Financial Data
Updated 16 Oct 2019


How good is your governance?

SMEs with high turnovers or asset bases could find themselves subject to stricter financial reporting, document control and management regulations in terms of the new Companies Act. This article offers an overview of some of these regulations.


02 April 2012  Share  0 comments  Print


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One of the key goals of the new Companies Act of 2008 is to encourage greater transparency and accountability in financial reporting, and to promote sound financial management. All companies, large and small, are therefore required to produce annual financial statements, but only public companies and parastatals have to conduct audits.

For everyone else, the Act introduces the concept of "independent reviews", which are reports prepared by independent professional accountants, based on your business's financial statements. This review provides assurance from the accounting practitioner of your company's financial health.

In terms of the Act, private and small businesses can choose to do an audit anyway. However, the independent review helps to reduce the burden of compliance and cost of reporting.

How this affects you

While an independent review might remove some of the expense and "hassle factor" associated with audits, it will not carry much weight unless it is conducted by a registered member of a professional accounting body.

Also bear in mind that the Act stipulates that anyone who prepares financial statements for a company, has to abide by international financial reporting standards as set down by the new Financial Reporting Standards Council.

In terms of this, the person preparing your financial statements can be held criminally liable if they are found to have not carried out their duties properly.

Take note

According to some sources, private companies with assets of less than R5 million and reported annual revenues of less than R20 million might NOT have to conduct independent financial reviews, or comply with prescribed reporting standards.

This could mean a huge sigh of relief for SME owners. However, these thresholds are yet to be published. Keep an eye on this space for updates.

Linked to the rules governing financial reporting, is a new regulation stating that directors may be liable for losses that a business suffers as a result of those directors conducting unauthorised or unlawful actions, or failing to act against such actions.

For example, a director who consents to publishing false financial statements could be held personally liable for any loss, damages or costs that result - whether directly or indirectly.

This liability is just one of a number of ways in which the Act tightens the reins on corporate governance. It puts special focus on directors' fiduciary duties, requiring directors to act in good faith, for a proper purpose and in the best interest of their company.

In other words, if you are a director you cannot put yourself in a position in which your personal interest conflicts with your duty to act in the company's best interest.

While the previous Companies Act made provision for certain conflict of interest situations, the new Act takes it a step further, requiring directors to disclose not only their own personal financial interest in a matter, but also that of any related persons that the director knows of, or should know of.

What's more, these fiduciary duties and responsibilities also apply to a company's "prescribed officers", as well as members of board committees who are not directors.

The Act defines a "prescribed officer" as anyone who has general executive control and management over a significant portion of the business, and who actively participates therein.

With this focus on greater accountability, however, also comes greater flexibility: the Act gives companies more options for structuring shares, voting rights and share benefits.

How this affects you

Board directors, committee members and anyone else who could be described as a "prescribed officer", need to be fully informed of their duties and the fact that they could be held personally liable for certain business losses.

They also need to know what indemnity, if any, your company might offer them. At the same time, you should review your insurance cover to adequately cater this indemnity and/or liability.

The Act clearly strives to focus directors' attention on corporate governance and their fiduciary responsibilities. However, it also introduces a new defense for directors who find themselves facing liability, but who can prove that they took sufficient steps to be informed, that they made objective decisions that were in the best interest of the business, and that they ultimately acted with the necessary skill, care and diligence.

It is also important to note that certain aspects of corporate governance - such as the King III recommendations, remain voluntary. Only selected principles are legislated in this Act.

Finally, the Act specifies a list of company records and registers that must be kept in written form (or a form that can be converted into written form relative quickly), usually for a minimum of seven years. This includes:

  • a copy of the Memorandum of Incorporation;
  • copies of all annual financial statements, reports presented at annual general meetings, and accounting records for the current and previous seven financial years;
  • notices and minutes of all shareholder meetings, including resolutions and related documents;
  • copies of written communication to all holders of any of the company's securities;
  • minutes of all meetings and resolutions of directors, the directors' committee and audit committee; and
  • a register of directors, securities, and company secretary and auditors.

Take note

This article is a general summary and should not be construed as legal advice or as an exhaustive overview. To download a full copy of the Act, visit http://www.info.gov.za/view/DownloadFileAction?id=98894

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