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The Act does not clearly define what constitutes an independent review, the standard that should be followed or even the person that will be allowed to issue an independent review. However according to the South African Institutes of Professional Accountants there is an understanding as to what organisations would need to undergo an independent review.
An independent review is mandatory only for that company's whom appoint directors from persons other than shareholders. Companies with only one shareholder or companies where all the shareholders are appointed as directors are exempt from the independent review requirement.
It is important to keep in mind that non-shareholder-director companies can voluntary choose to have an audit performed instead of the independent review. The same would apply to shareholder -director companies or owner-managed companies may choose to have their financial statements audited or independently reviewed.
Something that stands out about The Companies Act of 2008 is that it does not associate the independent review with public interest. When taking into account the public interest nature of a particular company/entity, the Minister may only command that a particular company is subject to an audit.
It is therefore recommended that in determining the form and content of the independent review the following should be well thought-out:
The different international standards applicable to different types of reports on the financial statements.
The public interest as determined by the economic and social significance of the company.
The types of entities that are made subject to the independent review - these are, non public interest companies, therefore to be borne in mind that only public companies and public interest private companies are subject to a mandatory audit.
Public interest is not associated with the independent review as the Act only defines the audit, but there are only regulations for the independent review.
The audit may not be performed by an employee of the company whereas no such exclusion exists for the independent review.
The Act allows the shareholders of non-owner managed private companies either to accept the mandatory independent review or to choose a higher level report in the form of the audit.
According to Theashen Ashley Vandiar, Project Director: Auditing and Members' Advice, at the South African Institute of Chartered Accountants (SAICA).
He explains that all companies, whether public or private are required to be audited in terms of the Companies Act of 1973, but in terms of the new Companies Act, the aim is to lower the regulatory burden for small firms. He states that only public companies and companies considered as being in the public interest are required to be audited. Non- public companies would have a choice between an audit and an independent review of their financial statements.
Vandiar states that there is a huge misconception as to the cost and workload involved in a review engagement as compared to the lesser benefits derived from it. One misconception is the idea that a review engagement would be cheaper than an audit because no substantive procedures are required for review engagements. Vandiar also says that businesses need to fully understand the two options (An independent review or an Audit) available to them in order to make the best choice for the business.
He also states that depending on the size of assets and turnover a company subject to an independent review may be required to:
Only produce a compilation report, as is currently the case with close corporations.
Have a independent review performed in accordance with the International Standards on Related Services (ISRS 4400), a standard that relates to agreed upon procedures, or
Have a review performed in accordance with the International Standards on Review Engagements (ISRE 2400).
Vandiar says that only the third provides some form of assurance. An audit involves tests of controls and substantive procedures and would result in a positive opinion being expressed by a registered auditor, audit results in a reasonable level of assurance. An independent review performed in accordance with ISRE 2400, involves only enquiry and analytical procedures, therefore an independent review thus results in only limited assurance being expressed by a practitioner.
Accordingly, Vandiar finds that many view the review engagement, as an alternative to an audit, as cheaper and simpler, but most fail to realize that a review is a double-edged sword. It might seem quicker than an audit, since a review comprises only of analytical procedures and inquiries and therefore it would be by no means cheaper or simpler, given the level of expertise required of the reviewer and his experience and knowledge of the client.
How an Independent review is done and who can do it
The new Companies Act has stated that private companies do not have to be audited as was the case previously; they only need to have independent review.
So how an independent review is conducted, who can do it and is there any procedure set out for it?
The Companies Act does not define the independent review, nor does it define the training and competencies required for the individual who will be performing said independent review.
As the Companies Act does not define an independent review it is therefore unclear as to what is expected.
Here are two interpretations of how an independent review should be conducted:
1) Is from an auditing view point and the other
2) Is from an accounting view point.
Review as indicated in ISRE2400, was included. (International Standards on Review Engagements).
According to ISRE2400 standards independent review engagements includes the following procedures:
Understanding the entity's business, industry, accounting policies and procedures
Analytical review procedures
Reviewing of accounting adjustments made during the financial year under review
Review of implementation of management decisions which directly influence the Financial Statements
Inquires from those responsible for accounting records, to determine: (a) whether all transactions have been recorded, (b) awareness of and compliance to accounting policies, changes in accounting standards and policies
Agreeing the Trial Balance to the General Ledger and the Financial Statements
Reviewing Bank Reconciliations
Surprise cash count
Confirmation of amounts of liabilities
Confirmation of Assets
These procedures were used to determine their importance in the minds of the respondents.
If the independent review, indicated in the corporate law, takes the format of the review as indicated in ISRE2400, the capabilities and qualifications of the individual who performs the review can be clearly interpreted. ISRE2400 refers to a practitioner in the introduction when explaining the purpose of the standard. The definition of a practitioner according to the glossary of terms as issued by the International Auditing and Assurance Standards Board (IAASB) is linked to the definition of a Professional Accountant in Public Practice.
A Professional accountant in turn is defined as any person who is a member of an IFAC member body. A Professional Accountant in public practice is defined as a professional accountant irrespective of functional classification (e.g. audit, tax or consulting in a firm that provides professional services.)
