‘Fiduciary duty’ is the reason those who govern must do so to a certain standard, and is the basis upon which they are called to account. It is therefore an important concept to understand.
The Companies Act, 71 of 2008 (“the Act“) contains a number of provisions relating to auditing and accounting requirements. However, unlike the old Companies Act of 1973 which required all companies to be audited, the Act is less onerous in the sense that only certain categories of companies will need to be audited and this also depends on whether the audit would be in the public interest to do so.
In terms of the Act, there are two main categories of companies, namely a profit company and a non-profit company. A profit company is further divided into four sub-categories, being a (i) private company, (ii) personal liability company, (iii) state-owned company and (iv) public company. In order to establish whether a company must comply with the requirement to be audited (by an auditor) or simply independently reviewed (by an accountant), will depend on the type of company concerned.
The production of audited reports is not a legal requirement for all organisations in terms of the Companies Act 71 of 2008. (See NPO structure schedule in module one section 3.) The Organisations Regulations provide for the categorisation of organisations according to a ‘public interest score’. Organisations are required to adhere to the minimum financial reporting standards stipulated for its particular category. Every company must calculate its ‘public interest score’ at the end of each financial year. Factors that determine the ‘public interest score’ include: the number of employees, the company’s turnover and number of members of the Company. The financial reporting standards can, depending on the category, either be; the International Financial Reporting Standards (IFRS), IFRS for SMEs, SA GAAP, or the standards determined by the Company.
It is also important to note that the Organisations Regulations also provide any non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R 5 million.
Subject to the above, Organisations have to decide whether the finances of the company will be audited, independently reviewed or neither.
1.The calculation of the Public Interest Score is done on the following basis:
2. A non-profit company is required, in terms of the Organisations Regulations, to have its financial reports audited if:
Annual financial statements must include a report approved by the governing body covering:
It should however be noted that organisations that are established as special purpose vehicles would usually be required pursuant to the provisions of the Public Finance Management Act, 1 of 1999, to prepare audited financial statements.
Although it is the organisations duty to keep these records, the governing body members are responsible for ensuring that they are being kept, and they should be open at all times to inspection by any governing body member.
The annual financial statements of the Company must comprise the following:
What accounting framework are companies to use?
In a non-profit company, an Audit is required only if it meets the requirements test as per the Regulations of the Act.
Annual financial statements are required to be prepared in accordance with the financial reporting standards as follows:
|Category of company
|Financial Reporting Standard
|Non-profit companies that are required in terms of the Regulations to have their annual financial statements audited
|IFRS, but in the case of any conflict with any requirement in terms of the Public Finance Management Act, the latter prevails.
|Non-profit companies, other than those contemplated in the first row above, whose public interest score or the particular financial year is at least 350
|One of –
(b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s
|Non-profit companies, other than those contemplated in the first row above –
(a) Whose public interest score for the particular financial year is at least 100 but less than 350; or
(b) Whose public interest score for the particular financial year is less than 100, and whose statements are independently complied
|One of –
(b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s
(c) SA GAAP
|Non-profit companies, other than those contemplated in the first row above, whose public interest score for the particular financial year is less than 100, and whose statements are internally complied
|The financial reporting standard as determined by the company for as long as no financial reporting standard is prescribed
The Governing body members are responsible for the preparation and presentation of the annual financial statements. The statements must first be approved by the governing body members and signed on their behalf by two of the governing body members. The governing body members report should include at least the following matters:
It is the duty of the Auditor, where applicable, to examine the annual Financial Statements to be laid before an AGM or GM to satisfy themselves that:
The Auditors appointed by the Non-Profit organisation must not be:
In terms of the Public Finance Management Act, every Public Entity, which at this stage excludes organisations, established as special purpose vehicles, must have an authority that will be accountable for purposes of the Act.
The Accounting Authority for these defined entities will be the Governing bodies of such entities and their fiduciary duties are set out under sections 50 and 51 of the PFM Act. The following are some of the major responsibilities of these Governing bodies defined as Accounting Authorities:
The accounting Authority for a public entity must:
If an accounting Authority is unable to comply with any of the responsibilities determined for an accounting authority in this part of the PFM Act, the Accounting Authority must promptly report the inability, together with reasons, to the relevant executive authority and treasury.
