Introduction to Corporate Governance
"Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of these resources. The aim is to align as nearly as possible the interests of individuals, corporations and society."
Sir Adrian Cadbury- UK Cadbury Commission Report on Corporate Governance, 1992
"Corporate Governance is essentially the practice by which companies are managed and controlled. It encompasses:
- the creation and ongoing monitoring of a system of checks and balances to ensure a balanced exercise of power within a company;
- the implementation of a system to ensure compliance by the company with its legal and regulatory obligations;
- the implementation of a process whereby risks to the sustainability of a company’s business are identified and managed within agreed parameters; and
- the development of practices which make and keep the company accountable to the broader society in which it operates.
Corporate Governance, then, is essentially about the responsible leadership of companies. This is leadership that is transparent, answerable and accountable towards the company’s identified stakeholders. It aims at achieving a balance between economic, social, individual and collective goals, seeking to align as closely as possible the interests of individuals, the company and society as a whole."
Ramani Naidoo- Corporate Governance: An essential guide for South African companies, 2002
Corporate Governance therefore encompasses the following:
Direction and leadership – refers to the quality of the organisation’s strategy, the calibre of the executive management charged with developing and implementing the strategy, and the calibre of the board charged with supervision and oversight.
Risk management and control – refers to the processes in place to identify, evaluate, monitor and control risks associated with the successful delivery of strategic and operational objectives which ensure sustainability.
Accountability and reporting – refers to the provision of a true, fair and accurate account of the stewardship of the enterprise, in a transparent manner to relevant stakeholders.
“If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country, regardless of how steadfast a particular company’s practices may be, suffer the consequences. Markets must now honour what they, perhaps, too often have failed to recognise. Markets exist by the grace of investors. And it is today’s more empowered investors that will determine which companies and which markets will stand the test of time and endure the weight of great competition. It serves us right to remember that no market has a divine right to investors’ capital.”
Arthur Levitt - Former Chairman, US Securities and Exchange Commission, 2000
Board of Directors
Considered the ‘directing mind of the company’ the board is key to ensuring the implementation of good governance principles.
Responsibilities of the board of directors would include:
- Oversight of control and accountability
- Development of corporate strategy and performance objectives
- Systems of risk management and internal compliance and control, codes of conduct and legal compliance
- Monitoring senior management’s performance and implementation of strategy and ensuring appropriate resources are available
- Approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments
- Approving and monitoring financial and other reporting
- Board appointments, removals, succession planning and executive remuneration.
Companies Act No 61 of 1973
The current situation under the Companies Act No 61 of 1973
Presently the rights and obligations of a director are imposed by the Companies Act, the Articles of Association of a company and the common law. A director is required to act in good faith, act independently with the degree of care, diligence and skill, that may reasonably be expected from a person of his knowledge and experience, within the scope of authority as prescribed by the Memorandum and Articles of Association of a company and as a member of the board.
The King Committee’s code of corporate practices and conduct elaborates on the duties and obligations of a director, and those affected by the King Code include JSE listed companies, banks, financial and insurance entities, and public sector enterprises governed by the Public Finance Management Act. Mervyn King, convener of the King Commission, has made no secret of the fact that the King Commission has never supported the idea of making the King Report statutory. The third King report is expected to be released towards the end of this year and is also based on a ‘comply or explain’ philosophy, rather than a ‘comply or else philosophy’.
Companies Act No 71 of 2008
What does the new Companies Act No 71 of 2008 say about directors?
In addition to encouraging entrepreneurship and high standards of corporate governance, amongst others, it is a purpose of the Companies Act No 71 of 2008 to balance the rights and obligations of shareholders and directors, and to also encourage the efficient and responsible management of a company. In terms of the Act a company’s governing document is the Memorandum of Incorporation (no longer the memorandum and articles of association) and it is consistently referred to throughout the Act. The Memorandum of Incorporation should serve as a higher standard than legislation and should allow for smoother governance processes. It is intended for the Memorandum of Incorporation to be binding between the company and each shareholder, between or among the shareholders, and between the company and each director or officer of the company and any person serving as a member of the Audit Committee or any other committee of the board. This document may only be amended in terms of a court order or by virtue of a special resolution.
The Board of Directors
The Act provides for the business and affairs of a company to be managed by, or under, the direction of its board. The board has the authority to perform any of the functions of the company except to the extent that the Companies Act or Memorandum of Incorporation provides otherwise. A private company or personal liability company requires at least one director, whilst a public company or a non-profit company requires at least three directors. These minimum numbers may be increased in a company’s Memorandum of Incorporation. Should a company at any time fail to have the requisite minimum number of directors, the authority of the board will not be limited or negated, neither will anything done by the board or the company be invalidated.
The Memorandum of Incorporation may also provide for:
a) the direct appointment or removal of one or more directors by any person who is named in, or determined, in terms of the Memorandum of Incorporation
b) a person to be an ex officio director as a consequence of holding an office, title, designation or similar status
c) the appointment or election of alternate directors
d) Shareholders of profit companies (other than state-owned entities) to elect at least 50% of directors and at least 50% of any alternate directors.
The first directors of a company are the incorporators. The board may comprise directors that are permanent, alternate, temporary or ex officio, all with common duties and liabilities.
A person becomes a director of a company when that person has been appointed or elected or holds an office, title, designation or similar status entitling that person to serve as a director and has all the powers, functions and duties of any director, and is subject to all of the liabilities of any director. The Memorandum of Incorporation may limit the powers and functions of the ex officio director, but not the duties and liabilities.
