In a previous post, we dealt with the fact that no matter what size or type of business you have, you legally have to have accounting records. But, the type and size of your business DOES affect whether or not those accounting records need to be audited.
There are two categories of companies in South Africa: Profit Companies (incorporated for the purpose of financial gain for the shareholders) and Non-Profit companies (incorporated for a public benefit, the income is not distributable within the business and is used for some greater good).
Profit Companies are further split into four subcategories:
- State-owned company – an enterprise that is either listed as a public entity (such as SARS) or is owned by a municipality (Like City of Joburg).
- Public company – a company that is not state-owned, which has shares listed on the stock exchange for purchase by the public.
- Personal liability company – a company type mainly used by “associations” such as lawyers, engineers or accountants.
- Private company – a business that is owned by private individuals and it’s Memorandum of Incorporation prohibits the public trading of its shares on a stock exchange.
If a company provides ANY financial statements to ANY person for ANY reason, then the law requires that those statements satisfy the prescribed reporting standards. Financial reports must fairly represent the state of a business’s affairs and must accurately explain the transactions and financial position. So regardless of your company type and size, you need accounting records and those records need to be turned into financial statements every year. These statements are mainly used for management and tax returns. But do you need your company’s statements to be checked and signed by an auditor?
The following companies MUST have their financials audited by an independent accounting professional:
- All state-owned entities
- Non-profit businesses that are owned or controlled by the state
- Non-profit businesses with assets exceeding R60 million and income exceeding R120 million
- All public companies
- Private companies that hold assets in a fiduciary capacity for third parties
- A private company or non-state-owned non-profit with a public interest score of 350 or more (generally speaking, this is a company with more than 100 employees and an annual turnover of R100 million or more)
Instead of a full audit, the following businesses are subject to an independent review:
- Private, personal liability or non-profit companies with a public interest score of less than 100 but are not “owner managed”.
- Private, personal liability or non-profit companies with a public interest score of more than 100 but less than 350.
- Owner-managed businesses that also handle their own accounting internally.
If your business has a public interest score of less than 100 or is considered to be “owner managed” then you are not legally required to have an audit or an independent review of your financials, so long as your accounting is done by an independent accounting professional.
An owner-managed company is one in which:
- One person has all the beneficial interest in all of the issued securities
- Every shareholder is also a director
Therefore, if you own and manage your own business and your turnover is less than R100 million per year then you just need financial statements prepared by an independent accounting professional in order to meet your legal requirements.
Remember – this is your legal requirement only. If you apply for loans or wish to sell your business, then the person you are dealing with may very well request audited financials from you and you cannot refuse them if you wish to move forward with the contract. SARS may also conduct their own audit of your affairs if they feel that it is necessary. If you are unsure about whether or not your business legally requires an audit, or what your public interest score is, or if it would be in your interests to have a voluntary annual audit, then give us a shout!