaching company law to company secretarial practitioners and partners in accounting firms for the last 15 years. Directors of companies and small companies know even less. Facts are facts and we need to deal with this lack of knowledge and come to grips with it.

The situation before the compliance checklist was introduced

Let’s deal with the situation before we knew about the compliance form checklist. The new 2008 Companies Act came into being on 1 May 2011 the provisions of which are quite easy to read, there are courses and there are very good textbooks that tell you what these provisions are. So, before the compliance form, directors should have still understood the Companies Act and should have made sure that the company was compliant according to the laws. The law is the law and needs to be carried out. If the directors did not know about a compliance issue, they relied on their accountants and the company secretarial practitioners who do the company secretarial transactions anyway. Good company secretarial practitioners made sure their clients complied.

So, during this period, did accountants not advise their clients accordingly about the law. Did they not advise them about a distribution when one took place? Did they not advise them about a share register that they didn’t have and did they not help them fix it? What did they do about directors’ debit loans, did they just leave them because they did not think it was a distribution? What was the position where there was a fundamental transaction and the fact that the company could be defined as a regulated company? Did they not know these facts and ignore the compliance responsibilities? Many of them did know about all these things.

By now you are starting to understand where I am going with this.

What’s actually changed now that there is a compliance checklist

So, what’s changed now is that we now have to answer a checklist to indicate if we have been doing our jobs and complying with the law since 2011 which we should have been doing anyway. Now suddenly there is over-regulation, interpretation issues and moaning about all kinds of things because accountants or directors responsible did not do their jobs in the first place or did they, and they are now moaning about a form that has to be filed, a form that if they did their jobs properly by making sure company secretarial transaction were taken care of would take 10 minutes or less for most companies.

The compliance form is the CIPC’s right to ensure that compliance takes place. Many companies in SA, if they don’t have a company secretary, employ the company secretarial department of an accounting firm. They know whether or not compliance is required. We have to do this anyway so why are we complaining about a form that helps us comply, helps the community and helps South Africa.

The article talks about smaller companies

We are talking about smaller companies which may not be a concern because it won’t cause the economy to go into a decline as it is not systemic. Of course, it will cause decline, one company at a time. If one job is lost because of non-compliance or if a creditor loses money because of non-compliance then there is a problem and it needs to be addressed. Have you noticed that company insolvencies are on the increase?

What about a distribution that is missed and the company is liquidated and the directors are sued by a shareholder or creditor, who is to blame? Sorry it can’t be the accountant who compiled the accounts because he did not do a compliance form an he was not even aware of a distribution! The compliance checklist is an opportunity to learn and correct what is wrong and make small business a better place.

Over-regulation and investment in SA

In the Accounting Week article, it mentioned that “overregulation flies in the face of government’s plan to turn the economy around”. This is absolute nonsense in regard to this matter as this is not over-regulation as this is a check to make sure that we are running our companies compliantly which we should have been doing anyway since 2011. What does this say for the accounting profession if we are complaining about this?

The compliance checklist itself should attract more investment into South Africa as investors want to see that their investments are safe and won’t be subjected to abuse by crooked directors.

The core of the argument is small business

Let’s get to the core of what the argument is. It looks like bigger companies are going to have to do this checklist anyway and we might get a pass on smaller companies that are not audited. This is wrong as the companies that are not audited are precisely the companies that we need to do the compliance checklist for as these companies don’t know any better and don’t know the law and need their accountants to help, but may not be getting any help at all.

Let’s take a smaller company as an example, the ones that are going to get a pass on this. Say a small company starting to grow, there are no secretarial transactions and there are no distributions during the course of the year. They keep a share register but there is no movement. In order to comply with most of the questions on the questionnaire the accountant does it in about 5 minutes – what’s the big deal and they even charge for it! Where is this over-regulation?

The question of risk

There is a question of risk and the directors are in fact responsible so we need to do what we do in the tax environment and pass the risk back to the directors and this can easily be done by a standard mandate that all the directors sign. In fact, if you do the company secretarial work you should have a mandate signed specifically for the secretarial work which will include the compliance form.

Saiba’s principal concern is that it will raise the costs for small businesses. Sure, it will, companies will pay a fee of at least R750 per annum to ensure that they comply and make them safe.

Claim of R1.2 billion in fees to accountants

There must be a serious question over the amount claimed as a cost to the country. I refer to SARS 2019 statistics showing 991,207 company tax returns of which 814,151 have been assessed. Now we have been told that CC’s outnumber companies by 8 to 1. This means that there are only 110,135 company returns which includes all size companies. CC’s don’t do the checklist. Let’s say that 80% of these companies are small companies. This means that the compliance checklist only applies to 88,108 companies. Assuming a fee of R750 per checklist per submission, this comes to a charge to the economy of R82 million.

This is nowhere near R1.2 billion. Whatever the fees charged it does create jobs in the profession teaches accountants and directors about company law and improves compliance in the country.