Directors may be remunerated for their services unless provided otherwise in the Memorandum of Incorporation. However, remuneration may only be paid in accordance with a special resolution approved by the shareholders within the previous two years. The practicality of this clause may certainly prove a challenge and will undoubtedly serve as yet another reason to make the position of a South African director rather unattractive.
A director may be appointed for an indefinite term unless otherwise stipulated in the Memorandum of Incorporation. An indefinite term of office really does go against basic corporate governance principles, so hopefully this provision is excluded from the final Act. Unless the Memorandum of Incorporation provides otherwise, a board may also appoint a director on a temporary basis and such temporary director will have all the powers, functions and duties of a director and be subject to all of the liabilities of any other director of the company.
The Act also provides for the Minister to appoint a ‘prescribed officer’ within a company.
Provisions for filling vacancies on a board, and removal of directors, are also dealt with and it is a requirement that within ten business days after a person ceases to be a director, a company must file a notice in that regard.
Who may not be a director?
Juristic persons, unemancipated minors (or persons under similar legal disability) or anyone who does not satisfy any qualification set out in the Memorandum of Incorporation are ineligible to be a director.
Unless exempt by a court on application, you may not be a director, ex officio director, alternate director, temporary director or prescribed officer if:
- A court has prohibited you from accepting a directorship position
- You are an unrehabilitated insolvent
- You are prohibited in terms of any public regulation to be a director of the company
- You have been removed from an office of trust on the grounds of misconduct, involving dishonesty
- You have been convicted in the Republic or elsewhere, and imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury or an offence (involving fraud, misrepresentation or dishonesty, in connection with the promotion, formation or management of a company, or in connection with ineligibility or disqualification to serve as a director or probation in terms of a court order).
The last grounds for disqualification mentioned above prevail for a period of five years from the date of removal from office or completion of the sentence imposed, however, it may be extended for a further five year period if a court believes it is in the interests of protecting the public, on application by the Companies Commission.
Exception to the rule
Despite being disqualified, a person may act as a director of a private company if all the shares of that company are held by that disqualified person alone, and persons related to that disqualified person and each such person has consented in writing to that person being a director of the company. The Companies Commission is empowered to establish and maintain a public register of persons who are disqualified from serving as a director, and who are subject to an order of probation as a director. This register will clearly be cause for concern from a human rights perspective.
Board Committees
The directors may appoint any number of board committees it deems fit and delegate any authority to a committee. Unlike the King Report (King II), the Act does not stipulate the types of board committees required. Unless limited by the Memorandum of Incorporation or a resolution establishing a committee, a person who is not a director of the board may be appointed to a committee; that person is not allowed to vote on a matter and must not fulfill the ineligibility and disqualification criteria established for directors. Although a committee of the board has the full authority of the board in respect of the matter referred to it, it must be understood that a board may delegate authority but never accountability! The drafters have closed the loop of possible uncertainty by further providing that the creation of a committee, delegation of any power to a committee, or action taken by a committee, does not alone satisfy or constitute compliance by a director with the required duty of a director owed to a company.
It is therefore recommended that a board ensures that clearly documented mandates are provided to board committees and, furthermore, ensures that a proper reporting framework is instituted to facilitate reporting by board committees to the board. An overarching board charter clearly stating the principles of, and intention behind, delegation to board committees would also diminish uncertainty and the danger of something falling through the cracks.
Meetings by video conference or web cam?
The Companies Act No 71 of 2008 promised simplicity, efficiency and convenience and one of the ways in which it is meeting this promise is by allowing for the conduct of board meetings by electronic communication, or for some of the directors to participate in a meeting by electronic communication. To every company secretary, the worry of forming a quorum for a meeting is always prevalent and this provision is most certainly welcomed. The proviso is that the electronic communication facility employed ordinarily enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate effectively in the meeting. The definition of electronic communication relied upon is that which may be found in the Electronic Communications and Transactions Act, which simply defines electronic communication as ‘communication by means of data message’. A data message is further defined as data generated, sent, received or stored by electronic means and includes voice, where the voice is used in an automated transaction and a stored record.
Requirements for notification of, and the conduct of, board meetings are stipulated in the Act with the option of further or alternate requirements being captured in the Memorandum of Incorporation. The Act also sets out requirements for the drafting of minutes of meetings and provides that any minutes of a meeting, or a resolution, signed by the chair of the meeting, or by the chair of the next meeting of the board, is evidence of the proceedings of that meeting, or adoption of that resolution, as the case may be.
Duty to disclose a conflict of interest
The requirement and process to be followed in respect of disclosure of interest is clearly set out in the Act. In terms of Section 75, if a director of a company has a personal financial interest in respect of a matter to be considered by the board, or knows that a related person has a personal financial interest in the matter, the director:
a) must disclose the interest and its general nature before the matter is considered at the meeting
b) must disclose to the meeting any material information relating to the matter, and known to the director
c) may disclose any observations or pertinent insights relating to the matter if requested to do so by the other directors
d) if present at the meeting, must leave the meeting immediately after making the disclosure
e) must not take part in the consideration of the matter except to the extent of being requested to disclose observations by the other directors
While the director is required to recuse himself, he is to be regarded as present for the purposes of constituting a quorum and is not to be regarded as being present at the meeting for the purpose of determining whether a resolution has sufficient support to be adopted and must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board.
