Corporate South Africa is in danger of grinding to a halt as armies of legal and accounting advisers attempt to come to terms with the detailed implications of the new Companies Act and, more recently, the proposed changes to the Income Tax Act.
One independent auditor said there were “well over 70 problem areas” in the implementation of the Companies Act.
It appears that problems of interpretation of the new act are being compounded by the enormous demands being made on companies to bring all of their accounting and reporting policies in line with the new act.
Thus one of the basic tenets of the new act is that the memorandum of incorporation (MoI) will be the sole governing document of a firm. This removes the need for both a memorandum of association and articles of association. But while the drafters of the act believed that it would be relatively easy for the two documents to be merged into one MoI, the reality is that it has created enormous amounts of work, particularly for large companies with scores of subsidiaries.
In addition, companies are now faced with having to get shareholder approval for inter-company loans. This was an area of concern raised by opposition parties during the parliamentary hearings.
“The act is going to generate huge fees for legal and accounting advisers,” the independent auditor said.
One area that is likely to cause concern for the local authorities, and in particular Sars, is the treatment of foreign companies carrying on business in South Africa. These are “external companies” and are required to have a local registered office. But in terms of the new act they will not be subjected to any form of audit process or even to an independent review.
Previously all such external firms had to be audited by local auditors. Under the new act they need to register, but the absence of an audit requirement means that they will not be subjected to any regulatory oversight.
“Without a formal audit of these South African-based businesses, how will Sars know what tax they should be paying?” asked one lawyer, who added that many “external companies” were larger than most domestic firms.
Another area expected to cause difficulties is the requirement to undertake a fair value exercise before any corporate activity because of the need to pass a solvency and liquidity test.
Large firms also face hefty obligations in their public interest scores.
Carl Stein of law firm Bowman Gilfillan noted that every state-owned, listed and any other company “that has, in any of its previous five financial years, scored above 750 points on its ‘public interest scorecard’ must have a social and ethics committee”.
The committee, which is appointed by the board, has the duty to “monitor the company’s activities” in relation to five aspects of a company’s social responsibilities, namely social and economic development; good corporate citizenship; the environment, health and public safety; consumer relationships; and labour and employment. Stein described the all-embracing nature of this requirement as “startling”.
For small companies, that is, those with a public interest score below 100, that are trying to decide what sort of accounting policies to use, the good news is that the SA Institute of Chartered Accountants (Saica) is in the process of developing a voluntary guide.
Sue Ludolph, the project director for accounting standards at Saica, stressed that it was a voluntary guide and noted that the government did not want to be too prescriptive when it came to very small businesses. - Ann Crotty