Under the amended legislative framework, members of a close corporation are now required to prepare annual financial statements (AFS) within six months after the financial year-end. This timeline was shortened from the previous nine-month period due to the incorporation of relevant provisions from the Companies Act into the Close Corporations Act 69 of 1984.
Section 30(1) of the Companies Act stipulates that all entities, including close corporations, must finalise their AFS within six months of their financial year-end. Additionally, Section 30(2) specifies that these statements must be audited or independently reviewed, depending on the provisions set out in the company’s regulations, the entity’s founding document, or its memorandum of incorporation (MOI).
Regulation 28(2)(a) of the Companies Act further clarifies that any close corporation or company that manages assets exceeding R5 million annually in a fiduciary capacity is obligated to undergo an audit.
Moreover, Section 30(2)(b) of the Companies Act, when read together with Section 58(2A) of the Close Corporations Act, indicates that a close corporation must be audited if its public interest score (PIS) surpasses a specific threshold.
What is a Public Interest Score (PIS)?
The PIS is calculated based on several factors:
- The number of employees;
- Annual turnover; and
- The number of stakeholders with direct or indirect financial interests.
The score must be determined at the end of each financial year and plays a key role in deciding whether a close corporation requires an audit or independent review.
- If the PIS is 350 or higher, an audit is mandatory.
- If the PIS is between 100 and 349, and the AFS are compiled internally by an employee, then an audit is still required.
- If the AFS are prepared independently, only an independent review may be required.
Is an Independent Review Mandatory?
There is some debate around whether an independent review is compulsory for close corporations. One perspective holds that, since Section 58(2A) of the Close Corporations Act limits the application of the Companies Act only to close corporations that require an audit, these entities may be excluded from the independent review requirement.
Despite this uncertainty, close corporations may still voluntarily opt for an independent review, especially when transparency or stakeholder trust is a concern. However, the financial cost of such a decision should be carefully considered.
Audit vs. Independent Review: What’s the Difference?
An independent review offers limited assurance that the financial statements fairly reflect the entity’s financial status. It involves analytical procedures and inquiries but does not typically involve the same depth of testing or verification.
An audit, in contrast, is a more comprehensive process. It involves examining supporting documents, evaluating internal controls, and verifying financial data, thus offering a higher level of assurance.
While reviews are generally less invasive, they can sometimes be nearly as costly as audits without delivering the same depth of assurance.
New Requirements
Before the Companies Act amendments, close corporations were only required to prepare AFS and appoint an accounting officer, who primarily reported on whether appropriate accounting policies were applied. The recent changes have significantly expanded these responsibilities.
Each close corporation must assess whether it meets the criteria for a statutory audit or review based on its specific operations, public interest score, and fiduciary activities. Even when not legally required, entities can still choose to undergo an audit by including such provisions in their founding documents or through a decision by members. The nature and scale of the business should guide these decisions to ensure proper governance and safeguard members’ interests.
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