Learning Unit 7: Increased Accountability and Transparency Study Notes

Learning Unit 7: Increased Accountability and Transparency

Lecture 14: Auditors, Audits, etc

Overview of the Education Unit

  • Contact Information:
    • Phone: +27(0)51 401 9111
    • Email: info@ufs.ac.za
    • Website: www.ufs.ac.za

Legal Framework Governing Auditors

  • The responsibilities regarding the appointment, duties, and other implications for company secretaries, auditors, and audit committees are primarily regulated by Chapter 3 of the Companies Act.
  • This regulation predominantly applies to:
    • Public companies
    • State-owned companies (SOCs)
    • Certain private companies

Enhanced Accountability and Transparency Requirements

  • All public and SOCs, as well as specific private companies, are mandated to appoint:
    • An independent auditor
    • An audit committee
    • A company secretary
  • A register must be maintained to record secretaries and auditors per Chapter 3 of the Companies Act.

Role of the Auditor

  • An independent overview of financial statements is crucial for protecting stakeholders from unreliable, inaccurate, unfair, misleading, or dishonest information.
  • Auditing Requirements:
    • Financial statements must indicate whether they have been audited or subjected to an independent review.
    • Not all companies are required to have their statements audited:
    • Public companies and SOCs must have their annual financial statements (AFS) audited.
    • Other companies must have AFS audited based on Public Interest (PI) scores:
      • If PI score is 350+: Must have AFS audited
      • If PI score is 100-350: AFS may be internally compiled

Appointment Process of Auditors

  • Public companies, SOCs, and certain private companies must:
    • Appoint an auditor upon incorporation and at every Annual General Meeting (AGM).
    • The retiring auditor can automatically be reappointed unless certain conditions apply (e.g., ineligibility or objections from the audit committee).

Independence and Qualification of Auditors

  • To be appointed as an auditor, an individual or firm must meet the following criteria:
    • Be registered with the Independent Regulatory Board for Auditors (IRBA).
    • Be determined as independent by the audit committee.
    • Not fall into prohibited categories (e.g., not holding directorial positions or having significant interactions with the company’s financial records in prior years).

Resignation and Vacancies in the Position of Auditor

  • Procedures regarding the resignation and appointment of an auditor include:
    • Notifying the company of resignation.
    • Board-initiated removal from office.
    • In case of a casual vacancy, the board must appoint a new auditor within 40 business days after proposing a name to the audit committee.

Rights and Functions of Auditors

  • Auditors have the right to:
    • Access all accounting records and books of the company.
    • Obtain information and explanations from directors and prescribed officers to perform their duties.
    • Attend general meetings of shareholders.
    • Receive notice of shareholders' meetings and be heard on any pertinent issues.

Audit Committee (AC)

  • The audit committee plays an integral role in:
    • Ensuring integrity in financial controls and integrated reporting (financial and sustainability reporting).
    • Identifying and managing financial risks.
    • All public companies and SOCs are required to have an AC.
Composition and Election of AC
  • The AC must consist of at least three members who are directors (non-executive independent directors).
  • They cannot be involved in the company’s day-to-day management or have significant relationships with suppliers/customers that would question their independence.
  • Members should be elected at every AGM.
Nominating Committee's Role in AC
  • The board’s nomination committee is significant in identifying qualified individuals for the AC. The AC can have as many members as desired, but all must meet the qualification criteria.
Duties of the Audit Committee
  • The AC is responsible for:
    • Nominating an independent auditor.
    • Determining auditor fees and engagement terms.
    • Ensuring compliance with all laws regarding auditor appointments.
    • Pre-approving contracts for non-audit services provided by the auditor.
Reporting Obligations of AC
  • The audit committee's report included in annual financial statements should cover:
    • How the AC performed its functions.
    • Confirmation of auditor independence.
    • Comments on financial statements and accounting practices.
    • Handling complaints regarding accounting practices and internal controls.
Additional Functions of AC
  • Besides statutory duties, the AC may also oversee:
    • Financial risk management and reporting.
    • Internal audit functions.
    • Integrated reporting.
    • Assurance models to ensure coordinated assurance practices.
Monitoring Auditor Independence
  • The King IV Code and others stress the need to ensure the auditor's independence, disclosing the audit firm's length of tenure, significant audit matters, and other contexts concerning the auditing standards.

Company Secretary (CS)

  • Public companies and SOCs must appoint a CS who:
    • Is a permanent resident of South Africa.
    • Can be a partnership or legal entity (with at least one resident partner/employee).
  • The CS is accountable to the board and must be capable of fulfilling their duties.
Duties of the Company Secretary
  • Responsibilities include:
    • Advising directors on legal compliance.
    • Reporting on compliance failures.
    • Certifying in annual financial statements that required returns have been filed.
    • Ensuring proper record-keeping of meetings.
Importance of Company Secretary
  • The role has evolved from mere record-keeping to a central position in educating and inducting directors and ensuring comprehensive and timely information flow to boards for decision making.

Disqualification and Removal of Company Secretary

  • The CS can be disqualified under similar grounds as directors and may be removed by board resolution. They can resign with a month's notice.

Internal Audit Function

  • Responsible for:
    • Providing objective reviews of internal controls.
    • Reporting to the board and operating under AC oversight.
    • Employing a risk-based approach to planning rather than solely compliance-focused assessments.

Key Responsibilities of Internal Audit

  • The internal audit must be independent from management and report on risks impacting the company's strategic goals. Their approach should align with the board's understanding of significant risks to ensure effective governance.

[Continued detailed framework about audits and corporate governance practices across pages continued in Transcript 1]

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