If a director acquires a personal financial interest in an agreement or matter in which the company has a material interest, or knows that a related person has acquired a personal financial interest in the matter after the agreement or other matter has been approved by the company, the director must promptly disclose to the board the nature and extent of that interest and the material circumstances relating to the director or related person’s acquisition of that interest.
A decision by the board or a transaction or agreement approved by the board or company is valid despite any personal financial interest of a director or person related to a director if it was approved in the manner explained above, or has been ratified by an ordinary resolution of the shareholders. Any interested person may apply to court to have a transaction or agreement approved by the board or shareholders declared valid, as the case may be, despite the failure of the director to satisfy the requirements explained above.
Standards of conduct
The Companies Act No 71 of 2008 includes a detailed section on the standards of directors’ conduct and codifies the common law relating to directors’ duties as well. It precludes an abuse of power in that a director must not use his position, or any information obtained while acting in the capacity of director, to gain an advantage personally, or for another person, other than the company or a wholly owned subsidiary of the company; or to knowingly cause harm to the company or a subsidiary of the company. Furthermore, the director must communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director reasonably believes that the information is immaterial to the company or generally available to the public, or known to the other directors; or is bound not to disclose that information by a legal or ethical obligation of confidentiality.
Act in the best interests of the company with the requisite care, skill and diligence
A director is required to exercise his powers and perform his functions as director in good faith and for proper purpose, in the best interests of the company and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director, and having the general knowledge, skill and experience of that director.
A director would be considered to be acting in the best interests of the company with the requisite degree of care, skill and diligence if he had taken reasonably diligent steps to become informed about the matter.
He would also be acting in the best interests of the company if either he had no material personal financial interest in the subject matter of the decision, and had no reasonable basis to know that any related person had a personal financial interest in the matter, or he declared the interest in respect of Section 75 discussed above.
Furthermore, he would be considered to be exercising care, skill and diligence if he made a decision, or supported a decision of a committee or the board with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company. A director is entitled to rely on the performance of one or more employees of a company whom the director reasonably believes to be reliable and competent in the functions performed, or the information, opinions, recommendations, reports or statements, including financial statements and other financial data prepared or presented by any of the above persons. This reliance is extended to legal counsel, accountants, or other professional persons retained by the company, the board or a committee, as to matters involving skills or expertise that the director reasonably believes are matters within the particular person’s professional or expert competence; or as to which a particular person merits confidence; or a committee of the board of which the director is not a member, unless the director has reason to believe that the actions of the committee do not merit confidence. The director may also rely on the performance of any person to whom the board may reasonably have delegated formally or informally by course of conduct, the authority or duty to perform one or more of the board’s functions that are delegable under applicable law.
Liability of directors
In terms of this section of the Companies Act No 71 of 2008 liability extends to an alternate director, prescribed officer or member of a board committee or of the audit committee of the board.
If a director breaches his fiduciary duty (duty to disclose personal interests, abuses power, does not act in good faith and for proper purpose in the best interests of the company) he will be liable for any loss, damage or costs sustained by the company as a consequence of any breach by the director.
If a director fails to exercise the requisite due care, skill and diligence, or breaches any other provision of either the Company’s Act or the Memorandum of Incorporation, he will be delictually liable for any loss, damage or cost sustained by the company as a result of the breach.
Broadly speaking, a director will be liable for direct or indirect loss, damage or costs sustained by the company if:
a) he/she acts beyond the scope of his authority;
b) he/she allowed the company to carry on business with the knowledge that it was being conducted recklessly, negligently and fraudulently, or with the knowledge that the company traded under insolvent circumstances (see Section 22);
c) being party to an act or omission of the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder, or had another fraudulent purpose;
d) he/she signed, consented to, or authorised any financial statements, prospectus or written statement that is false, misleading or untrue. Here the director’s knowledge and the materiality of the misrepresentation would be factors for consideration in assessing the liability of the director;
e) Failing to vote against, or participating in, the issue of unauthorised shares, the issue of authorised securities, the granting of options, the provision of financial assistance, approval of a distribution, acquisition by the company of its shares, or that of its holding company, or allotment by the company in contravention of the Companies Act.
Liability extends jointly and severally but a director does have at his disposal a mechanism to apply to court to set aside a decision of the board for which he may be held liable. The court has the discretion to set aside the decision in whole or in part, and to make any further order, for example rectify the decision, reverse a transaction and even indemnify the director for the costs of the proceeding. Recovery of loss, damage or costs, is limited to a prescription period of three years after the act or omission that gave rise to that liability.
Section 78 limits the extent to which a company may indemnify a director.
The role of a director is very onerous and is to be regarded in a rather serious light. Anyone accepting such an appointment must at all times ensure that they are fully aware of their rights, duties and obligations, and ensure that every question in their mind is answered prior to taking a decision.
The Company Secretary
Companies Act, No 61 of 1973
Section 268G of the Companies Act, No 61 of 1973 details the duties of a Company Secretary as follows:
‘268G. Duties of secretary
A secretary’s duties include, but are not restricted to:
(a) providing the directors of the company collectively and individually with guidance as to their duties, responsibilities and powers;
(b) making the directors aware of all law and legislation relevant to or affecting the company and reporting at any meetings of the shareholders of the company or of the company’s directors, any failure to comply with such law or legislation;
(c) ensuring that minutes of all shareholders’ meetings, directors’ meetings and the meetings of any committees of the directors are properly recorded in accordance with section 242;
(d) certifying in the annual financial statements of the company that the company has lodged with the Registrar all such returns as are required of a public company in terms of this Act and that all such returns are true, correct and up to date;
(e) ensuring that a copy of the company’s annual financial statements is sent, in accordance with section 302, to every person who is entitled thereto in terms of this Act.’
