Companies Act

No 71 of 2008

Auditing 221E
Unit 1

1
Module Objectives
• Learners should be able to:
• Explain the statutory requirements of the Companies Act, 2008
including the schedules thereto and the accompanying common
law aspects
• Deal with practical applications of the Companies Act., 2008

References:
 Jackson & Stent 9th edition – Chapter 3
How to study this module
• Understand WHY and WHEN
• Picture the physical LAYOUT OF THE ACT and be comfortable
with it
• STUDY the SECTIONS summarised in J&S
• Underline the KEY WORDS in the Act
• Make your own DICTIONARY of TERMS AND DEFINITIONS
• Develop a TECHNIQUE for answering statutory type questions
• PRACTISE!!!!
• Remember: do not look at statutory matters in isolation -
CONTEXTUALISE
 Outline
• Introduction
• Regulations
• Sections of the Co Act:
• Contractual powers of companies
• Company records & financial statements
• Share capital
• Shareholders
• Directors
• Company secretary
• Auditors
• Other
4
Introduction
• Why are we, as auditors, interested in legislation?
• Brief background & objectives
• Structure of the Act
• Definitions
Why are we, as auditors, interested in
legislation?
• Knowledge of the business: regulatory frameworks in
which our clients operate
• Fraud and error (legislation and common law)
• Auditing of transactions and account balances
(negotiable instruments, contracts, VAT, Income Tax,
loans to directors, share capital transactions)
• The auditor’s duties and rights
Brief background
• Constitutional protection of persons (juristic persons have
constitutional rights and obligations)
• Old Companies Act promulgated in 1973
• Changes in political, economic and social landscape required revision
of the legislation to achieve the aforementioned objectives
• Thus new Companies Act No 71 of 2008 passed on 9 April 2009:
• Simplification
• Flexibility
• Corporate efficiency
• Transparency
• Predictable regulation
• CIPRO – administration
• Effective 1 May 2011
Structure of Act
• STRUCTURE:
• 9 chapters, each covering a broad topic (learn titles)
• Chapter divided into alphabetically sequenced parts
• Each part deals with a more specifically stated topic
• Five schedules
• RED FLAG PAGE 3/4 AND 3/5
• Titles of chapters
• Titles of schedules
• Structure of individual sections
• Thinking about the structure and sections in this way
makes it easier to understand and use the Act
Structure of each section:
• Requirements for action
• Specific prohibitions
• Level of authority necessary for action
• Exceptions

• Paragragh 5 - J&S Pg 3/5

9
Definitions
• Important terminology
• Memorandum of Incorporation (MOI)
• Ordinary Resolution
• Special Resolution
• Related and inter-related persons and control (s2(1) & (2))
• Subsidiary relationships (s3)
• Solvency and Liquidity tests (s4)
• Distribution
• Persons / Individual / juristic persons
• Categories of companies (s8 – ref pg 3/15):
• Non-profit company (NPC) and Profit Co :
• Public (LTD)
• State owned (SOC LTD)
• Private company (PTY) Ltd
• Personal liability company (INC)
Regulations
• Reg 26 – Public Interest score
• Reg 27 – AFS compilation & framework
• Reg 28 – Companies required to be audited
• Reg 29 – Independent reviews
• Reg 43 – Social & ethics committee

• J &S Pages 3/3 - 3/11

11
Regulation 26
This regulation introduces the concept of public interest score. Every company (and CC)
must calculate this score at the end of each financial year.

It is used to determine:
• which financial reporting standards the company must comply with (Reg 27)
• the categories of companies which must be audited / reviewed (Reg 29) and
• who must carry out the review of a company which must be independently reviewed.
(Reg 29)

The public interest score is the sum of:

• 1 point per employee (average number during the financial year)
• 1 point for every R1 million (or portion thereof) in 3 rd party liability (at financial year end)
• 1 point for every R1 million (or portion thereof) in turnover
• 1 point for every individual who directly or indirectly has a beneficial interest in any of
the company’s securities
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PI example:

Detail PI points
Employees at 1 Mar x1 300
Employees at 28 Feb x2 360
660 / 2 = 330
Long + Short term liabilities R8.2m 9
Turnover R82.7m 83
Shareholders 14 14
436

13
Regulation 27
This regulation states that a company’s financial statements may be compiled internally or
independently. This regulation further stipulates the applicable financial reporting standards with
which different categories of company must apply.

Independently compiled AFS must be prepared:

• by an independent professional (refer definition below)
• on the basis of financial records provided by the company and
• in accordance with any relevant financial reporting standard.
Independent accounting professional means a person who:
• is a registered auditor in terms of the APA or
• is a member in good standing of a professional body accredited in terms of the APA
or
• is qualified to be appointed as a accounting officer of a CC
• does not have a personal financial interest in the company or a related company
• is not involved in the day to day management of the company and has not been
during the previous 3 years
• is not a prescribed officer, or full-time executive employee of the company (or
related company) and has not been during the previous 3 years
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• is not related to anyone in (iv) to (vi) above.
 CATEGORY OF COMPANY FINANCIAL REPORTING STANDARD

State owned companies IFRS, but if conflict with PFMA, PFMA prevails.
   
