Section 90 – Companies Act 2008 and Once off Consulting Engagements

Issue – Company A require IFRS 15 consulting services. They also are placing their external audit out to tender to begin on 1 March 2018. Question – If the IFRS 15 consulting work is accepted – would this preclude the consultant accepting the appoint as auditor in 2018/2019 based on Subsection (2) (b) (vi) [commonly know as the five year cooling off period]? 1. Introduction Section 90 (2) (b) of the Companies Act 2008 sets out who can and who cannot be appointed as an auditor. a. Subsection (2) (b) (i) The registered auditor (whoever that person maybe) must also not be a director or prescribed officer of the company. This section does not prohibit consulting work. b. Subsection (2) (b) (ii) The registered auditor (whoever that person maybe) must also not be an employee or consultant of the company who was or has been engaged for more than one year in the maintenance of any of the company's financial records or the preparation of any of its financial statements. This section includes consulting work – however it is limited to financial records and the preparation of financial statements. c. Subsection (2) (b) (iii) The registered auditor (whoever that person maybe) must also not be a director, officer or employee of a person appointed as company secretary in terms of Part B of this Chapter. This section does not prohibit consulting work. d. Subsection (2) (b) (iv) The registered auditor (whoever that person maybe) must also not be a person who, alone or with a partner or employees, habitually or regularly performs the duties of accountant or bookkeeper, or performs related secretarial work, for the company. This section does not prohibit consulting work. e. Subsection (2) (b) (vi) The effect of this subsection is to disqualify from appointment as auditor of a company every person who, at any time during the five financial years immediately preceding the date of appointment, was a person related to persons contemplated in ss (2) (b) (i)–(iv). 2. Suggested Solution The only time the term “consulting” is mentioned in s 90 (2) (b) is contained in Subsection (2) (b) (ii). The two persons mentioned in the above as are ‘Employees and Consultants’. An ‘employee’ is any person, excluding an independent contractor, who works for the potential auditee or who receives, or is entitled to receive, remuneration. A ‘consultant’ is a person person who provides expert advice professionally. The auditor does not provide expert advice in the normal course of his or her duties. Therefore an auditor cannot be a consultant for the purposes of this section. An example of a consultant in this context may be a person who provides expert advice in the interpretation and application of financial reporting standards such a those services required by Company A. Another example would be a person who was engaged to compile the financial statements on behalf of the board of directors. However it must stressed that the consultant in this section is limited to the maintenance of financial records and the preparation of financial statements and does not apply to any other area of expertise. The only question that needs to be addressed is whether the required IFRS 15 consulting services are akin to the maintenance of financial records or the preparation of financial statements. Financial records according to SAICA have the following meaning - means information in written or electronic form concerning the financial affairs of a company as required in terms of the Companies Act 2008 including, but not limited to, purchase and sales records, general and subsidiary ledgers and other documents and books used in the preparation of financial statements. It is clear that the IFRS 15 consulting work is not akin nor is even remotely similar to task of maintaining accounting records. SAICA define ‘financial statements’ as a structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term ‘financial statements’ ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement. The Independent Regulatory Board’s (IRBA) code of professional conduct which is prescribed by the APA explains that the audit process necessitates dialogue between the auditor and other consultants and the auditee in respect of the application of accounting standards. The IRBA Code is clear that such dialogue is considered to be a normal part of the audit process and does not, generally, create threats to independence. The IRBA code explains that the auditee may request technical assistance in this regard. Again the IRBA Code is very clear that such services do not, generally, create threats to independence provided the firm or any other person do not assume a management responsibility for the client. What if the IFRS 15 opinion is one that is relied upon by management and forms the very basis upon which the financial statements are based. This may very well be perceived to be preparing financial statements, despite it being “part of the dialogue”. However subsection (2) (b) (ii) refers to “one year”. Therefore despite the IFRS 15 engagement being perceived to be preparing financial statements such an engagement still fails the “one year” rule. The separate consulting engagement must have been ongoing for more than one year. The emphasis appears to be on the words “for more than one year”, so that a person who is called in only temporarily to perform the duties of an IFRS 15 consultant (a once off engagement), would not be disqualified in terms of this subsection. A part-time consultant, however, who is permanently employed as such, is consequently disqualified. I am of the professional opinion that subsection (2) (b) (vi) does not apply as none of ss b (i) to (iv) apply. However – s 90 Section must be read in conjunction with s 94 of the Companies Act 2008. Section 94 (7) (a) reads as follows: An audit committee of a company has the following duties: “To nominate, for appointment as auditor of the company under section 90, a registered auditor who, in the opinion of the audit committee, is independent of the company”. Section 94 (8) (c) amplifies the context of s 94 (7) (a) by stating “consider compliance with other criteria relating to independence or conflict of interest as prescribed by the Independent Regulatory Board for Auditors established by the Auditing Profession Act (APA)”. An example that best illustrates s 90 (2) (b) would to assume that the consultant accepts the engagement on 1 March 2017 and completes it by 31 March 2017 and is appointed auditor from 1 April 2017 to 31 March 2018. If this is the case it would be hard to imagine that the consultant would be able to accept the appointment as auditor of Company A in the next financial year (1 March 2017 to 31 March 2018) as there is no doubt that consultants who became the auditors would be auditing their own opinion. I believe the IRBA code of professional conduct would frown upon such an acceptance. The audit committee I believe would not be able to appoint the auditor. However this is not the case. The consultants would only be accepting the appointment of the audit for 1 April 2018 to 31 March 2019. IFRS 15 is applicable on 1 January 2018. The audit tender would be for the year end begin 1 April 2019. The current auditors would be the ones that audited the IFRS 15 opinion and not the consultants who are the potential auditors. So there would be an entire financial year of applying IFRS prior to the new auditors taking over. So it is very unlikely that the new auditors in 2019 would be auditing their own opinion which was conceived in 2017. 3. Conclusion The IFRS 15 consulting work is a once off assignment and is not a continuing one therefore the “one year” rule does not apply. In addition the “five year” rule does not apply either as the potential auditor would never come to audit his/her own consulting work ensuring that the objectives of independence are maintained. Therefore I in my professional opinion I do not believe that by accepting this once off IFRS 15 consulting engagement it would preclude any such person from accepting the 2019 audit of Company A.