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Survey among Small and Medium accounting firms confirms that businesses still prefer audits

Survey among Small and Medium accounting firms confirms that businesses still prefer audits

Last Updated Mar 2013


 

An overwhelming 85.7% of respondents felt that the work effort required in an independent review equates to between 60 to 100% of an audit

Johannesburg, Thursday, 14 March 2013 – Only less than 40% of all businesses eligible for an independent review in 2012 opted for an independent review. This is according to the South African Institute of Chartered Accountants’ (SAICA) recent survey of Small and Medium accounting firms which was aimed at ascertaining the views of the practitioners, following the 2008 Companies Act’s (the Act) promulgation.

Ashley Vandiar, SAICA’s project director: Assurance and Member’s Advice explains that of all the survey findings, one of the most significant revelations was the fact that majority of practitioners reported that less than 40% of their clients that were eligible for an independent review actually elected to have an independent review. “An overwhelming 85.7% of respondents felt that the work effort required in an independent review equates to between 60 to 100% of an audit. Of these 85.7% respondents, 32.1% believed that the work effort in an independent review will equate to 80% to 100% of an audit.”

Pure independent review viz combined independent review and accounting services:

The study further revealed that audit firms which provided both independent reviews and accounting services to their clients reported a lower cost and lower billable hours charged for the performance of review services when compared to practitioners who performed review services only. He confirms that these findings are consistent with prior international research which concluded that the performance of both assurance and non-assurance services by the same practitioner would result in economies of scope and knowledge spill-overs from the one service to the other.

“This indicates that Regulation 29(5) of the Act prohibits these economies of scope which consequently result in increased costs, and this is contrary to the objective of the Act”, says Vandiar. Regulation 29(5) of the Act prohibits the preparer of a company’s financial statements from also being the independent reviewer. This independence requirement is more onerous than that which is required of an auditor for a voluntary audit. The objective of the 2008 Act was to reduce the cost and regulatory burdens for small entities and as such, the legislator introduced independent reviews as an alternative to audits.

However, in terms of the old Act, these small companies that were subject to audit had a provision in terms of Section 275(3) which permitted the auditor of private companies to also perform certain additional non-audit services. However, under the new Act, there is no such provision. Therefore, it can be argued that Regulation 29(5) further increases the regulatory burden for these smaller companies.

When specifically asked about the effect of Regulation 29(5):

  • 93.1% of respondents indicated that it would increase costs
    • 41.4% of respondents believed that while it would increase costs of performing an independent review, an independent review will still be cheaper than an audit
      • Majority of respondents (51.70%) however believe that Regulation 29(5) will increase costs of an independent review to the extent that an independent review will equal or exceed the cost of an audit

      Audit viz independent review:

      The survey results also indicate that practitioners believe that the time taken to complete a review when compared to an audit is significantly less. “The results also reveal that although an independent review is generally cheaper than an audit, the difference is not by a significant margin,” Vandiar advises. He says that one needs to take cognisance of the fact that companies with a Public Interest Score between 100 and 350 who want to exercise their option to have an independent review, will need to appoint an independent accounting professional and have their financials independently compiled and reported.

      “Firms agree that it is important to bear in mind that the cost of having independently compiled financial reports together with the cost of an independent review is most likely to exceed the cost of having a voluntary audit. These firms believe that when looking at the holistic cost of a review compared to an audit, the reduction in cost for smaller entities is questionable,” says Vandiar.

      A clear finding from this survey is that Regulation 29(5) is contrary to the objective of the Act since it results in an increase in costs and regulatory burdens for smaller entities to the extent that it almost negates all the cost savings that could have been achieved by entities selecting a lower form of assurance to audit. Vandiar confirms that Regulation 29(5) will undoubtedly result in extremely high independence of the review practitioner but he questions whether such high independence is required for entities that clearly fall out of the scope of the public interest. “The costs of achieving practitioner independence should never exceed the benefits or quality that can be achieved through potential knowledge spill overs,” Vandiar reiterates.

      MEDIA CONTACT:

      Bontle Tsikwe
      Communications Coordinator: Corporate
      SAICA Communications & Marketing Division
      Tel: 011 621 6712
      Email: bontlet@saica.co.za

      Nkolola Halwindi
      Project Director: Communication
      SAICA Communications & Marketing Division
      Tel: 011 621 6713
      Email: NkololaH@saica.co.za

      ABOUT SAICA:
      The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 34 500 members who are Chartered Accountants and hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in their spheres of business operation. Most of these members operate in commerce and industry, and play a significant role in the nation’s highly dynamic business sector and economic development.

      SAICA serves the interests not only of the Chartered Accountancy profession, but also of society in general through its key objective of upholding professional standards and integrity. The pre-eminence of South African Chartered Accountants [CAs(SA)] nationally and internationally attests to the successes achieved by SAICA on a broad global canvas. SAICA’s members enjoy the privilege of using the highly regarded and prestigious CA(SA) designation. Members of SAICA are subjected to a Code of Professional Conduct, which provides guidelines for ethical and professional behaviour. Fundamental ethical principles to which CAs(SA) are expected to achieve include:

      • Integrity;
        • Objectivity;
          • Professional Competence and Due Care;
            • Confidentiality; and
              • Professional Behaviour.

              SAICA members serve on international accounting bodies including; the Trustees of the International Financial Reporting (IFRS) Foundation, the International Accounting Standards Board (IASB), the IFRS Interpretations Committee, the IFRS Advisory Council and the Council of the International Federation of Accountants (IFAC). SAICA is also a member of The Global Accounting Alliance (GAA).

              For more information visit www.saica.co.za