How the audit abolition fails SA

THE debate about whether auditing standards should be the same for all companies, large and small, has been running for some time. In this context, the principle of audit exemption has now been accepted by the government.

The Companies Act of 1973 currently imposes a statutory audit requirement for the financial statements of all companies, irrespective of their size, capital structure or business activity. One of the most influential regulatory changes will ensue when the Companies Bill, 61 of 2008, is enacted, allowing for the abolition of the audit requirement for private limited liability companies.

The government’s reason for the removal of the audit requirement for small companies is the elimination of bureaucracy and unnecessary administrative requirements for small companies. It is quite clear that the government views the statutory audit as providing no added value for a private limited liability company and believes the sooner it is abolished, the better. But the public interest is not best served by the abolition.

The shareholders, or members of a limited liability entity, have the privilege of decision making, acting and running operations for which they, in their individual capacity, take only limited responsibility, whether financial or otherwise. For this privilege, the limited liability entity must “pay” by making information available to its stakeholders in a responsible, transparent and unbiased manner.

Gone are the days that a company is accountable only to its shareholders. No company is an island. It is part of a complex infrastructure and as a corporate citizen, is accountable to the community, employees and others. The owners and directors of private limited liability companies must be made accountable in law for their actions. The law should ensure that external stakeholders such as shareholders, minorities, employees, creditors, suppliers, consumers and the general public, are protected.

Questions arise about the rationale for the abolition of the audit for the private limited liability company. The cost burden cannot be the only reason, or is it? One would assume that a regulatory impact assessment would have been conducted in order to provide a detailed appraisal of the potential effects of the new regulation to assess whether the regulation is likely to achieve the desired objectives. This appears not to have been done. It appears that the removal of the statutory audit for private limited liability companies has been developed and implemented with little regard to its effect on the economy. This is the essence of legislative inefficiency.

While auditors carrying out a statutory audit of financial statements are accountable and report to the shareholders of a company only, there may be other stakeholders who believe that an independent audit provides some means of ensuring that the company’s responsibilities to them are being met; in effect that it serves their interests too. Stakeholders such as creditors, lenders, credit agencies, customers and employees may claim an interest in the audit.

Private companies are the forgotten stakeholders in the fair and efficient management of South African corporate governance. The government has assumed that rules, norms and best practice will somehow magically trickle down to private companies.

The bill offers neither resources nor practical guidance on corporate governance. It has deregulated the single aspect of corporate governance that has traditionally served the public interest.

Company-law regulators have sacrificed the promotion of the public interest in favour of economic efficiency when it comes to private companies.

Today's legal structures allow private companies to raise astronomical amounts of finance from the public in the time it takes to bat an eyelid, and to employ these resources as they see fit behind a wall of secrecy and freedom from legal accountability. It is time to end the illusion that an audit has no value.