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.