[S. 268G inserted by s. 18 of Act No. 37 of 1999.]
Companies Act, No 71 of 2008
Duties of the Company Secretary in terms of the Companies Act, No 71 of 2008
The Companies Act, No 71 of 2008 details the duties of the Company Secretary as follows:
‘S88 (1) A company secretary is accountable to the company’s board
(2) A company secretary’s duties include but are not restricted to:
(a) providing the directors of the company collectively and individually with guidance as to their duties, responsibilities and powers;
(b) making the directors aware of any law relevant to or affecting the company;
(c) reporting to the company’s board any failure on the part of the company or a director to comply with this Act;
(d) ensuring that minutes of all shareholders’ meetings, board meetings and the meetings of any committees of the directors, or of the company’s audit committee, are properly recorded in accordance with this Act;
(e) certifying in the company’s annual financial statements whether the company has filed returns and notices in terms of this Act, and whether all such returns and notices appear to be true, correct and up to date;
(f) ensuring that a copy of the company’s annual financial statements is sent, in accordance with this Act, to every person who is entitled to it; and
(g) carrying out the functions of a person designated in terms of section 33(3) (i.e. filing information returns in terms of annual transparency and accountability report).
Auditors
Companies Act, No 61 of 1973
The Companies Act, No 61 of 1973, as amended by the Corporate Laws Amendment Act provides the following:
(1) When the memorandum and articles of a company to be incorporated are lodged with the Registrar for registration, a written consent by a person to his appointment as auditor of the company to be formed may be lodged simultaneously, and such auditor shall be deemed to have been appointed as such by the company.
(2) If no appointment of auditor of a company is made under subsection (1), the directors of the company shall appoint the first auditor of the company within twenty-one days after the date of incorporation of the company.
(3) The auditor of a company appointed under subsection (1) or (2) shall hold office until the conclusion of the first annual general meeting of the company.
(4) If the directors of a company fail to appoint an auditor of the company as provided in subsection (2), the registrar may appoint such first auditor.
(5) If the directors of a company fail to appoint the first auditor of the company as required by subsection (2), every director shall be guilty of an offence.
(6) No person or firm may be appointed as auditor of a company unless that person or firm is a registered auditor.
(7) In this Chapter ‘registered auditor’, ‘firm’ and ‘Regulatory Board’ have the same meanings as in the Auditing Profession Act, 2005 (Act No. 26 of 2005).
Annual appointment of auditor
(1) A company shall at every annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting of the company.
(2) A retiring auditor shall be deemed to be re-appointed at any annual general meeting without any resolution being passed, unless:
(a) he/she is not qualified for re-appointment; or
(b) a resolution has been passed under section 278; or
(c) he/she has given the company and the Registrar notice in writing of his/her unwillingness to be re-appointed at the next annual general meeting.
(d) an audit committee appointed by the company in terms of section 269A (1) objects to the reappointment; or
(e) section 274A (1) applies.
271. Where meeting fails to appoint auditor and notice to Registrar
(1) Where at an annual general meeting of a company no auditor is appointed or re-appointed, the directors shall, within thirty days as from the date of the meeting, appoint a person or persons to fill the vacancy, and if they fail to do so, the Registrar may at any time do so.
(2) The company shall and any director may, if the directors fail to appoint an auditor as provided in subsection (1), within seven days after the expiration of the period mentioned in the said sub-section, lodge with the Registrar a notice in the prescribed form to that effect.
(3) Any company which fails, and any director or officer of such company who knowingly fails, to comply with the provisions of sub-section (2), shall be guilty of an offence.
(4) In the case of a widely held company with an audit committee, an appointment by the directors in terms of sub-section (1) shall only be valid if the audit committee is satisfied that the auditor is independent of the company.
272. Minister may appoint joint auditor
The Minister may at any time, in the case of a company having a share capital, on the application of one hundred members, or of members holding not less than one-twentieth of the issued share capital, and, in the case of a company not having a share capital, on the application of not less than one-tenth of the members, appoint, for such period and at such remuneration (payable by the company) as he may determine, an auditor to act jointly with any other auditor of the company.
273. Filling of casual vacancies
(1) Subject to the provisions of Section 280, a casual vacancy in the office of an auditor of a company:
(a) shall, if such auditor be the only incumbent, be filled by the directors within thirty days, and the provisions of section 271 shall mutatis mutandis apply in regard to the filling of such vacancy and the duty of the company; or
(b) may, if there be more than one incumbent, be filled by the directors, but while any such vacancy continues, the surviving or continuing auditor shall act as auditor of the company.
(2) If a vacancy arises in the office of an auditor of a widely held company during the tenure of an audit committee, sub-section (1) does not apply and the directors shall within 21 days propose to the audit committee a registered auditor to be appointed as the new auditor.
(3) If, in a case contemplated in sub-section (2), the former designated auditor was a member of a firm and the firm itself is not disqualified or removed, only another member of the firm may be proposed to the audit committee to be the new designated auditor.
(4) If, within 10 days of the making of a proposal to an audit committee under sub-section (2), the audit committee does not give notice in writing to the directors rejecting the proposed auditor, the directors shall proceed to the appointment, either by appointing the auditor or, as the case may require, by selecting the new designated auditor.