Public companies listed on an exchange IFRS
 
Public companies not listed on an exchange One of :
   IFRS, or
 IFRS for SME’s

Profit companies (other than state owned or public One of :

companies) whose PI score is at least 350  IFRS, or
   IFRS for SME’s

Profit companies (other than state owned or public One of :

companies):  IFRS, or
 PI score at least 100, but less than 350  IFRS for SME’s, or
 PI score less than 100, and whose statements are  SA GAAP (to be phased out)
independently compiled  

Profit companies (other than state owned or public Financial Reporting Standard as determined by the
companies) whose PI score is less than 100 and whose company for as long as no Financial Reporting Standard is
statements are internally compiled. prescribed.
 

15
Regulation 28
This regulation stipulates the categories of companies which
are to be audited:
• Public companies and state owned companies
• Any profit (or non-profit) company which, in the ordinary
course of its primary activities, holds assets in a fiduciary
capacity for persons who are not related to the company,
and the aggregate value of the assets held exceeds R 5
million at any time during the financial year
• Any company whose public interest score in that financial
year is 350 or more, or is at least 100 if its annual financial
statements are internally compiled. (per Reg 29)
16
Regulation 29
• This regulation deals with independent reviews. It further places an obligation on an
independent reviewer to report a reportable irregularity at an independent review
client (Not just audit clients, as per the APA)

Public Interest Private Company: Close Corporation: CC Owner Managed:

Score Pty (Ltd) All sh/h = directors

Less than 100 Independent Review by No external intervention No external intervention

RA/AO (internally or (AO report)
externally compiled)

100 to 349 Audit if AFS internally Audit if AFS internally Audit if AFS internally
compiled. compiled. compiled.
Independent review if AFS No independent review if No independent review if
externally compiled (RA) externally compiled. (AO externally compiled.
report)

350 and above Audit Audit Audit

17
Regulation 43
The following companies must appoint a social and ethics committee:
• every state owned company
• every listed public company and
• any other company that has, in 2 of the last 5 years, a PI score > 500.
• Committee must be appointed within 12 months becoming listed or meeting the
500 point requirement. Must have 3 directors, at least 1 non-executive.
 
This committee is to monitor the company’s activities with regard to:
• social and economic development
• good corporate citizenship
• the environment, health and public safety
• consumer relationships
• labour and employment

18
Contractual powers of Companies
(1)
• Sections:
• 15 – Memorandum of Incorporation, Shareholder
agreements and rules of the company
• 16 – Amending the Memorandum of Incorporation
• 19 – Legal status of companies
• 21 – Pre-incorporation contracts
• 22 – Reckless trading prohibited
Contractual powers of Companies (2)
• 15 – Memorandum of Incorporation, Shareholder
agreements and rules of the company
• Provisions of MOI to be consistent with Act, if not then
will be void
• Operational matters (date and type, auth share capital, number
and class, debt instruments, shareholders rights, meetings,
directors
• May include items more detailed than in the Act
• Alterable provisions – refer Jackson and Stent Pg 3/19
• In addition to MOI, BOD has discretion to make incidental rules
• MOI and rules are binding between company,
shareholders and directors / officers
Contractual powers of Companies
(3)
• 16 – Amending the MOI
• May do so by:
• Court order, or
• BOD / shareholders (at least 10%) can PROPOSE SPECIAL
RESOLUTION to amend (at least 75%)
• MOI contains requirements for proposals
• File a Notice of Amendment with prescribed fee
(effective from date of filing with Commission)
Contractual powers of Companies (4)
• 19 – Legal Status of Companies
• From date of incorporation Company is: Juristic person,
has legal powers and capacity of an individual (note
incapacity and MOI provisions)
• Prohibitions ito MOI, and the legal enforceability of
transactions entered into when prohibited by MOI
• Third parties not presumed to know contents of MOI
• Third parties may assume that company has complied with
provisions of its MOI
• Shareholders can ratify transactions/actions that are not
compliant with MOI
• Shareholders recourse for damages against directors inconsistent
with MOI / Act
Contractual powers of Companies
(5)
• 21 – Pre-incorporation contracts
• Person enters into an agreement in the name or, or
purporting to act in the name of, or on behalf of an
entity which has not yet been incorporated
• Lease agreements
• Property transactions
• Within 3 months of incorporation, BOD to completely,
partially or conditionally ratify or reject the pre-
incorporation contract, otherwise deemed to be ratified
• Recourse for third parties
Contractual powers of Companies
(6)
• 22 – Reckless trading prohibited (NB)
• Company must not
• Carry on its business recklessly, or with gross negligence, with intent to
defraud any person or for any fraudulent purpose
• Trade under insolvent circumstances (i.e. Unable to pay debts as they fall
due in normal course of business)
• Commission (if reason to believe above taking place)
• Issues notice to co to show cause why co should be permitted to
continue carrying on its business or trade
• Co has 20 business days in which to satisfy Commission that it is no
contravening the section
• Failing above (response or response to satisfaction) Commission may
issue notice to cease trading

Consider link to Going Concern