An Orwellian take on irregularities
Authorities will ask whether the act was unlawful or deliberate
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.