Quo Vadis Financial Reporting and Audits

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 19 September 2008

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Auditor's Dilemma: light at the end of the tunnel?

By Ian Scott, chairman of Marketing and Business Development of BDO Spencer Steward.

Auditing which has been around for hundreds of years, has become ever more sophisticated, but has struggled to keep pace with the growth of complicated multinational companies and technology.

At the same time, audit firms under pressure from tight fees diversified into other more lucrative services and lost their independence and objectivity. This contributed towards corporate failures such as Enron, Worldcom and Anderson. New regulations, in the form of the Sarbanes Oxley Act, were introduced in America, where the highest losses were suffered. This legislation has effectively doubled the size of the auditing industry in America overnight and audit fees on SEC registered companies have doubled in order to ensure compliance with this legislation.

South Africa, too, has been dogged by corporate failures including Leisurenet, Tigon, Business Bank Macmed, etc. New and revised legislation seeks to address the problems of the past, but has also added to the amount of red tape companies have to deal with. The Auditing Profession Act has created a far more stringent regulatory environment for auditing firms.

At the same time the South African accounting profession has sought to ensure that its accounting standards are harmonised internationally as this has obvious benefits for foreign investors, global trade and comparability. The rush to do this, however, means that South Africa adopted these International Financial Reporting Standards (IFRS) with effect from 1 January 2006 and found itself in the frontline of countries around the world doing so.

This means that since 1 January there has been one standard of reporting for every company in South Africa regardless of whether it is a sole trader or a listed multi-national. South African companies are ill equipped to deal with this reporting as the average accountant is either not a chartered accountant or is not conversant with IFRS reporting standards.

According to Ignatius Sehoole, the President of the South African Institute of Chartered Accountants (SAICA), these new standards will lead to fee increases of around 50%. “In my opinion, our mistake was our failure to introduce differential reporting first. Many countries in Europe, including the UK, allow differential reporting and this results in a lighter audit report for private companies.”

The new Companies Bill proposes that all public companies should comply with International Financial Reporting Standards and should be audited. Private companies must be audited if:

The audit is a voluntary requirement at the option of the company The Minister has prescribed by regulation categories of private companies that should be audited

The Minister has prescribed by regulation that an independent review should be conducted on categories of private companies

The only reference to reporting standards is in Sec 29(1)(a) and states that the financial statements must “Satisfy financial reporting standards”. The Minister may make regulations prescribing financial reporting standards (Sec 29(4)(a)) which must be consistent with IFRS. The Minister may also establish different standards applicable to profit and non-profit companies and different categories of profit companies provided that these promote sound and consistent accounting practices.

Various interested parties made representations concerning the Bill in Parliament recently but unless the Bill is amended, there is no clarity regarding the audit status of private companies, or the reporting standards with which they must comply.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 19 September 2008