MODULE FOUR 

SECTION 13.0 – AUDITING AND FINANCIAL MANAGEMENT REQUIREMENTS 

‘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:

• a number of points equal to the average number of employees of the company during the financial year;
• one point for every R 1 million (or portion thereof) in third party liability of the company, at the financial year end;
• one point for every R 1 million (or portion thereof) in turnover during the financial year; and
• one point for every individual who, at the end of the financial year, is known by the company in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.

2. A non-profit company is required, in terms of the Organisations Regulations, to have its financial reports audited 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; or
• its public interest score in that financial year is 350 or more; or is at least 100, if its annual financial statements for that year were internally compiled.
• As indicated above, the governing body members must ensure that all financial statements of the non-profit company must:
  • Present the state of affairs and business of the company fairly,
  • Explain the transactions and financial position of the business of the company,
  • Show the   company’s   assets,   liabilities ,   income   and expenditure,
  • Set out the date of its production and the accounting period, and
  • State on its first page:
    • Whether the reports have been audited, independently reviewed, or neither, and
    • The name and professional designation of the individual who prepared or supervised the preparation of the statements.

Annual financial  statements  must  include  a  report  approved  by  the governing body covering:

• The company’s state of affairs, and
• The business and profit or loss of the company.

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:

• A balance sheet containing assets and liabilities,
• An income and expenditure statement.
• The organisations state of affairs.
• The business and profit or loss of the organisation,
• The date of its production and the accounting period,
• A Governing body members report.
• An auditor’s report, if the statements are audited.

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:

Non-profit companies

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:

• Comments on the profit or loss and prognosis for the future.
• Nature of business and any changes therein.
• State of its affairs.
• Comments on every issue that is significant to the continuity of the business

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:

• Proper accounting records required by the Act have been kept.
• The minute books and attendance registers for Company meetings have been kept.
• A register of interest in contracts has been kept.
• That the Financial Statements are in agreement with its accounting records and returns.
• Statements made by the Governing body members do not conflict with fair interpretation, or distort the meaning of the Financial Statements and accompanying notes.
• To satisfy themselves that the organisation complies with all the relevant sections of the Act covering the duties of the Auditor.

The Auditors appointed by the Non-Profit organisation must not be:

1. A governing body member or prescribed officer of the organisation.
2. An employee or consultant of the Company who was or has been engaged for more than one year in the maintenance of any of the company’s financial records or the preparation of any of its financial statements.
3. A director, officer or employee of a person appointed as the company secretary of the Company.
4. A person who habitually or regularly performs the duties of account or bookkeeper, or performs related secretarial work for the Company.
5. A person who, at any time during the five financial years immediately preceding the date of appointment, was a person as described above.

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:

• Exercise the duty of utmost care to ensure reasonable protection of the assets and records of the public entity;
• Act with fidelity, honesty, integrity and in the best interests of the public entity in managing the financial affairs of the public entity;
• On request, disclose to the executive authority responsible for that public entity or the legislature to which the public entity is accountable, all material facts, including those reasonably discoverable, which in any way may influence the decisions or actions of the executive authority or that legislature; and
• Seek, within the sphere of influence of that accounting authority, to prevent any prejudice to the financial interests of the state.
• Ensure that the public entity has and maintains an effective, efficient and transparent system of financial and risk management and internal control.
• Ensure that organisations defined as a public entity have and maintain a system of internal audit under the control and direction of an audit committee complying with and operating in accordance with regulations and instructions as prescribed; and
• Ensure that such public entity has and maintains a system for properly evaluating all major capital projects prior to a final decision on the project;
• Take effective and appropriate steps to collect all revenue due to the public entity concerned; and
• Take effective and appropriate steps to prevent irregular expenditure, fruitless and wasteful expenditure, losses resulting from criminal conduct, and expenditure not complying with the operational policies of the public entity; and
• Take effective and appropriate steps to manage available working capital efficiently and economically;
• Is responsible for the management, including the safeguarding, of the assets and for the management of the revenue, expenditure and liabilities of the public entity;
• Must comply with any tax, levy, duty, pension and audit commitments as required by legislation.