Seeing that public practice is not clearly defined within the International standards the definition of public practice, as provided in the Auditing Professions Act will be used. This act clearly states that the public practice means the practice of a registered auditor who places professional services at the disposal of the public for rewards. From this interpretation it is clear that only members of the Independent Regulatory Board on auditors (IRBA) will be allowed to perform the independent review function until such a time that the Companies Act will clearly define this role.
According to the Companies Act "the manner, form and procedures for the conduct of an independent review other than an audit, as contemplated in subsection (2)(b)(ii)(bb), as well as the professional qualifications, if any, of persons who may conduct such reviews" should be set by way of regulations to the Act.
The Companies Act therefore, does not associate the independent review with the Auditing Professions Act, 2005, auditing standards, or the registered auditor. The independent review should also not be confused with the term "review" as associated with auditing standards. The Act does not associate the term "independent review" with the term "review" as defined in the IAASB Handbook.
The Companies Act furthermore, does not associate the independent review with the concept of "public interest". When considering the public interest nature of a particular company the Minister may only mandate that a particular company should be subject to the audit.
According to SAIPA:
It is suggested that, in determining the form and content of the independent review, the following should be considered.
The different international standards applicable to different types of reports on financial statements;
The public interest as determined by the economic and social significance of the company;
The types of entities that are made subject to the independent review - these are: non public interest companies (only public companies and public interest private companies are subject to a mandatory audit)
Public interest is not associated with the independent review as the Act only defines the audit, but there are only regulations for the independent review; a separate chapter in the Act is allocated to the audit while the independent review does not receive the same treatment;
The audit may not be performed by an employee of the company whereas no such exclusion exists for the independent review;
The Companies Act allows the shareholders of non-owner managed private companies to either accept the mandatory independent review or to choose a higher level report in the form of the audit. In determining the group of persons that would be allowed to issue the independent review the following should be considered:
The separate functions performed by accounting officers and auditors in terms of the Close Corporations Act, 1984 and the Companies Act, 1973, respectively;
The role and function of accounting officers in terms of various statutes to issue reports on aspects of financial statements and compliance to legislation;
Independent review providers should be defined in the regulations as consisting of persons that are members of an accountancy body that is a member of IFAC. Internationally such a person is known as a professional accountant. If recognition is provided in the manner proposed it would mean that the competence of South African report providers will be aligned to that required by the International Federation of Accountants (IFAC).
As SAIPA is a member of IFAC. This means that SAIPA members are recognized internationally as professional accountants. In South Africa SAIPA members are entitled to the designation Professional Accountant (SA)
Other South African bodies that are members of IFAC include: South African Institute of Chartered Accountants (SAICA); Association of Certified Chartered Accountants (ACCA); Chartered Institute of Management Accountants (CIMA). These bodies, including SAIPA, represent approximately 35 000 professional accountants in South Africa.
How the Independent Review will affect the Accounting and Auditing Profession
Firstly to perform or give the independent review a professional accountant does not have to be a registered auditor although they should be a member of a professional body that has membership with the International Federation of Accountants i.e. South African Institute of Professional Accountants.
The removal of the audit requirement is likely to have an effect on when it comes to the training of new and existing auditors. This is because some accountancy (including the big five accounting companies) firms may find a decrease in their audit business wing. The academic requirements differ to be registered with SAIPA as to with SAICA. The requirements to register with SAIPA are a Degree with the following core subjects from a SAIPA accredited Tertiary Institution which must include the following core subjects:
Financial Accounting 3;
Auditing 1 OR Internal Auditing 2 OR Internal Control & Code of Ethics 1 & 2;
Corporate Law 1 OR Commercial Law 2; and
Coupled with three years' supervised training at an Approved Training Centre.
There is clearly a less stringent requirements to be a member of SAIPA this makes you think whether the PA will have the necessary competence to actually issue or perform a independent review
The professional Accountant doing the independent review does not have to be independent of the entity (he can be employed by the entity who he is reviewing) where as in an audit report the professional accountant has to be a registered auditor.
The issuing of the Independent review creates more jobs for professional accountants that do not have a CA (SA) qualification but it also takes a way jobs from those with the CA (SA) qualification. It gives more responsibility to the person performing the independent review as well.
Compared to an audit report the independent review will take much longer to prepare than the audit report therefore resulting in a lesser level of assurance that is obtained with an independent review.
The independent review fee will be less than an audit fee, so if private companies and close corporations do elect on having their financial information reviewed it could mean that there is a loss(in terms of what they could be getting) for audit firms compared to when an audit is mandatory.
The independent review will play an important role in the reporting structure of entities which means that accountants and auditors will have more work to do.
The relationship between accountants and business owners is highly sensitive issue. Regardless of the fact that preparers of financial statements, whether they are employed by a business or hired from outside, will be personally liable for inaccuracies, and can be fined or even jailed. Preparers of financial statements can therefore be expected to refrain from accepting bribes in order to show a good performance of that company under review
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