1. Public Hearings Companies Bill, 2008. Submission to the Portfolio Committee on Trade and Industry August 2008

2. © 2008 Deloitte & Touche. All rights reserved.2 Companies Bill, 2008 Limitation of audit requirement Companies Bill, 2008 restricts requirement to have audited financial statements In line with international best practice Provision might impact auditing profession Appropriate to provide alternative form of verification for certain companies

3. © 2008 Deloitte & Touche. All rights reserved.3 Companies Bill, 2008 Accountability and transparency requirements for private companies Section 84 applies only to: public companies state owned enterprises and private companies, limited liability companies and non profit companies only to the extent that this requirement is included in the company’s Memorandum of Incorporation However, section 30(10) allows Minister to require different categories of private companies to have their respective annual financial statements audited Question: what is the position where a private company did not include the requirements of Chapter 3 in its Memorandum of Incorporation, but falls within one of the categories of companies required by the Minister to have its annual financial statements audited? Proposal Chapter 3 should also apply to private companies that are required in terms of section 30(10) to have audited financial statements

4. © 2008 Deloitte & Touche. All rights reserved.4 Companies Bill, 2008 Commencement of the Act In order for the Companies Act to be implemented effectively it is necessary to publish all regulations prior to the commencement of the Act: financial reporting standards regulations published in terms of section 30(10) in terms of which the Minister may require certain categories of private companies to have their annual financial statements audited Special provision for streamlined process not sufficient (section 223 and paragraph 14 of Schedule 6 dealing with Transitional Arrangements) Proposal Staggered implementation similar to provision in Consumer Protection Bill

5. © 2008 Deloitte & Touche. All rights reserved.5 Companies Bill, 2008 Commencement of the Act Proposal In terms of the proposed approach the following provisions will commence one year after the President has assented to the Act: enabling provisions of the Bill (Chapter 1) provisions dealing with the establishment of all regulatory agencies (Chapter 8) and provisions enabling the publication of regulations Remainder of the provisions become effective six months later

6. © 2008 Deloitte & Touche. All rights reserved.6 Companies Bill, 2008 Limitation of auditor liability Limitation of auditor liability dealt with in Companies Act, 1973 and Auditing Profession Act, 2005 No provision in Companies Bill, 2008 Companies have become larger and their activities global, society more litigious Auditors face an increasing number of claims, including many that would be beyond the auditor’s financial resources Joint and several liability This raises the concern that: one of the big auditing firms might exit the market, which would threaten the effective functioning of the South African capital markets, and adversely affect many listed and other companies through disruption of the market for audit services without a means of limiting auditor liability, audit fees might increase to cover the risks or firms might not be willing to accept appointments as auditors of higher risk entities and auditors may adopt a defensive, risk-averse approach to auditing

7. © 2008 Deloitte & Touche. All rights reserved.7 Companies Bill, 2008 Limitation of auditor liability Proposal ‘Liability limitation agreements’ as employed in the UK Companies Act, 2006 (section 532 to 538, effective since 6 April 2008) Principles of the liability limitation agreements: agreement to limit the amount of a liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust cannot cover more than one financial year must be approved by a resolution of the company’s shareholders limitation of liability only effective where it is ‘fair and reasonable’ Manner in which liability can be limited: auditor’s proportionate share of the responsibility for any loss purely by reference to the ‘fair and reasonable’ test a cap on liability, expressed either as a monetary amount or calculated on the basis of an agreed formula or a combination of some or all of the above

8. © 2008 Deloitte & Touche. All rights reserved.8 Companies Bill, 2008 Financial Reporting Standards Section 29 determines that if a company provides any financial statements to any persons of any reason, those statements must satisfy the ‘financial reporting standards’ Section 29(5) requires financial reporting standards to be consistent with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board The requirements of IFRS with regard to recognition, measurement and disclosure are complex and require advanced accounting skills to apply (this applies particularly to fair value measurement and recording) Unlikely that majority of owners of personal liability companies and some private companies will be able to comply with IFRS Proposal Financial reporting standards consistent with the IFRS only be required in the case of companies that are required to have audited financial statements All other companies to apply generally accepted accounting practices

9. © 2008 Deloitte & Touche. All rights reserved.9 Companies Bill, 2008 Rotation of auditors Proposal Rotation of auditor requirements only be applicable to companies that are required to have their financial statements audited in terms of the Bill: public companies state owned enterprises and categories of private companies as determined by the Minister in terms of section 30(10)

10. © 2008 Deloitte & Touche. All rights reserved.10 Companies Bill, 2008 Audit Committee Proposal Limitation on membership of this committee be extended to all full-time employees of the company, and not only to executive employees, as it may affect the independence of the committee should any ex-employee be allowed to serve as a member Board should have authority to assign any additional function to the committee Including matters related to oversight of risk management, internal controls, and governance Audit committee should at most be responsible for oversight of the development and implementation of the said policies and plans

11. © 2008 Deloitte & Touche. All rights reserved.11 Companies Bill, 2008 Related persons and the definition of a ‘group of companies’ Bill proposes that two individuals are related if they are separated by no more than three degrees of natural or adopted consanguinity or affinity Not clear what is meant by three degrees of ‘affinity’ Wide a definition may lead to unintended consequences – especially considering the definition of a ‘group of companies’ Proposal Definition of related persons be limited to two degrees of natural or adopted consanguinity The reference to ‘affinity’ be either defined or removed ‘Group of companies’ be defined only in terms of the relationship between a holding company and its subsidiaries In the alternative, where definition refers to relationship between natural persons that are able to control a company, it be limited to: marriage or a relationship similar to marriage or no more than two degrees of natural or adopted consanguinity

12. © 2008 Deloitte & Touche. All rights reserved.12 Companies Bill, 2008 Business rescue Deloitte would like to express support for the: requirement for a company to be financially distressed (rather than an act of insolvency) to commence business rescue proceedings measures to ensure oversight of the profession of business rescue supervisors and measures to protect all stakeholders, including employees

13. © 2008 Deloitte & Touche. All rights reserved.13 Companies Bill, 2008 Criteria to require audited financial statements Bill provides no indication of the criteria to be employed when the Minister determines the categories of private companies that should have their annual financial statements audited Proposal When making a determination in terms of section 30(10) the Minister must consider the need to protect the interests of any holders of the private company’s securities, or the public interest, having regard to the economic or social significance of the company as indicated by: –its annual turnover –the size of its workforce or –the nature and extent of its activities

14. © 2008 Deloitte & Touche. All rights reserved.14 Companies Bill, 2008 Takeover regulations Takeover regulations will only apply to a private company where 10% or more of the securities have been transferred in the last 24 months or where the company’s Memorandum of Incorporation expressly provides that the takeover regulations would apply Some very large private companies that do not often trade their securities. When its securities are then traded, the takeover regulations may not be applicable and as such minority security holders may have very little recourse Proposal Takeover regulations should apply to all private companies where the company’s Memorandum of Incorporation expressly provides that the takeover regulations would apply, or where the private company has 10 or more security holders and the transaction size of a fundamental transaction exceeds R10m

15. © 2008 Deloitte & Touche. All rights reserved.15 ABOUT DELOITTE Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s 150,000 professionals are committed to becoming the standard of excellence. Deloitte’s professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte’s professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/za/aboutus for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Client Service Centre - Telephone: +27 (11) 209 8999, Email: clientservicecentre@deloitte.co.za © 2008 Deloitte & Touche. All rights reserved.

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