Regulation 29(5) – Disqualification as independent reviewer

 

Question

 

Regulation 29(5) to the Companies Act determines that an independent review of a company’s annual financial statements must not be carried out by an independent accounting professional who was involved in the preparation of the said annual financial statements.

 

What does preparation of financial statements mean?

 

This is not defined in the Companies Act or in the Regulations to the Act. Neither is “Compile” or “Compilation of financial statements”. One could refer to relevant pronouncements of the IAASB, including the Glossary of terms to the IAASB Engagement Standards, ISRS 4410, par. 3-4 and Proposed revised ISRS 4410, par. 15(b) and 15(c). It would appear that “compilation of financial statements” is interpreted in a broad sense and may include varying scopes. It relates to any engagement where a practitioner assists management with the preparation of financial statements in accordance with an applicable financial reporting framework. Furthermore, the compilation is distinct from an assurance engagement and does not entail the type of procedures that provides a practitioner with assurance.

 

Consider:  W is a sole practitioner, Chartered Accountant and Registered Auditor. One of his clients is XYZ (Pty) Ltd, a private company with a public interest score of 65 and all the shareholders are NOT also directors of the company. In the past (under the 1973 Companies Act) XYZ has always provided W with a trial balance at the end of the financial year. Apart from performing the audit in accordance with International Standards on Auditing, W has always assisted management with the compilation of the annual financial statements in accordance with IFRS for SMEs.

 

Under the Companies Act, 2008, XYZ (Pty) Ltd is only required to have its annual financial statements independently reviewed. XYZ (Pty) Ltd wishes to appoint W for this purposes, but with the same arrangement as in the past – they will provide W with a trial balance at the end of the financial year and W must assist them with the closing entries and the compilation of the financial statements. Can W accept the engagement as independent reviewer of the company’s annual financial statements?

 

My opinion

 

It is significant in this instance that Regulation 29(5) does not specifically refer to “independently compiled and reported”, as contemplated in Regulation 27(2) and 26(1)(e). Instead it refers to “who was involved in the preparation of said annual financial statements”.

 

There could be little doubt that W was involved with the preparation of the financial statements and, therefore, W would be disqualified to accept the engagement as independent reviewer.

 

How W will explain to his client that the company is now required to appoint two professional accountants – one to compile the financial statements and another to review the financial statements, is another practical matter (one that leaves the thought of whether these situations were considered by the Regulator).

 


Response received

 

Unfortunately I agree with you. In the case of sole proprietors, it may be worthwhile to have an arrangement with another sole proprietor to swop preparation / reviews. That way you give him work in return for work he gives you and there is no infringement of the requirements of the Act.