LU 7 - Increased Accountability and Transparency

Question 1

Which chapter of the Co Act regulates matters iro co secretary, auditors, and audit committee?

Answer 1

Chapter 3

Question 2

To whom is this applicable?

Answer 2

Mainly public companies and SOCs and pvt cos with PI score of more than 350 points.

Question 3

Discuss ‘audit’

Answer 3

1. Independent overview of financial statements -> protection against unreliable, inaccurate, unfair, misleading or dishonest information
2. Must indicate on the Financial Statements whether the statements have been audited or independently review (not all cos need statements to be audited)
3. 350+ PI score must have AFS audited; 100-150 must have AFS internally compiled
4. Must be acceptable to the Audit Committee as being independent of the co
5. May not serve as auditor of co for more than 5 consecutive years
6. If vacancy Board must within 40 business days appoint new auditor; within 15 business days proposed name to AC and AC within 5 days reply. If no reply, board can appoint the auditor.

Question 4

What are the rights and functions relating to audit?

Answer 4

1. At all times right to access accounting records and books of the Co
2. Right to access information and explanations from directors/prescribed officers as needed for the performance of his duties
3. Right to access to financial statements of subsidiaries as holding co’s audit
4. Attend general meetings of shareholders
5. Receive notice and other communication about general meetings of shareholders
6. To be heard on general meetings of shareholders on any issues that concerns the auditor’s duties or functions

Question 5

Discuss internal/external auditors

Answer 5

• The shareholders are responsible for the appointment of the auditor at the AGM
• The AC has to nominate an independent auditor for appointment. But, nothing precludes the appointment by the Co at its AGM of an auditor other than one nominated by the audit committee.
• However, if such auditor is appointed, the appointment is valid only if the AC is satisfied that the proposed auditor is independent of the co.
• The Board may remove the auditor. Such vacancy must be filled within 40 business days.
• The AC is responsible, to the exclusion of the rest of the board, for the terms of engagement, the fees and the appointment of the external auditor.

Question 6

Discuss the Audit Committee (10)

Answer 6

1. Plays a vital role in-
   a. Ensuring the integrity of financial controls and integrated reporting; and
   b. Identifying and managing financial risk
2. The AC must be appointed by the shareholders at every AGM
3. The AC must consist of at least 3 members/directors who must be non-executive independent directors.
4. Members may not be involved in the day-to-day management of the co’s business.
5. Members may not be prescribed officer/employees of co in past 3 years; or material suppliers or customers of the co that a reasonable and informed 3rd party would in the circumstances question the integrity, impartiality or objectivity of the directors.
6. The requirements of s94 are prescriptive
7. If co appoints AC with persons other than prescribed, it would not be an AC; and any functions undertaking will not have been performed by the AC.
8. All AC members must be directors (members of the board)
9. The shareholders may appoint anyone they deem fit and proper
10. The AC will bear sole responsibility for its decisions pertaining to the appointment, fees and terms of engagement of the auditor. On all other matters, it remains accountable to the board and, as such, it will function as a board committee

Question 7

What are the duties of the Audit Committee

Answer 7

1. Nominate auditor
2. Determine fees to be paid to auditor and terms of engagement
3. Ensure that appointment of auditor comply with provisions of Co Act and other legislation relating to appointment of auditor
4. Determine the nature and extent of any non-audit services the auditor may provide to the co
5. Pre-approve contracts with auditor for provision of non-audit services
6. Report (included in AFS) on
   a. How the AC carried out its functions
   b. Did the AC determine that the auditor is independent
   c. Commenting on the financial statements, accounting practices and internal financial control of the co
7. Receive and deal with complaints from within or outside the co about co’s accounting practices, internal audit, content or auditing of financial statements
8. Make submissions to board on any matter concerning co’s accounting policies, financial control, records and reporting
9. Any other functions determined by the board

Question 8

What are the statutory duties of AC?

Answer 8

1. Making submissions to the board regarding the co’s accounting policies, financial controls, records and reporting
2. Nominating an auditor that the AC regards as independent
3. Determining the audit fee
4. Ensuring that the appointment of the auditor complies with the Co Act other relevant legislation
5. Determining the nature and extent of non-audit services
6. Pre-approving any proposed agreement with the auditor for the provision of non-audit services
7. Preparing a report to be included in the AFS
8. Receiving and dealing with relevant complaints; and
9. Any other functions designated by the board

Question 9

What are the additional disclosure to be considered for inclusion in the AC report?

Answer 9

1. A statement as to whether the audit committee is satisfied that the external auditor is independent. Which should address:
   a. The policy and controls that address the provision of non-audit services by the external auditor;
   b. The nature and extent of such services rendered during the financial year the tenure of the external audit firm;
   c. The rotation of the designated external audit partner; and
2. Significant matters that the AC has considered irt the AFS, and they were addressed
3. The AC’s views on the quality of the external auditor
4. The AC’s views on the effectiveness of the chief audit executive
5. The AC’s views on the effectiveness of the CFO and the finance function.

Question 10

Discuss the company secretary

Answer 10

1. Public Cos and SOCs must appoint co sec.
2. Must be permanent resident of RSA
3. May be a partnership or juristic person (1 partner or employee must be resident)
4. The co sec may be appointed either by the board or by an ordinary resolution fo the holders of the co’s securities.
5. The co sec is accountable to the board.
6. Where there is a casual vacancy of the co sec position, the directors have 60 business days to find a replacement.

Question 11

Discuss the duties of the company secretary

Answer 11

1. Provide guidance to directors collectively or individually about their duties, responsibilities and powers
2. Make directors aware of any laws relevant to/affecting the Co
3. Report to Board if co or director failed to comply with Co Act
4. Certify AFS that co filed the Co Act required returns and notices
5. Ensure that minutes of shareholder meetings, board meetings, board committee meetings and AC meetings are properly recorded
6. Ensure that copy of AFS is sent to every person who is entitled to it
7. Other functions ito the Co Act
8. Must ensure that directors receive all relevant information in their board papers. Such info should be complete to allow for an informed decision to be made, concise to ensure that the directors do not suffer from info overload, and timely.

Question 12

Discuss ‘internal audit’

Answer 12

• The internal audit function offers the board an objective review of the internal control systems within the co.
• Accountable to the board, and operates under the direct oversight of the AC.
• The charter of the internal audit function should comply with the guidance published by the Institute of Internal Auditors.
• They should pursue a risk-based approach to planning as opposed to a compliance approach that is limited to evaluation of adherence to procedures.
• The Chief Audit Executive should have a standing invitation to attend as an invitee any of the executive committee or other committee meetings.
• Where the directors feel that there are significant risks that are not being sufficiently managed, they should be able to look to the internal audit function to work with management in creating and maintaining a comprehensive risk management plan to manage these risk