IFRS ONLY A MEANS TO AN END
There are no reported court cases in South Africa on the specific question of whether AFS are presented fairly. However in a case heard by the Companies Tribunal of South Africa, in the matter between Welfit Oddy (Pty) Ltd (Applicant) and the Companies and Intellectual Property Commission (CIPC – Respondent)), the Applicant Welfit Oddy (Pty) Ltd brought an application in terms of section 172 (2) of the Companies Act 2008 for cancellation of the Compliance Notice issued by the Respondent on 15 February 2017.[1]
The essential facts are as follows: During July 2016, the Respondent received a report that was sent to the Independent Regulatory Board of Auditors (IRBA), concerning a reportable irregularity on the part of the Applicant. Such reports are sent to IRBA by the auditors in terms of section 45 (3) of the Auditing Profession Act 26 of 2005.
The report came in the form of two letters dated 7 June 2016 and 8 July 2016 from Deloitte and Touche, the then auditors of the Applicant. The letters suggested that Applicant had contravened section 29 of the Companies Act 2008. On 15 February 2017, the Respondent issued a Compliance Notice to the Applicant, in terms of which Applicant was required within 40 days, to correct any action in contravention of the Act, specifically: The Board of Directors of the entity should comply with all the requirements of the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SME’s); The Board of Directors for Welfit Oddy (Pty) Ltd must avoid the recurrence of a similar non-compliance and/or reportable irregularity; and to provide reasons to the Commission why the Board of Directors of the company never rectified the abovementioned reportable irregularity and/or non-compliance of the IFRS for SME’s, even though they were persistently informed by their auditors.
On 7 March 2017 Applicant filed an application with the Companies Tribunal for cancellation of the compliance notice.
The crux of the auditors concern was based on the fact that the Applicant did not as obligated to do so apply fair value in hedging various transaction as required by IFRS for SME’s. The Applicant admits that it failed to comply with IFRS for SME’s; but claimed that this was done in order to prepare AFS that presented fairly the financial results of the company, which is one of the statutory duties of the Directors of a company. The Applicant submits that its non-compliance is not material because it is fully disclosed, explained and the impact is set out.
Hence, there is no misrepresentation and no material breach of the fiduciary duties owed by the Directors to a company.
The Presiding Member of the Companies Tribunal: Ishara Bodasing made some crucial and telling observations:
“Compliance with IFRS for SME’s is not an end in itself, but a means to an end. Hence the recognition in domestic legislation of the fair presentation override, as per S29(1)(b) of the Act… the preparation of financial statements [cannot be approved by the directors] without applying objective professional judgement to ensure that the statements achieve a fair presentation…That a particular standard is appropriate may be unquestionable, but there may be complicated issues of judgement in applying that standard which could affect, perhaps crucially, the resultant quantification or appearance of items in the financial statements. Such judgement is not given in a vacuum, but to achieve fair presentation.”
The Presiding Member made the following comments in delivering the findings of the Companies Tribunal:
“It appears that Respondent has mechanically applied the IFRS for SME’s standards in deciding that the form must strictly be adhered to, thereby confusing outcome with the need for due process… the provisions of the Act have served to underline and reinforce the centrality of the true and fair [present fairly] requirement to the preparation of financial statements... [the] Respondent did not apply its mind to the question of under what circumstances can departure from a relevant standard be contemplated, particularly if it is alleged that compliance therewith would be inconsistent with the objective of true and fair view…In light of the above, I find that Respondent did not act in a manner that was reasonable or procedurally fair by issuing Applicant with a Compliance Notice.”
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