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THE IMPACT OF SECTION 90(2) OF THE COMPANIES ACT, 2008 ON AN AUDIT

An audit on a set of financial statements (with regards to a South African incorporated company or close corporation) can either be classified as a voluntary- or a statutory audit.

A voluntary audit refers to the situation where an entity is not required to be audited by either law or regulation, but a decision has been made by either the shareholders, directors or members to undertake an audit of the financial statements. A statutory audit refers to the situation where the entity is required to be audited in terms of the law, its Memorandum of Incorporation, or an Association Agreement in the case of a close corporation.

Section 90 of the Companies Act is applicable to statutory audits only. In summary, Section 90 prohibits an auditor from providing certain specified services for a client on which a statutory audit is performed. This article investigates Section 90(2) and these prohibited services in further detail.

Section 90(2)(b)(ii) and 90(2)(b)(iv) of the Companies Act states the following:

(b)” in addition to the prohibition contemplated in section 84(5), must not be—”

  1. ii) “an employee or consultant of the company who was or has been engaged

for more than one year in the maintenance of any of the company’s

financial records or the preparation of any of its financial statements;”

(iv) “a person who, alone or with a partner or employees, habitually or

regularly performs the duties of accountant or bookkeeper, or performs

related secretarial work, for the company;

Examples of activities that would be classified as maintenance of financial records[1]

  • Assisting clients with outsourced payroll systems;
  • Maintenance of fixed asset registers;
  • Compilation of purchase orders;
  • Preparing time records for payroll; and
  • Compilation of customer orders.

Examples of activities that would be classified as preparation of financial statements

  • The preparation of the Statement of Financial Performance (income statement), Statement of Financial position (balance sheet), cash flow statement and notes to the financial statements;
  • Preparing notes to the financial statements;
  • Converting financial information from a trial balance or a reporting package to financial statements;
  • Using an automated system (software) to produce financial statements; and
  • Posting journal entries to ensure compliance with IFRS.

Examples of activities that would be classified as related secretarial work

  • Providing continuous advice on compliance with legislation; and
  • Being appointed as the company secretary

From the above, it is evident that uncertainty might be encountered in interpreting the Act in order to determine which services are allowed and which services are indeed prohibited.

[1] As per the SAICA and IRBA guidance with regards to Section 90(2)

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)