(5) In this chapter ‘designated auditor’ means the individual contemplated in sub-section 274 (3).
Appointment of firm as auditor
274. (1) This section applies where the auditor appointed in terms of section 270 (1) is a firm.
(2) A change in the composition of the members of a firm appointed as auditor of a company for a financial year shall not itself constitute a casual vacancy in the office of auditor for that year, but if, by comparison with the membership of that firm at the time of its latest appointment, less than one half of the members remain after such change, the occasion of that change shall be taken as a resignation of the auditor and a casual vacancy shall be taken to have arisen accordingly.
(3) The appointment of a firm as auditor of a widely held company shall not be valid unless the appointment specifies, in addition to the name of the firm, the name of the individual registered auditor (being a member of the firm) who undertakes the audit.
Rotation of Auditors
274A. (1) The same individual may not serve as the auditor or designated auditor of a widely held company for more than five consecutive financial years.
(2) Where an individual has served as the auditor or designated auditor of a widely held company for two or more consecutive financial years and then ceases to be the auditor or designated auditor, the individual may not be appointed again as the auditor or designated auditor of that company until after the expiry of at least two further financial years.
275. Disqualification for appointment as auditor
(1) No person shall be qualified for appointment as auditor of a company if he is:
(a) a director, officer or employee of the company;
[Para. (a) substituted by s. 18 (a) of Act No. 59 of 1978.]
(b) a director, officer or employee of any company performing secretarial work for the company;
[Para. (b) substituted by s. 18 (b) of Act No. 59 of 1978.]
(c) a partner, or employer, or employee of a director or an officer of the company;
(d) a person who by himself, or his partner or employee, habitually or regularly performs the duties of secretary or bookkeeper of the company;
(e) . . . . . .
[Para. (e) deleted by s. 28 (1) of Act No. 80 of 1991.]
( f ) a person who at any time during the financial year was a director or officer of the company; or
[Para. (g) substituted by s. 8 (a) of Act No. 82 of 1992.]
(2) Any person who in terms of sub-section (1) is disqualified for appointment as the auditor of a company shall likewise be disqualified for appointment as the auditor of any other body corporate which is a subsidiary or holding company of that company, or is a subsidiary of such holding company, or would be so disqualified if such body corporate were a company.
[Sub-s. (2) substituted by s. 27 of Act No. 64 of 1977.]
(3) The provisions of sub-section (1) shall not be construed as prohibiting the appointment as auditor of a private company, no shares of which are held by a public company, of a person who by himself or herself or his or her partner or employee habitually or regularly performs the duties of secretary or bookkeeper of such private company, if he or she is registered with the Regulatory Board and all the shareholders of such private company agree in writing to his or her appointment and the relevant circumstances are set out in the auditor’s report on the affairs and annual financial statements of such private company.
[Sub-s. (3) substituted by s. 8 (b) of Act No. 82 of 1992.]
(4) Any person who acts as the auditor of a company or other body corporate while disqualified, as aforesaid, shall be guilty of an offence.
(5) For the purposes of this section ‘secretarial work’ does not include share transfer secretarial work.
Certain non-audit services not open to current auditor of widely held company
275A. (1) An auditor appointed to a widely held company may not, for the duration of the appointment, perform for that company services prohibited under the code of professional conduct mentioned in section 21 (2) (a) of the Auditing Profession Act, (Act No. 26 of 2005).
(2) The Independent Regulatory Board for Auditors shall in the code mentioned in sub-section (1) define and prohibit the provision by an auditor of certain non-audit services in circumstances in which these will be subject to the auditor’s own auditing.
(3) Sub-section (1) does not affect the power of an audit committee under section 270A (1) (d) or (e) to further limit the services which an auditor of that company may render.
276. Notice by, and entries in register of directors and officers, and lodging of returns pertaining to Auditors
(1) The written consent contemplated in section 269 (1) shall be given by the person concerned on the prescribed form.
(2) Any other person who consents to his appointment as auditor of a company, other than a retiring auditor contemplated in section 270 (2), shall give notice on the prescribed form to the company concerned of such consent on his part.
(3) (a) Any auditor of a company shall give notice on the prescribed form to the company concerned of any change in his or her particulars which are in terms of section 215 (2) to be entered in the register referred to in that section, and he or she shall give such notice within fourteen days after the occurrence of any such change.
(b) The requirements of paragraph (a) are met if the auditor gives notice of the relevant changes to the Registrar in the prescribed electronic format and also to the company concerned.
(4) (a) A company shall, after any entry has been made in the register referred to in section 215 in respect of particulars pertaining to the auditor of the company, lodge with the Registrar a return in the prescribed form, and the company shall lodge such return within fourteen days after an auditor has vacated his or her office, or after receipt of a notice contemplated in sub-section (2) or (3) of this section, as the case may be.
(b) If the auditor of the company has given notice to the Registrar of any changes contemplated in sub-section (3) and in the manner contemplated therein, the lodging of a return by the company in respect of such changes is not required.
(5) Any company which fails to lodge a return contemplated in sub-section (4), and any person who fails to comply with any provision of sub-section (2) or (3), shall be guilty of an offence.
[S. 276 substituted by s. 16 of Act No. 83 of 1981.]
