Be careful – Big Brother really is watching!

Reportable Irregularities just aren’t worth it

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 in terms of the Auditing Profession Act (Act), No 26 of 2005, and the requirements in terms of reporting Reportable Irregularities (RI’s), 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 RI has occurred. A process then unfolds with further obligations on the part of the auditor, entity and IRBA.

But, what exactly is a RI?

The Act defines a RI 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 RI has occurred is management’s intent, and whether or not it was deliberate. For example, if it emerges that due to a clerical error VAT was underpaid, it won’t be a RI if there was no intention of being unlawful and it wasn’t deliberate. If however, VAT was under declared purely to avoid paying the South African Revenue Service (SARS) or to save on cashflow - that would be a RI. 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 likely be a RI 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 AGM 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. They might not be criminal acts, but they do constitute 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 RI. This isn’t easy, as my colleague points out in the article Take Two for the Companies Act Regulations in this newsletter. However, ignorance of your obligations will not absolve you.

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 RI. But if an act is committed with the knowledge, consent or on instruction of management or if management does not take adequate corrective action, it will be a RI. No matter how immaterial the amount, if it’s fraudulent or amounts to theft, then it’s a RI.

Once the matter is reported to IRBA, and the RI continues, IRBA must pass it on to an appropriate regulator, eg. SARS, CIPRO, or 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 a RI, consult with your auditor and let him be your Big Brother. It could save you in the long run.