Accountability and transparency in business- why they matter
Business owners - know your basic legal duties and responsibilities, writes Monisha Prem
Business are required to be more accountable to various stakeholders by ensuring disclosures of business activities, more stringent accounting requirements and compliance with laws ensuring that directors discharge duties honestly, responsibly and diligently. As a result accountability and transparency now play a fundamental role in modern business practice.
In line with this trend, the new Companies Act 71 of 2008 ("the Act") which came into effect on 1 April 2011, imposes greater transparency and accountability requirements on all companies. Many SMEs ask whether the concept of accountability and transparency apply to them or only to big corporates. The Act applies to all companies regardless of size, and non-compliance may result in penalties.
1. Registered office. Every company must have a registered office in the Republic of South Africa, which address must be indicated on the Notice of Incorporation. Should the registered office change from time to time, the company must file a Notice of Change of Registered Office with the Companies and Intellectual Property Commission ("CIPC").
2. Maintain records for a certain period. All records and information that a company is required to keep must be held for a period of at least 7 years in written form, or any other form that allows it to be converted into written form, at the company’s registered office. Where these records are kept at another office, the company must advise the CIPC of this address. All shareholders have a right to inspect and obtain copies of the company records upon request.
3. Fixed financial year. Every company must have a fixed financial year, ending on a date set out in the Notice of Incorporation, subject to any change made by the board by filing a notice of such change with the CIPC.
4. Financial reporting. All companies, whether big or small, must keep accurate and complete accounting records and prepare annual financial statements. However, only public companies and certain private companies with a greater responsibility to the wider public as a consequence of their significant social or economic impact as indicated by any relevant factors, including its annual turnover, the size of its workforce or the nature and extent of its activities, are required to be audited. All other companies must be either voluntarily audited or independently reviewed, except private companies which have only one beneficial shareholder, or where all the directors are also the beneficial shareholders.
An independent review is a report prepared by an independent professional accountant, based on the business’s financial statements, and speaks to the company’s financial health. In comparison, an audit is more costly and places a heavier burden of compliance on a company than independent reviews.
Bear in mind that all financial statements must satisfy the prescribed financial reporting standards, which may vary for different types of companies, but must be consistent with International Financial Reporting Standards as set by the International Accounting Standards Board.
5. File annual returns. All companies are required to file annual returns with the CIPC. The purpose for the lodging of such annual returns is to confirm whether a registered company is still trading, or if it will be in business in the near future. Failure to submit annual returns for two consecutive years will result in de-registration of the company by the CIPC. Once a company has been de-registered, it no longer has any juristic personality and therefore ceases to exist.
6. Auditors, audit committee and company secretary. Only public companies and state-owned companies are obliged to appoint an auditor, audit committee and company secretary. No private or other type of company is obliged to appoint a company secretary or an audit committee, even if it is obliged to have its annual financial statements audited, in which case they will only need to appoint an auditor.
The same individual may not serve as an auditor of a company for more than 5 consecutive financial years. The Act prescribes the duties of an audit committee and company secretary. An audit committee is responsible for determining the auditor’s fees and terms of engagement, amongst other, while a company secretary’s duties include providing the directors of the company with guidance, making them aware of relevant laws and any failure to comply, and ensuring that all minutes of meetings are properly recorded.
About the author: Monisha Prem (BA MBA) is the CEO and senior legal practitioner at Excelsur Legal Services. Monisha is an admitted attorney with over 10 years post-article experience in law.