Removal and Resignation of Auditor
277. Removal of auditor appointed by directors or Registrar, and filling of vacancy
Subject to the provisions of section 279, a company may at a general meeting by resolution, remove any auditor appointed by the directors or the Registrar under section 269 or 271, or by the directors under section 273 before the expiration of his term of office, and at the same meeting, appoint another person as auditor in his place, provided that where an auditor has reason to believe that in the conduct of the affairs of the company, a material irregularity has taken place or is taking place, which has caused or is likely to cause financial loss to the company or to any of its members or creditors, and he has made a report thereon in writing to the directors of the company, he may not be removed from office until the provisions of section 26 (3) (b) of the Public Accountants’ and Auditors’ Act, 1951 (Act No. 51 of 1951) have been complied with.
[S. 277 substituted by s. 21 of Act No. 111 of 1976.]
278. Removal of auditor and appointment of new auditor
Any company may, subject to the provisions of section 279, at an annual general meeting by resolution passed by not less than three-fourths of such members entitled to vote as are present in person or by proxy, determine that any person then holding office as its auditor shall not be re-appointed, or that some other person shall be appointed as the auditor of the company, provided that where an auditor has reason to believe that in the conduct of the affairs of the company a material irregularity has taken place or is taking place which has caused, or is likely to cause, financial loss to the company or to any of its members or creditors, and he has made a report thereon in writing to the directors of the company, he may not be removed from office until the provisions of section 26 (3) (b) of the Public Accountants’ and Auditors’ Act, 1951 (Act No. 51 of 1951), have been complied with.
[S. 278 substituted by s. 22 of Act No. 111 of 1976.]
279. Special notice of removal for auditor
(1) Special notice to the company shall be required for a resolution to be proposed at a general meeting under section 277 or at an annual general meeting under section 278, and upon receipt of notice of such a proposed resolution, the company shall forthwith deliver a copy thereof to the auditor concerned.
(2) (a) Where any such notice is given and the auditor concerned makes in respect of the proposed resolution representations (not exceeding a reasonable length) in writing to the company and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so:
(i) in any notice of the proposed resolution given to members of the company, state that such representations have been made; and
(ii) send a copy of the representations to every member of the company to whom notice of the meeting is sent (whether such notice is sent before or after receipt of the representations by the company).
(b) If a copy of such representations is not sent as aforesaid because of their being received too late, or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.
(c) No copy of such representations shall be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any person who claims to be aggrieved, the Court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter.
(d) The Court may on an application under paragraph (c), order the company’s or the said person’s costs to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.
280. Resignation of auditor
(1) The auditor of a company may, at any time during the period of his office, resign as such, provided the requirements of this section are complied with.
(2) An auditor intending to resign shall deliver to the company and to the Registrar a written notification in the prescribed form, to the effect that he has no reason to believe that in the conduct of the affairs of the company, a reportable irregularity within the meaning of the Auditing Profession Act, 2005 (Act No. 26 of 2005), has taken place or is taking place which has caused, or is likely to cause, financial loss to the company, or to any of its members or creditors, other than an irregularity (if any) which has been reported to the Public Accountants’ and Auditors’ Board in terms of the Regulatory Board under that Act, and it shall not be necessary that such an auditor shall have carried out, for the purposes of such notification, a special audit subsequent to the date up to which the last annual financial statements on which he or she has already reported, were made up.
(3) The directors of the company shall forthwith upon receipt of the said written notification appoint an auditor in accordance with section 273 to fill the vacancy, and shall lodge the said notification together with the return required under section 276, with the Registrar.
(4) The resignation of an auditor shall become effective upon the receipt by the Registrar of the written notification referred to in sub-section (2).
(5) If the directors fail to appoint an auditor to fill the vacancy within three months after the receipt of written notification referred to in sub-section (2), any person who:
(a) at the expiration of that period of three months was a director of the company; and
(b) was aware of the vacancy but failed to take all reasonable steps to ensure that it would be filled in accordance with sub-section 3,
shall together with the company be jointly and severally liable for all debts incurred by the company during the existence of the vacancy.
[S. 280 amended by s. 23 (1) of Act No. 111 of 1976 and substituted by s. 9 of Act No. 82 of 1992.]
Rights, Duties and Remuneration
281. Auditor’s right of access to books and to be heard at general meetings
An auditor of a company shall:
(a) have the right of access at all times to the accounting records and all books and documents of the company, and be entitled to require from the directors or officers of the company, such information and explanations as he thinks necessary for the performance of his duties as auditor;
(b) in the case of an auditor of a holding company, have the right of access to all current and former financial statements of any subsidiary of such holding company, and be entitled to require from the directors or officers of such holding company or subsidiary, all such information and explanations in connection with any such statements and in connection with the accounting records, books and documents of the subsidiary as he may consider necessary; and
[Para. (b) substituted by s. 25 of Act No. 64 of 1977.]
(c) be entitled to attend any general meeting of the company and to receive all notices of, and other communications relating to, any general meeting which any member of the company is entitled to receive, and to be heard at any general meeting which he attends on any part of the business of the meeting which concerns him as auditor.
282. Duties of auditor
The auditor of a company shall report to its members in such manner and on such matters as are prescribed by this Act, and carry out all other duties imposed on him by this Act, or any other law.
283. Remuneration of auditor
(1) Save as is otherwise provided in this Act, the remuneration of the auditor of a company shall be determined by agreement with the company.
(2) All payments made, or to be made, by a company to its auditor, specifying the remuneration for the audit, the remuneration for other specified services, the auditor’s expenses and payments in respect of the audit and any other matter, shall be included under a separate heading in the income statement in respect of the accounting period concerned.
