While enjoying a braai the other day a friend was complaining about how expensive his audit fees are, especially as he is just a small private company trying to get through these tough economic times. After a long discussion and a very happy friend, I realised that many people do not know the rules on whether their company’s financial statements need to be audited, reviewed or simply need to be compiled.
Being a well-informed owner or director can make a difference in your company and save you a lot of money, especially when the company is still in its growing phase.
The reason why my friend was so happy, was because I explained to him how a company’s Public Interest (PI) score works and what it means for SMEs.The term “PI score” has managed to intimidate and confuse many small business owners. The purpose of this article is to provide a quick guideline on the topic and summarise what you need to know as a business owner and director.
First off, the Companies Act requires all companies to calculate their PI score. This score serves as an indicator of a company’s public interest. Why is it important to understand the extent of a company’s public interest? It determines the specific regulations and reporting requirements that a company will have.
Your company’s PI score determines:
- If your company’s financial statements should be audited, independently reviewed or simply compiled.
- And what financial reporting standards apply to your company, e.g. IFRS (International Financial Reporting Standards) or IFRS for SMEs.
To calculate your company’s PI score, you will need your company’s latest financial information. The most important numbers you will need are your turnover, total third-party liabilities and total fiduciary assets (assets that are held on behalf of another person e.g. a bank holding its client’s funds).
The following example illustrates the calculation process:
|No:||Parameter as stipulated in the Companies Act:||Example:||Points:|
|1||The number of points equal to the average number of employees of the company during the financial year.||Employees at the beginning of the year: 41
Employees at the end of the year: 44
Average number of employees: (41 + 44) / 2 = 42.5, thus 43 employees.
|2||One point for every R1 million (or portion thereof) in turnover for the financial year.||Turnover = R32,320,000||33|
|3||One point for every R1 million (or portion thereof) of third party liabilities of the company, at the financial year end.||Total third-party liabilities = R17,115,000||18|
|4||One point for every individual who,at year-end has a direct/indirect beneficial interest in any of the company’s issued securities.||Number of shareholders = 4||4|
Source: Accounting Weekly
Having calculated your company’s PI Score, you’ll be able to determine if your company’s financial statements should be audited, independently reviewed or simply compiled. Remember, the following companies will always be subject to an audit (irrespective of their PI score):
- State-owned companies
- Public companies (listed and non-listed)
- Companies holding fiduciary assets > R5,000,000
- Any company with a Memorandum of Incorporation (MOI) that requires an audit.
There are a few important aspects that you need to consider when analysing your PI score. Firstly, determine if your company is owner-managed or not. In an owner-managed company, the shareholders of the company are also the directors who manage the company. The general assumption is that directors will apply added due care in managing a company when their own interests are at stake. Therefore, the risk of misconduct is less.
After determining the owner/management structure you need to clarify whether your financial statements are internally compiled or independently compiled. Financial statements are internally compiled when for example; a company’s own financial director prepared the financial statements. It is independently compiled when an external accountant/auditor prepares the financial statements of the company. Independently compiled financial statements are subject to less risk of misstatement.
The following table can be used to determine if you need to be audited, reviewed or only need a compilation of your financial statements. Take note of the PI score tabs, the management structure tabs and the internally compiled/independently compiled tabs.
|Not owner managed||Owner managed|
|PI score||Internally compiled||Independently compiled||Internally compiled||Independently compiled|
|100 – 349||
Source: Accounting Weekly
|Compilation||Basic level of assurance|
|Independent review||Limited level of assurance|
|Audit||Highest level of assurance|