The legal and statutory requirements that apply to the work of Governing body members, is both extensive and onerous and those accepting appointments to positions on governing bodies (boards) should be fully cognizant of their implications. In addition to the statutory provisions for the rights of persons, both as employees and as individuals, contained in the Acts as pointed out in Section 12.0, Governing body members must be knowledgeable of the applicable regulations contained in the following legislation:
In terms of various provisions of the above legislation, Governing body members can in certain instances be held jointly criminally liable with the Company for offences committed by the Company, if the offences resulted from the failure by the Governing body members to take all reasonable steps to prevent the offences.
Governing body members share equal responsibility whether they are executive or non-executive, and regardless of any specific duties.
Failure by Governing body members to fulfill their standard of conduct as provided in the Organisations Act of 2008, or to manage the affairs of the Company recklessly, negligently or fraudulently may present grounds for their removal and leave them open to civil liability, or in some instances criminal prosecution.
If the Company becomes insolvent, The Insolvency Act, Amended to No 122 of 1993, imposes various duties and requirements on the Governing body members which are designed to protect the interests of the Company’s creditors. The most important responsibilities are:
Section 71(1) of the Organisations Act of 2008 provides, that – despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any members and a director – a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director
Section 71(2) requires the members of a non-profit company to notify the director concerned of the meeting and the resolution, at least equivalent to that which a member is entitled to receive, irrespective of whether or not the director is a member of the company and the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.
The following persons are amongst those who cannot become governing body members of a non-profit organisation:
(The last two categories of persons may become a director after the expiry of a five-year period, unless such period is extended in terms of the Act.)
The above persons are also disqualified from serving as members of a committee appointed by the governing body, including an audit committee. Section 69 of the Act requires the Organisations and Intellectual Property Commission to establish and maintain a public register of persons who are disqualified from serving as a director.
Every company is required to file a notice within 10 business days after someone becomes or ceases to be a director of the company.
A code of good practice does not supersede Company and common Law or any other legislation, and is more than a set of guidelines and rules. The code is implemented primarily to enhance business/organisation performance through knowledge and skills at Governing Body level and draws attention to duties, responsibilities, legal obligations and liabilities
There is good guidance on and requirements for good governance applicable to non-profit organisations.
Economic and commercial endeavours cannot be pursued without certain moral and ethical limitations that protect the rights of all members of society. In the business world ethical behaviour is conventionally defined as honouring the unwritten moral rule of not causing harm to others through unfair and uncompetitive commercial practices. This goes beyond just legal obligations and includes moral conduct expected with generally accepted commercial practices.
Morality refers to human conduct and values whilst ethics in general refers to the study of those areas. However, the terms are used interchangeably and are mostly used as meaning right or good. Business ethics is therefore, strictly speaking, the study of what constitutes right or wrong or good or bad human conduct in a business context.
The incorporation of a preferred set of moral behaviours and business conduct in a Governance Study guide such as this is for the purpose of stating clearly and expressly, the Company’s position, and therefore the obligation of its Members, Governing body members, Managers and Employees. The elements that refer to moral behaviours can be described collectively as a code of conduct or a code of ethics.
The Institute of Directors in Southern Africa (IoDSA) state that, “It is the responsibility of the governing body members to determine the moral and ethical climate of the business.” By their business practice, shared values and applied ethics, the Governing body members of an enterprise set the moral standard and culture of an organisation.
However, the espoused values alone, upheld by Governing body members, is not sufficient to infuse the organisation with a particular culture, and it is only with group experience over time, of these values consistently at work and their success as business practice, that they become the shared values of an organisational culture. It is important therefore that the code of conduct and ethics adopted by the Governing body be well communicated at an early stage in the operation and management of the Company. Once ways of working and relating become relatively fixed they are more difficult to change.
This section sets out some basic guidelines of what a code of conduct should cover, but it is the responsibility of the Governing body to ensure that any adopted code includes all required behaviours specific to their business.
A code of conduct is not a set of business processes or procedures, and as explained, refers to a set of expected behaviours from all members that the organisation values above other ways of doing things. Activities that a code should be clear on would typically include:
The information contained in this study guide does not necessarily represent the opinion of Third Sector Insights NPT (TSI), MRB Bus, or the authors. The contents do not constitute advice on the topics covered. While reasonable care has been taken to ensure the accuracy of the information, TSI, MRB Bus expressly disclaims all and any liability to any person, relating to anything written or omitted to be written or to the consequences thereof in reliance upon the contents.