In simple terms, an independent review checks that your company’s financial statements meet the required standards, offering a level of confidence in their accuracy without the more extensive procedures involved in a full audit.
Section 30 of the Companies Act 71 of 2008 sets out the requirements for the annual financial statements (AFS) of a company and stipulates which companies require their AFS to be audited or independently reviewed.
While the thought of an audit or review may feel overwhelming, independent reviews are fairly commonplace. Understanding the process can help you prepare and ensure the experience runs smoothly.
Generally, an accountant will inform the client that they need an independent review, but ultimately it is the responsibility of the directors of the company to know whether or not it is required.
If a company meets the legal requirement for an independent review under the Companies Act, they need to have it performed or the accountant becomes bound by his/her professional code to report the client for not complying with legislation.
That being said, a company can opt to have an independent review done without being legally compelled to do so.
What is an Independent Review?
An independent review is a professional service that provides limited assurance on the accuracy and compliance of a company’s financial statements. During this process, the independent reviewer performs specific procedures to gather enough evidence and determine that the financial statements comply with the International Standard on Review Engagements 2400 (Revised), commonly known as ISRE 2400.
Key benefits of an Independent Review
An independent review can provide several advantages for your business:
- Credibility: it adds credibility to your financial statements, demonstrating to stakeholders that your financial reporting is trustworthy.
- Cost-effective: independent reviews are generally less expensive and time-consuming compared to audits, making it a more affordable option for many businesses.
- Investor confidence: having your financial statements reviewed can increase confidence among potential investors and financial partners, assuring them of your business’s financial health.
- Error detection: an independent review can uncover mistakes, inconsistencies, or even potential fraud that may have gone unnoticed by internal teams, helping prevent financial misstatements or compliance issues.
When is an Independent Review required?
There are specific circumstances where an independent review is required, as well as situations where it is an alternative to an audit. Here are some key scenarios where an independent review might be necessary:
- Public companies are generally required to undergo a full audit rather than an independent review.
- Private companies may have the option to choose an independent review instead of an audit, depending on their financial situation. For example:
- A company with a Performance Indicator (PI) score between 0 and 100, where financials are compiled internally, can opt for an independent review.
- A company with a PI score between 0 and 349, where financial statements are independently compiled, also has the option of an independent review.
- Non owner-managed companies, where the shareholders are not the same individuals as the directors, are required to have an independent review.
- Voluntary review: even if not legally required, a company may choose to have an independent review voluntarily to enhance trust and transparency.
Owner-managed companies: what does it mean?
The concept of owner-management is important when considering the need for an independent review. If a company’s shares are owned by another company, it most likely will not be classified as owner-managed. However, if Company A owns 100% of the shares in Company B, and the director of Company B is also the sole shareholder of Company A, Company B is considered owner-managed and does not need an independent review.
Partner with the specialists
It is clear an independent review can bring numerous benefits to your business. If you are unsure whether your company requires an independent review or how to proceed, consulting with experts is the best way to ensure your business remains on the right side of the law.
By working with professionals who specialize in these services, such as the team at Tax Consulting South Africa, you can ensure that your business is fully compliant and prepared should any financial review or audit be required.