Companies Act, No 71 of 2008
The Companies Act, No 71 of 2008 provides the following relating to auditors:
Auditors
A public company or state-owned enterprise must, upon incorporation and at each annual general meeting, appoint a registered auditor. The Act precludes any of the following persons from being appointed as an auditor of a company:
A director or officer of the company;
- An employee or consultant of the company who has, 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;
- A director, officer or employee of a person appointed as company secretary;
- A person who regularly performs the functions of an accountant, bookkeeper or secretary of the company;
- A person who complied with any of the above categories during the five financial years immediately preceding the date of appointment.
A company is required to maintain a record of its auditors, including the name and former name of such person and date of appointment. Where a firm, or juristic person is appointed, the record must include the name, registration number, registered office and the name and date of appointment of the individual determined by that firm to be responsible for performing the audit.
The audit committee must be satisfied with the auditor’s independence.
When an auditor resigns, it is effective from the date that the notice was filed and a new auditor must be appointed within forty business days. The board appoints the auditor, subject to the provision that the audit committee may reject the proposed appointment. Stringent time lines apply in that the board ought to have made a proposal to the audit committee within fifteen business days of the vacancy arising, providing the audit committee with a further five business days to reject the proposed appointment in writing. Where a firm of auditors has changed its auditors resulting in less than one half of its members remaining after the change, that change constitutes a resignation by the firm of auditors giving rise to a vacancy.
As provided in the Corporate Laws Amendment Act, rotation of auditors must occur every five years. It would be prudent for a company that has joint auditors to ensure that all of the joint auditors do not relinquish office in the same year.
The Act enshrines the right of the auditor to access to accounting records and all books and documents of the company at holding company and subsidiary level. The auditor is also entitled to require from the directors and officers of the company, any information and explanations necessary for the performance of the auditor’s duties. The auditor’s rights also extend to the right to receive notification of, attend and be heard at any general shareholders’ meetings. Clearly, it would be most appropriate for the auditor to prepare for the shareholders’ meeting and consult with parties such as the company secretary, chairman and investor relations manager, prior to the meeting, in order to appropriately manage the potential risk of shareholders and press receiving the wrong message or misconstruing the facts. Of course, an auditor should not be tempered where a breakdown in corporate governance, for example, is being covered up. The auditor’s rights are enforceable in a court that may make an order that is just and reasonable to prevent frustration of the auditor’s duties. The court may also make an order of costs personally against any director or officer whom the court has found to have wilfully and knowingly frustrated the performance of the auditor’s functions.
The provision of non-audit services by an auditor is limited in that the auditor may not perform services that would create a conflict of interest in terms of the Auditing Profession Act or as may be determined by the company’s audit committee.
Audit Committees
Companies Act, No 61 of 1973
The Companies Act, as amended by the Corporate Laws Amendment Act provides the following:
Audit committees for public interest companies
269A. (1) In every financial year in which a company is a widely held company, its board of directors shall appoint an audit committee for the following financial year.
(2) Sub-section (1) shall not apply to a company:
(a) if the audit committee of a holding company will perform the functions required under section 270A (1) on behalf of that company;
(b) if the company ceases to be a widely held company in the manner contemplated in section 1 (7);
(c) if the company belongs to a category of companies specified by the Minister under section 269B.
(3) An audit committee must have at least two members and consist only of non-executive directors of the company who must act independently.
(4) For the purposes of this chapter:
(a) ‘financial year’ shall be construed in accordance with section 285;
(b) a director is a non-executive director of a company if the director:
(i) is not involved in the day-to-day management of the business and has not in the past three financial years been a full-time salaried employee of the company or its group;
(ii) is not a member of the immediate family of an individual mentioned in sub-paragraph (i);
(c) a director acts independently if that director:
(i) expresses opinions, exercises judgment and makes decisions impartially;
(ii) is not related to the company or to any shareholder, supplier, customer or other director of the company in a way that would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that director is compromised by that relationship.
Minister’s powers in respect of audit committees
269B. (1) The Minister may, by publication in the Gazette, specify certain categories of companies that are not required to appoint an audit committee in terms of section 269A (1).
(2) The Minister must be satisfied that little, or no benefit, would result from the appointment of an audit committee by companies in a category mentioned in sub-section (1).
270. Annual appointment of auditor
(1) A company shall at every annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting of the company.
(2) A retiring auditor shall be deemed to be re-appointed at any annual general meeting without any resolution being passed, unless:
(a) he is not qualified for re-appointment; or
(b) a resolution has been passed under section 278; or
(c) he has given the company and the Registrar notice in writing of his unwillingness to be re-appointed at the next annual general meeting.
(d) an audit committee appointed by the company in terms of section 269A (1) objects to the reappointment; or
(e) section 274A (1) applies.
[Para. (c) substituted by s. 20 of Act No. 111 of 1976.]
Functions and funding of audit committees
270A. (1) An audit committee of a widely held company must, with respect to the financial year for which it is appointed:
(a) nominate for appointment as auditor of the company under section 270 a registered auditor who, in the opinion of the audit committee, is independent of the company;
(b) determine the fees to be paid to the auditor and the auditor’s terms of engagement;
(c) ensure that the appointment of the auditor complies with this Act and any other legislation relating to the appointment of auditors;
(d) determine, subject to this chapter, the nature and extent of any non-audit services which the auditor may provide to the company;
(e) pre-approve any proposed contract with the auditor for the provision of non-audit services to the company;
(f) insert in the financial statements to be issued in respect of that financial year a report:
(i) describing how the audit committee carried out its functions; and
(ii) stating whether the audit committee is satisfied that the auditor was independent of the company;
(g) receive and deal appropriately with any complaints (whether from within or outside the company) relating either to the accounting practices and internal audit of the company or to the content or auditing of its financial statements, or to any related matter; and
(h) perform other functions determined by the board.
