Home Accounting and Auditing How to fix the Companies Act – what accountants say

How to fix the Companies Act – what accountants say

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A comprehensive survey of recommended changes to the Companies Act conducted on behalf of the SA Institute of Business Accountants (Saiba) has highlighted several perceived weaknesses in areas such as business rescue, Public Interest Score (PIS), the ability of accounting officers to conduct Independent Reviews, and the accountability of foreign companies doing business in SA.

The survey respondents included several academics and professionals in practice.

Some of the problems identified in the existing Companies Act 2008 were the definitions of terms such as “turnover”, “third party liability” and “beneficial interest”.

The problem of definitions

The Companies Act does not include a definition for “turnover” and “third party liability”. Although these concepts are generally understood in practice in interpreting Regulation 26 of the Companies Act, there remain some lingering uncertainties.

For example, “turnover”: where a holding company receives a distribution is it “turnover for purposes of the PIS calculation?

In the case of “third party liabilities”, should shareholder loans be included, or should we follow the UK model of reporting these liabilities as a trend over a number of years.

Another perceived problem is the definition of “beneficial interest”: in large, multi-jurisdictional groups, it is sometime unclear how to do the “beneficial interest” calculation in terms of the regulations, which refer to both a direct and indirect beneficial; interest. The definition is wide enough to include cessions of share rights.

Does the Public Interest Score (PIS) help or hinder small businesses?

Perhaps one the key takeaways of the survey is that SME’s do not benefit enough from relief provided for through introduction of the PIS. The recommendation of the survey respondents is that it should be simplified in line with the UK and European use of averages.

Your company’s PIS determines:

  • If your company’s financial statements should be audited or independently reviewed (audits apply to all companies with a score above 350);
  • The financial reporting standards applying to your company, e.g. IFRS (International Financial Reporting Standards) or IFRS for SMEs.

One of the reocmmendations from the Saiba survey is that accounting officers be allowed to assist with Independent Reviews (IRs) for companies with a PIS of between 100 and 350. This would open the market to independent reviewers, and bring down the costs of compliance for companies.

“The requirement that only a Chartered Accountant or a Registered Auditor can perform an independent review for companies that score between 100 and 350 points should be removed,” says the survey.

It is also recommended that the inclusion of “Individuals with beneficial interest” should be removed from the PIS calculation.

PIS is not helping job creation

As the table below demonstrates, respondents are not convinced that the PIS is advancing the goals of creating jobs or growing the economy. It does, however, raise the costs of doing business.

Some respondents believe the current method of calculating the PIS is adequate, and reject any suggestion that qualitative criteria should be added as this would make it even more complicated.

Their emphasis is on simplicity of calculation and compliance. Others believe the main purpose of the PIS is to determine whether a Social and Ethics Committee (SEC) should be formed. “An SEC would be a response to a particular risk of a particular industry, therefore in those circumstances it would be more appropriate to review the nature of the business of the company. A mining/power generation company would have a larger need for an SEC to address environmental risks and therefore certain baseline qualification criteria for the establishment of an SEC could be considered,” according to the survey.

Key recommendations for amending the PIS

  • Remove the distinctions between below and above 100 PIS score for Independent Reviews. All accounting officers as currently defined in the Act should be able to do independent reviews at any level.
  • Amend the PIS score and simplify the distinctive principles to turnover, assets value, and number of employees on a 2 out of 3 principle and measured over a 3-year period.
  • Introduce a simplified reporting standard for SMEs below a certain PIS level (either Cash Basis of Accounting, or Tax Basis of Accounting).
  • Enhance the powers of the Financial Reporting Standards Committee to consult with the Minister and determine the national policy for making submissions to the international standard setters.
  • Clarify the meaning of “turnover”, “third party liability” and “indirect beneficial interest” in the Act.
  • Make sure our representatives at international standard setting bodies properly represent our interests.

Social and Ethics Committees (SECs)

The need for SECs is determined by a company’s PIS and, as the survey results show, are not seen to be advancing the goals of job creation and economic growth. This has a noble aim, but is seen as a blunt instrument for achieving better corporate behaviour. Rather, it is seen to be increasing the cost of doing business in SA.

Main findings:

  • The establishment of an SEC s is seen as increasing the cost of doing business, with some of our respondents suggesting that is should only be applied for listed companies
  • Extending the SEC requirements to foreign and external companies is unanimously not supported with the result of dissuading foreign investment
  • A proposed change to the SEC rules that could be useful would be to identify key risk areas of a particular company and ensure that individuals that have a senior role in managing that risk be representatives on the SEC
  • Due to the conflict of employee organisations who act in the best interest of their employees and the SEC that needs to act in the best interest of the shareholder, it is unanimously opposed to appoint representatives from workers on the SEC.

Recommendations for improving business rescue

Business rescue was one of the crucial inclusions in gteh 2008 version of the Companies Act, but it remains mired in problems.

The survey respondents found there was lack of clarity around certain definitions, and a general perception that companies are entering the rescue process too late to effect a successful turnaround.

Here’s one key takeaway: “BRP’s with a legal or liquidation background with exceptionally low incentive to rescue the business and rather opt for liquidation and receive extraordinarily little support from financial institutions.”

When it comes to the ranking of creditors, this is perhapos one of the most contentious points. Financial Institutions appear to be the creditor type with the least risk due to over securitisation, but have the highest voting rights. The concurrent creditors’ fate is linked to the preferred creditors’ willingness to allow the business rescue process to continue to maturity. o Post commencement finance appears to be exceedingly difficult to obtain and form an integral part of the business rescue plan, however Financial Institutions are heavily over securitized, leaving extraordinarily little security to support trading debt.

Another key takeaway: All contributors felt that business rescue practitioners lack the necessary skills, experience, and know-how. This problem is exacerbated by a lack of proper policies with regards to the conduct of the BRP and little oversight on the side of the CIPC and/or the BRPs’ professional bodies.

Post commencement finance is almost impossible to obtain and that threatens the success of business rescue plans.

Again, very few respondents see business rescue as either creating jobs or growing the economy.

Companies Tribunal seen as impotent

The market perception is that the Tribunal is impotent due to a lack of professionalism and knowledge of the members of the Tribunal. A lack of budget to support the objectives of the Tribunal is mainly to blame. While the public have a positive impression of the CIPC (Companies and Intellectual Property Commission), the same is not true of the Tribunal.

Directors’ misconduct – key findings

  • To prove a case of directors’ misconduct, the shareholder needs information to support his/her claim. This information is not obtainable by the shareholder as the information is confidential. The recent changes to the Act that require that a shareholder requires a valid reason for a director to be removed is contrary to the intention of section 7 of the Act to balance the rights and obligations of shareholders and directors.
  • Institutional shareholders exercise voting rights of their individual shareholders without providing the shareholders with the information needed to discharge their voting rights based on their weighted shareholding. The independence of the institutional shareholders that discharge their voting right can be questioned.
  • Without a higher level of shareholder engagement and information corporate scandals are not kept in check and the shareholders do not have access to the supporting information to enable them to make informed decisions.

Objections against filing

Objections administrative filing is seen as cumbersome and places a time and financial drain on the resources of the company.

Respondents believe the electronic nature of filing increases the potential for fraud with the resulting business disruptions that can follow if verification procedures are not performed.

Share buybacks

The requirements of the Act with regards to share buybacks are seen as complex and onerous, and there is a risk of certain provisions being triggered unbeknownst to the directors resulting in unintentional non-compliance.

The benefits for shareholders, employees and empowerment are however quite significant and as such the benefits are considered to outweigh the disadvantages.