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.

SECTION 14.0 – LEGAL AND STATUTORY REQUIREMENTS

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:

• New Organisations Act 71 of 2008 – (Replaces The Organisations Act No 63 of 1973).
• Non-profit Organisations Act No. 71, 1997, if so registered,
• The Public Finance Management Act No 1 of 1999.
• Trust Property Control Act 57 of 1988 as amended (Non-profit Trusts)

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:

• Governing body members must take all appropriate steps to minimise the creditors potential losses, once they know or ought to have concluded that insolvency and liquidation could not be avoided.
• Breach of this or other provisions of the Insolvency Act may involve the Governing body members in personal liability, and/or criminal prosecution and disqualification.

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:

• A juristic person,
• An unemancipated minor,
• Disqualified because of a condition contained in the Memorandum of Incorporation,
• A person declared a delinquent in terms of the Close Corporations Act,
• An unrehabilitated insolvent,
• A person who has been prohibited by public regulation to be a director of a the company,
• A person who has been removed from office of trust on the grounds of misconduct involving dishonesty,
• A person who has been convicted and imprisoned, or fined for theft, fraud, forgery or other listed office.

(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.

SECTION 15.0 – CODE OF CONDUCT AND ETHICS

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.

These include:

• SANGOCO’s Code of Ethics for Non-profit Organisations (1997);
• Department of Social Development’s Code of Good Practice for South African Non-profit Organisations (2001);
• Inyathelo’s Independent Code of Good Practice (2012).
• KING IV’s Code of Good Practice – NPO Supplement (2017) – (KING I was launched 1994).

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:

• That the code be made available to everyone in the organisation
• All people, to whom the code will apply, must fulfil their obligations in such a manner as to conduct business effectively without causing harm to any party other than by fair and legitimate commercial practices.
• To fully disclose the services and benefits offered by the organisation to all prospective beneficiaries without bias or prejudice.
• To respect the political, religious, ethnic and other attributes of diverseness that will be encountered within the operating milieu of the organisation.
• To honour both the spirit and letter of agreements made with suppliers of goods and services and to avoid catching vendors on “technicalities.”
• To supply with promptness any undertaking made by a member of the organisation.
• Not to mislead any party regarding the object of the organisations business, its ability to deliver, or to raise false expectations about the organisation.
• To create such a transparency about the business and its management that information on its performance and conduct can be presented by any stakeholder without fear of reprisal.
• To maintain an open door with stakeholders that will enable them to easily contact the responsible people for information or to lodge complaints.
• Everyone must strive to reduce inefficiencies and the wastage or abuse of resources in the organisation.
• Not to place the assets of creditors at risk.
• Not to use the assets or resources of the organisation for personal benefit or for uses not authorised by the Governing body.
• Not to engage in or sanction any bribery and to immediately disclose such acts as may become known
• Terminate dealings with any enterprise that bribes or attempts to bribe employees.
• Not to use confidential information gained in the course of conducting the business for personal gain or to the prejudice of the organisations stakeholders, or for any improper use.
• To ensure that the business obtains good cost-benefit advantages by applying astute, but fair buying practices.
• Not to employ abusive, intimidating or threatening tactics to obtain advantage for the organisation.
• Not to apply funds for purposes other than the purpose for which it was lent or donated.
• To report honestly on the financial position of the business to its stakeholders.
• Deal courteously with all stakeholders, having respect for cultural sensitivities, different business methods and individual dignity.
• Give due attention to the development and training of all employees.
• Recognise employees efforts by fair and adequate remuneration and other means
• Employees shall fulfill their service obligations and support management in a manner that enables the Company to fulfill its commercial and ethical obligations.
• Help fellow employees to meet their obligations.
• Employees shall avoid unreasonable disruption of the business or hindering it from accomplishing its aims.
• Employees shall avoid making any false accusations against management, fellow employees and organisations or their representatives doing business with the organisation.

IMPORTANT:

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.