The Independent Review – A New Skill Set for South African Accounting Professionals

On 1 April, 2011 Companies Act 2008 (“Act”) will replace both the Companies Act 1973 and Corporate Laws Amendment Act 2006. The Act introduces the concept of an “Independent Review” as an alternative form of external independent assurance of financial statements. Private companies in South Africa will be able to replace the annual audit with an Independent Review. The work effort in an independent review engagement is limited to inquiry, analytical procedures and discussions related to the information that the client supplies. Consequently, an independent review does not require the gathering of supporting or independent evidence or an assessment of internal control as would be required in an audit. Management's responses to inquiries are acceptable as long as they appear plausible in the circumstances. The word plausible is often defined in terms such as the information being credible, appearing worthy of belief, or seemingly or apparently valid, likely or acceptable. The draft regulations to the Act make provision that allows the registered auditor in terms of the Auditing Professions Act and an accounting officer in terms of the Close Corporations Act to conduct the independent review. The independent review requires different skills from those possessed by auditors or accounting officers. An auditor and accounting officer are only skilled in conducting various specialised procedures based on the objective of their engagement. However they are not skilled with an ability to ask penetrating questions an essential ingredient of an independent reviewer. This is because the independent reviewer not only has to ask the right questions and analyse the responses given to spot implausibilities but to have the strength to stand up to implausibilities and press for further explanation. An auditor has to corroborate all management representations while the accounting officer does not have to inquire anything of management as part of their duties. Therefore the acceptance of management representations without corroboration is a new skill for the auditor while making management inquiries will be a newly acquired skill for the accounting officer. An ability to read body language would be advantageous. Conducting an analytical review of the financial statements is not the primary source of audit evidence required by an auditor. Accounting officers are not obliged at all to conduct analytical reviews. An analytical review in an audit is used as a planning tool and to corroborate any primary audit evidence obtained. In an independent review the analytical review is a primary source of evidence in assessing the plausibility of management’s representations. Auditors and accounting officers will have to acquire sufficient analytical skills that would enable them to use analytical reviews as a primary tool rather than just a secondary one. This would entail additional training and practice to ensure this new skills set is obtained. The accounting officer would be at a disadvantage when it comes to the conducting of independent reviews as compared to the auditor. The accepted view is that the ability to perform an independent review is greatly facilitated by the fact that an auditor had previous audit experience with the clients. The accounting officer will need to obtain additional skill sets that an auditor already has. For example: the ability to plan the review and document the review procedures conducted, something that has been part of the auditor’s DNA for almost time in memorial. The draft regulations to the Act recognises the differences in skills between the registered auditor and accounting officer. The regulations allow only the registered auditor to conduct the independent review of the larger private company while the Accounting Officer can only conduct the independent review for the smaller private company.