Mandatory Rotation of Auditors

Mandatory Rotation of Auditors

Over the past few years the audit industry has been under significant scrutiny where the independence of auditors has been questioned.

In response to this and to further drive auditor independence, the Independent Regulatory Board for Auditors (IRBA) issued a rule prescribing that auditors of public interest entities (PIEs) in South Africa must comply with mandatory audit firm rotation (MAFR) with effect from 1 April 2023.

So what is a PIE?

PIEs are:

    a) All listed entities; and
    b) Any entity defined by regulation or legislation as a public interest entity or for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Such regulation may be promulgated by any relevant regulator, including an audit regulator such as the Board.

In general, entities, as classified under point b above, has a large number and wide range of stakeholders and are therefore more likely to be considered PIEs, for example, banks, insurers, collective investment schemes, pension fund administrators etc.

What do the new rules entail?

In the past, after a period of five years, it was mandatory for the audit partners to rotate, but the same audit firm could be used. Going forward, additionally to the partner rotation, all PIEs must rotate their audit firms as well (including network firms) after a period of ten consecutive financial years, after which that firm will only be eligible for reappointment after at least five consecutive financial years.

The new rules come into effect on 1 April 2023. For example, if you have a February yearend and your auditors have performed the audit since the 2013 financial year, you would need to rotate your audit firm for the 2024 financial year.

What is the impact of MAFR?

For PIEs, this means that every ten years a new audit firm with new audit teams that has to get to know the business and internal workings. This could result in increased audit fees.

The process is widely contested in the market, with many firms stating that the impact of this new rule has not yet been fully assessed and will not increase independence and enhance audit quality, whereas the JSE responded by being one of the first entities to rotate their auditors to support the motion.

What you need to do

If your company is a PIE, it is time to start planning when would be best to rotate your auditors, which would give you sufficient time to obtain quotes from other firms.

You are also most welcome to contact our audit department to discuss any questions you may have in this regard.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

When should financial statements be audited, reviewed or compiled?

The Companies Act of South Africa (the Act) requires all companies to prepare financial statements within 6 months after the end of its financial year. A very popular question among business owners with regards to financial statements is whether the statements should be independently audited, reviewed or compiled. In determining the engagement type, the Act prescribes the following criteria to be applied:
Audited financial statements

    1. Any profit or non-profit company that, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
    2. Any non-profit company, if it was incorporated:

a. directly or indirectly by the state, a state-owned company, an international entity or a company; or

b. primarily to perform a statutory or regulatory function in terms of any legislation, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function;

    1. Any other company whose public interest score in that financial year is:

a. 350 or more; or

b. at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

How to calculate your public interest score, to determine if you exceed 350 points or not:

  1. a number of points equal to the average number of employees of the company during the financial year;
  2. one point for every R1 million (or portion thereof) in third-party liabilities of the company, at the financial year end;
  3. one point for every R1 million (or portion thereof) in turnover during the financial year; and
  4. one point for every individual who, at the end of the financial year, is a member of the company, or a member of an association that is a member of the company.

Independent review of financial statements

The Act prescribes that an independent review of a company’s annual financial statements must be performed if the following apply and the company does not select to be voluntarily audited:

If, with respect to a company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is not a director of the company, that financial statements should be independently reviewed.

A company and its directors may choose to be voluntarily audited or reviewed if they wish to engage in an assurance engagement, although it has not been prescribed by the Act.

Compiled financial statements:

If none of the above-mentioned requirements has been met, the financial statements may be compiled.

With compilations, or compiled financial statements, the outside accountant converts the data provided by the client into financial statements without providing any assurances or auditing services.

If you need any assistance with your engagement in financial statements, do not hesitate to contact our friendly staff.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Registration of a trust as a taxpayer

The frustration experienced by taxpayers and the complexity of registering a trust as a taxpayer with the South African Revenue Service (SARS), has been widely publicised in recent years. Despite calls from industry bodies for a simplified approach (like companies and individuals), registering a trust as a taxpayer remains an overly complex process.

The inconsistency of information received by taxpayers between the SARS website and different branch offices is one of the areas of major concern. SARS’ website, for example, indicates that either certified or uncertified copies of identity documents are acceptable, whereas branch officers only accept certified copies. Another frustration is requirements that are seemingly not in line with legislation. As an example, SARS requires the appointment, by resolution, of a so-called “main trustee”, whereas the concept of a “main trustee” does not exist in the Trust Property Control Act 57 of 1998. The same act requires that a separate bank account must be used for deposits received by persons in their capacity as trustees of a trust, but SARS seemingly requires some trusts to have bank accounts while not imposing this requirement on others during registration.

Based on recent interactions with SARS, the following guidelines should assist taxpayers in registering trusts as a taxpayer. Although many of the requirements do not seem to agree with what is required by legislation (or sometimes common sense), a call on such formal matters at a branch office will not assist taxpayers and they should rather ensure that the documents below are at hand. All the documents indicated below must be in a certified form:

    • A completed IT77TR form (available on the SARS website);
    • A resolution appointing one of the trustees a “main trustee”. Even if this is indicated in a trust deed, it must be specifically resolved. It is suggested that it is this “main trustee”
      that represents the trust at the SARS branch office;
    • A resolution authorising the said “main trustee” to sign all documents on behalf of the trust for purposes of registering it as a taxpayer with SARS;
      Identify documents of all trustees (if you use the new smartcard ID document, ensure that both the front and the back are copied). Note that the trustee doing the registration, must also have their original identity document at the branch;
    • Proof of address for all trustees (ensure that this address on the proof agrees to what is completed on the IT77TR form);
    • Proof of address of the trust. For these purposes, use the CRA01 available on the SARS website to accompany the proof of address. It is suggested that two versions of the CRA01 are completed. One by the “main trustee” and one by a different trustee, since different branch offices require different trustees to complete the form;
    • Proof of banking details. If the bank account is less than one month old, then a letter from the bank confirming that the details are in order. In all other cases, a bank statement is required;
    • The trust deed; and
    • The letter of authority from the Master’s Office.

For good measure it is suggested, if possible, to take all original documents along to the branch as well (only present these if required and ensure it is returned). Also, ensure that a proof of registration and the taxpayer reference number of the trust is obtained after successful registration.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)