SA Institute of Chartered Accountants (Saica) says the checklist has interpretation problems

Let’s say you need to answer the question: “Did the company comply with Section 4?”. Section 4 deals with the solvency and liquidity test which is triggered by distributions of the company. This means that the filer has to know what the distributions are. They are clearly visible in the Act. If one knows the Companies Act there is no interpretation required. I can deal with many of the other questions on the same basis.

The CIPC can improve the checklist by having sub-questions, like did the company pay a dividend, do a buyback etc. I guess there will be complaints about this because of the extra time. I would be in favour of this as it makes everything very clear.

Osidon says they got an email abolishing the compliance checklist from the CIPC.

Since when does the CIPC publish a notice through an accounting firm? (Good point – it’s been confirmed by the CIPC to Accounting Weekly, but we should await the exact wording of the official notice, likely to be issued next week – Ed.)

Saiba in an Official Notice says – “Until we have a final notice from the CIPC we urge members to obtain an instruction from their clients on whether to submit the current checklist or postpone submission until more clarity is received.” The important point here is that the list should be done.

Conclusion

I believe that I have dealt with some very valid points based on my experience and the knowledge that I have of company law and would implore the CIPC not to backtrack on something that I believe is extremely important to this country and the economy and is important to them as they would not have implemented this in at all in the first place if they did not think it was important.

If one looks at the proposed new Companies Act amendments the new provisions take compliance even further. That’s a discussion for another day.

Mark Silberman

From Genesis Corporate

1.         Benefits of Incorporation

The benefits of forming a company are in the main, limited liability and perpetual succession.

Directors of all companies have a statutory duty (to comply) with the Companies Act.

Saiba (Nicolaas Van Wyk), Osidon (Ferreira), PAA (Shantall-Lurie) and Sacia (“the Protagonists”) aim to minimise or restrict full compliance for the private owner-managed company.

2.         Two Tier Compliance Checklist Application

There is no need for a two-tier compliance structure as the existing Public Interest Score system caters adequately for different assurance levels for different companies which impacts the applicability of different mandatory sections in the CIPC Enforcement Compliance Checklist.

3.         Number of Effected Private Companies

Section 30(2A) Companies that are exempt from audit and independent review represent approximately 75% of all private companies. That is approximately in excess of 2,5 million private companies which will be excluded if the proposal of the Protagonists is accepted.

Many of these companies are also subsidiaries of holding companies.

All of these companies have no existing assurance requirements and further exacerbates compliance risks if they do not need to comply with the CIPC Enforcement Compliance Checklist which is an excellent internal control mechanism needed by this class of companies.

4.          Best Interest of Companies versus Best Interest of Institutes’ Members

The Protagonists mission is to make recommendations that are in the best interests of their members and not in the best interests of the applicable companies.

Excluding the CIPC Enforcement Compliance Checklist for the recommended ‘small companies’ eliminates them operating in the best interests of the company.

Implementation of compliance is an essential component to operating in the best interests of the company (section 76(2) Companies Act 2008)

5.         Companies Act requires compliance with all 225 sections not just 24 mandatory sections

By excluding the majority of private companies one creates a dangerous precedent whereby not only are the 24 mandatory sections being excluded in terms of legal due diligence, since all other sections of Companies Act, schedules and regulations will be treated in a similar way.

6.         The Memorandum of Incorporation and Voluntary Assurance

How does the proposal of the Protagonists deal with voluntary audits in terms of the MOI (thus becoming a statutory requirement)?

The Proposals of the Protagonists means that the requirements of the MOI become superfluous.

7.         Applicable in 1 Year and Not Applicable in the Next Year Scenarios

Where a company’s PI Score fluctuates from one year to the next, it will create a situation wherein one year they have to comply with the CIPC Enforcement Compliance Checklist and the next year not if they become exempt in terms of the PI Score.

The CIPC Enforcement Compliance Checklist should apply every year irrespective of whether the company’s PI Score changes on a year on year basis.

8.         Company Health Check : ‘Small Companies’

The weakest economic corporate entity are the small companies; which are normally under-capitalised and do not meet the S&L Test and in many cases trade under insolvent conditions.

Companies Regulation 29 dealing with trading under insolvent circumstances should be included in the CIPC Enforcement Notice.

The CIPC Enforcement Compliance Checklist is an effective and essential control mechanism and company health check which will assist these companies to improve their business model and ultimately the conformance, performance and sustainability of these companies.

Section 75 dealing with the Disclosure of Personal Financial Interests of Directors should also be included in the CIPC Enforcement Notice.

9.         Cost of Compliance versus Cost of Company Failure

The Protagonists have suggested the high level of cost of compliance as a motivation for these companies not to be included in the CIPC Enforcement Compliance Checklist structure.

The fact of the matter is that the cost of company failure including liquidations and business rescue far exceeds the cost of compliance.

10.      Compliance Culture and Ethical Practice

Compliance is part of an ethical culture which should be encouraged and not be eliminated or reduced as proposed by the Protagonists.

11.      Regulatory Role of CIPC is Undermined

The Protagonists mission is to undermine the regulatory role of CIPC in relation to all companies. CIPC needs to stand their ground and do not compromise nor capitulate to their proposals