(2) Nothing in this section precludes the appointment by a widely held company at its annual general meeting of an auditor other than one nominated by the audit committee, and where such an auditor is to be appointed, paragraph (a) of sub-section (1) shall not apply, but the appointment shall not be valid unless the audit committee is satisfied that the proposed auditor is independent of the company.
(3) The appointment of an audit committee shall not reduce the functions of the board of directors of the company, except with respect to the appointment, fees and terms of engagement of the auditor.
(4) A widely held company shall meet all expenses reasonably incurred by its audit committee, including the fees of any consultant or specialist engaged by the audit committee to assist it in the performance of its duties.
(5) In considering whether, for the purposes of sub-section (1) (a), (1) ( f ) (ii) or (2), a registered auditor is independent of a company, the audit committee shall in relation to the company and any subsidiary or parent of the company or, if the company is a member of a group, any other member of the group:
(a) ascertain that the auditor does not, except as auditor or in rendering services permitted under sub-section (1) (e), receive any remuneration or other benefit;
(b) consider the extent of any consultancy, advisory or other work undertaken by the auditor;
(c) consider whether the auditor’s independence may have been prejudiced as a result of any previous appointment as auditor; and
(d) consider compliance with other criteria specified for independence by the Independent Regulatory Board for Auditors.
Companies Act, No 71 of 2008
At each annual general meeting, a public company, state-owned enterprise or other company that has voluntarily determined to have an audit committee, must elect an audit committee comprising at least three members unless the company is a subsidiary of another company that has an audit committee that will perform the audit committee functions on behalf of that subsidiary. This is a solution to the dilemma created in the Corporate Laws Amendment Act that required every widely held company to have an audit committee, which requirement extends to even the smallest of companies by virtue of the fact that they are subsidiaries of widely held companies.
Each member of the audit committee must be a director of the company. Provision is made for the Minister to prescribe minimum requirements with regard to the financial knowledge and experience required of a member of the audit committee. Clearly, this would create a greater demand for an already scarce resource. The audit committee member must also be what used to be classified as ‘independent’. Without referring to the term ‘independent’ the Act requires a member of the audit committee to not be:
- involved in the day-to-day management of the company, or have been so involved at any time during the previous three financial years;
- a prescribed officer or full-time executive employee of the company, or have been such at any time during the previous three financial years;
- a material supplier or customer of the company, such that a reasonable and informed third party would conclude in the circumstances that the integrity, impartiality or objectivity of that director is compromised in that relationship;
- not be related to any person described above.
The terms of reference of the audit committee would include nominating the auditor for appointment. In nominating the auditor, the audit committee must consider the independence of the auditor, determine the auditor’s fees and terms of engagement and ensure the auditor’s appointment is in compliance with prevailing legislation. The rather contentious issue of the provision of non-audit services must be dealt with at audit committee level by the establishment of the company’s policy on the provision of non-audit services by the auditor and the pre-approval of any proposed agreement with the auditor for the provision of non-audit service. As opposed to previous practice where the audit committee, along with other board committees, would be reported on in the corporate governance section of a company’s annual report, the Act requires the audit committee to prepare a report for inclusion in the financial statements describing how the audit committee carried out its functions, stating its level of satisfaction with the independence of the auditor, and providing comment on the financial statements, accounting practices and internal controls of the company. The ambit of the audit committee also extends to the receipt and dealing with of any complaints around the accounting practices and internal audit of the company, content or auditing of the company’s financial statements, internal financial controls of the company, or any other related matter. It is also a requirement that the audit committee provide submissions to the board on accounting policies, financial control, records and reporting. The board may also delegate further functions to the audit committee, including the development and implementation of a policy and plan for a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes within the company.
The power of the audit committee extends to the ability to reject an appointment of an auditor at an annual general meeting on the basis of lack of independence.
In its assessment of the independence of the registered auditor the audit committee is required to delve into matters such as ascertaining whether any direct or indirect remuneration or benefit was received except in his/her capacity as auditor and in the provision of non-audit services; and whether the auditor’s independence may have been prejudiced as a result of a previous appointment as auditor or due to any other consultancy or advisory work undertaken for the company. Lastly, there must be consideration of other criteria relating to independence or conflict of interest as prescribed by the Independent Regulatory Board of Auditors.
Where previously it was practice for a board to obtain external professional advice, this privilege is extended to the audit committee, the cost of which must be paid for by the company, to the extent that it is reasonable.
Having conferred such powers and duties on the audit committee, the drafters of the Act found it necessary to stipulate that the functions and duties of the board of directors are in no way reduced, except with respect to the appointment, fees and terms of engagement of the auditor. One wonders whether this statement is aimed at negating the created perception that the audit committee does seem more powerful than the board!
In increasing the accountability and reporting requirements of companies, the Act has also expanded the role of the auditor and the audit committee, increasing their powers and accountability. The auditor now has a greater voice and must use it when necessary in order to fulfill its functions to the extent envisaged by the Act. The question is, are auditors up to the challenge?