An Or­wellian take on ir­reg­u­lar­i­ties

Authorities will ask whether the act was un­law­ful or de­lib­er­ate

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - MARC EDEL­BERG

GE­ORGE Or­well’s novel 1984 ex­posed the per­ils of over­reg­u­la­tion. In­stead of tak­ing it as a warn­ing, how­ever, it some­times feels as though reg­u­la­tors have taken the book as a blue­print — and Big Brother is watch­ing.

As a busi­ness owner, you prob­a­bly feel that reg­u­la­tors are al­ways telling you what to do and how to run your com­pany, and if you con­sider an au­di­tor’s re­spon­si­bil­i­ties un­der the Au­dit­ing Pro­fes­sion Act, 2005, and the re­quire­ments in terms of re­port­ing re­portable ir­reg­u­lar­i­ties, you can’t help but think of 1984.

Sec­tion 45 of the act re­quires au­di­tors to sub­mit a writ­ten re­port to the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors (Irba) if they have rea­son to be­lieve that a re­portable ir­reg­u­lar­ity has taken place. A process then un­folds with fur­ther obli­ga­tions on the part of the au­di­tor, en­tity and Irba.

But, what ex­actly is a re­portable ir­reg­u­lar­ity? The act de­fines a re­portable ir­reg­u­lar­ity as “any un­law­ful act or omis­sion com­mit­ted by any per­son re­spon­si­ble for the man­age­ment of an en­tity, which:

Has caused or is likely to cause ma­te­rial fi­nan­cial loss to the en­tity or to any part­ner, mem­ber, share­holder, cred­i­tor or in­vestor of the en­tity in re­spect of his/her or its deal­ings with that en­tity; or

Is fraud­u­lent or amounts to theft; or

Rep­re­sents a ma­te­rial breach of any fidu­ciary duty owed by such per­son to the en­tity or any part­ner, mem­ber, share­holder, cred­i­tor or in­vestor of the en­tity un­der any law ap­ply­ing to the en­tity or the con­duct or man­age­ment thereof.”

Let’s un­pack this def­i­ni­tion and as­sess how it af­fects you and your busi­ness deal­ings.

An im­por­tant el­e­ment in de­ter­min­ing if a re­portable ir­reg­u­lar­ity has taken place is man­age­ment’s in­tent, and whether or not it was de­lib­er­ate. For ex­am­ple, if it emerges that due to a cler­i­cal er­ror value-added tax (VAT) was un­der­paid, it won’t be an ir­reg­u­lar­ity if there was no in­ten­tion of be­ing un­law­ful and it wasn’t de­lib­er­ate. If, how­ever, VAT was un­der­de­clared with the in­ten­tion to avoid pay­ing the South African Rev­enue Ser­vice (SARS) or to save on cash flow — that would be an ir­reg­u­lar­ity. Due re­gard has to be given to the pos­si­bil­ity of neg­li­gence, for ex­am­ple if VAT was not paid be­cause man­age­ment was not aware of the re­quire­ment to pay VAT, then this would also likely amount to a re­portable ir­reg­u­lar­ity as man­age­ment should have been aware of the reg­u­la­tory re­quire­ment.

What is an un­law­ful act? The ob­vi­ous ones are fraud or theft. How­ever, not hold­ing an an­nual gen­eral meet­ing within the pre­scribed pe­riod; not com­ply­ing with the pro­vi­sions of the en­tity’s mem­o­ran­dum and ar­ti­cles of as­so­ci­a­tion; breach of fidu­ciary duty by a com­pany di­rec­tor and oth­ers are also seen as un­law­ful acts.

Direc­tors need to be fa­mil­iar with the changes to the Com­pa­nies Act as non-com­pli­ance with any of the new reg­u­la­tions could lead to a re­portable ir­reg­u­lar­ity. If an ad­min­is­tra­tive em­ployee con­tra­venes the Com­pa­nies Act and its reg­u­la­tions with­out man­age­ment’s knowl­edge, and man­age­ment takes cor­rec­tive ac­tion as soon as they be­come aware of it, this won’t be a re­portable ir­reg­u­lar­ity. How­ever, if an act is com­mit­ted with the know- ledge, con­sent or on in­struc­tion of man­age­ment or if man­age­ment does not take ad­e­quate cor­rec­tive ac­tion, it will be an ir­reg­u­lar­ity.

No mat­ter how im­ma­te­rial the amount, if it’s fraud­u­lent or amounts to theft, it’s an ir­reg­u­lar­ity.

Once the mat­ter is re­ported to Irba, and the ir­reg­u­lar­ity con­tin­ues, Irba must pass it on to an ap­pro­pri­ate reg­u­la­tor, such as SARS, or the South African Po­lice Ser­vices (SAPS) and the re­spon­si­bil­ity then rests with those bod­ies and could es­ca­late into a larger is­sue de­pend­ing on its sever­ity.

Con­se­quently, you need to ask, is it worth it? The du­ties im­posed on direc­tors are al­ready oner­ous — why ex­pose your­self fur­ther? So be­fore em­bark­ing on a course of ac­tion that could land up be­com­ing an ir­reg­u­lar­ity, con­sult with your au­di­tor and let him be your Big Brother. It could save you in the long run.

Pic­ture: iSTOCKPHOTO

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