Relaxation for small audit firm regulation needs to be considered

The future of small audit firms may be under threat depending on the outcome of a difference in interpretation of section 90 (2) of the new companies act between the Southern African Institute of Chartered Accountants (SAICA) jointly with the IRBA (Independent Regulatory Board for Auditors).

Andrew Hannington (pictured), the national chairman of PKF chartered accountants and business advisers, says: “Section 90(2) places a prohibition on firms simultaneously performing audit and non-audit work for the same client. This means that if you are doing the audit for a business, you cannot also do its payroll, bookkeeping or secretarial work. While this may resolve conflicts of interest involving large companies, it ignores the reality for a lot of small firms that they may be the only firm in a district and clients wish them to provide such a one-stop service.”

The differing interpretations of Section 90(2), which specifies who can be appointed as the auditor of the company and who is prohibited from being appointed.

Hannington explains that PKF’s view is one that reinforces the prohibition on performing both audit and non-audit services, and is therefore likely to be detrimental to the interests of small firms. He says these firms should take the opportunity to lobby CIPC to press their interests – as well as the interests of the entire audit profession given small firms account for more than half the number of CAs in the country.

“Because audit fees have come under such immense pressure, all firms large and small have diversified their sources of revenue. At PKF we have 15 separate business units today and this has become the norm among larger firms. Small firms are no different, and it may be that for financial reasons – if this regulation is passed as is – they choose to terminate their audit services in favour of non-audit. Audit work will come to be seen as a block to more lucrative alternative work. Where does this then leave statutory financial reporting, especially when larger firms are unlikely to be willing to step in to fill the void, given the economics of a small audit,” asks Hannington.

The unintended result of Section 90(2) is that to prevent ‘conflicts of interest’ among larger firms, those smaller clients that have opted to continue with the annual audit under the new Companies Act may end up with no choices at all.

“Small, often rural, firms tend to be one-stop shops for their clientele and they should be extended some flexibility in the application of this prohibition of non-audit work. Sometimes they perform this work in a community spirit, because there is simply no-one else to do it.”

IRBA extended the period of transition to 31 October to allow further monitoring. Hannington explains that how some firms are getting around it is to act as ‘agent’ to clients for their bookkeeping and secretarial needs, theoretically assisting someone at the firm while technically continuing to perform the function.

How this will be interpreted by IRBA at the end of the window remains to be seen.

Hannington argues that the regulator needs to relook at this issue from the perspective of the small firm (five-man and less). It will not affect large and urban firms as much, given that work lost at one client may be replaced with new work lost by a competing firm. “Furthermore, in our case bookkeeping only amounts to 10% of our revenue and it is work that typically does not need to be audited. However, our secretarial division is in danger of being closed down.”

The IRBA sent out a communication on 17 May 2012 outlining both the extension of the window regarding section 90(2) compliance to 31 October 2012, and advising that registered auditors “should continue to follow current practice as prescribed by the IRBA Code of Professional Conduct (the Code) in respect of the provision of audit and non-audit services. Consequently, until that date, the IRBA does not intend to prosecute registered auditors as long as they comply with the Code”.

“Small firms should not miss this opportunity to present their views. As an industry, we need them to be doing audits in their field,” he explains.

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