The Companies Bill: Audit, Statutory Auditors, and Company Investigations

1. The Companies BillParts XXI, XXII, and XXIIIMay 2011 Presented by: Simon Fisher

2. This slide presentation has been prepared for general guidance only, and does not constitute professional advice. You should not act upon the information contained in these slides without obtaining specific professional advice. Accordingly, to the extent permitted by law, RSM Ashvir (and its employees and agents) accept no liability, and disclaim all responsibility, for the consequences of anyone acting, or refraining from acting, in reliance on the information contained in these slides or for any decision based on it, or for any consequential, special or similar damages even if advised of the possibility of such damages.

3. Agenda • Part XXI – Audit • Part XXII – Statutory auditors • Part XXIII – Company investigations

4. Part XXI - Audit

5. Requirement for audit All companies must produce annual audited financial statements except: • Small companies • Dormant companies

6. Definitions Small companies are those companies, other than public companies, that satisfy two or more of the following in the current and the preceding year: • Turnover of not more than Shs 30 million • Total assets of not more than Shs 15 million • Not more than 50 employees (averaged over the year) And …

7. Definitions (continued) … is not part of a group, unless that group qualifies as a small group whose: • Consolidated turnover is not more than Shs 94.5 million or aggregate turnover is not more than Shs 113.5 million*, and • Consolidated gross assets are not more than Shs 370 million or aggregated gross assets are not more than Shs 450 million * this is per S 417, and is in conflict with S 348, which gives figures of Shs 750 million and Shs 900 million respectively

8. Definitions (continued) A dormant company is one that: • has been dormant (not defined) since formation; or • has been dormant since the end of the previous financial year and: • Qualified as a small company in the previous year; or • Would have so qualified but for being a public company or a member of an ineligible group; and • Is not required to prepare group financial statements for the current year

9. Right of members to require an audit The members holding not less than 10% of the issued share capital of an exempt company may give notice that they require that the financial statements be audited

10. Exempt companies … … must include a statement by the directors on the statement of financial position to the effect that: • The company is entitled to such exemption • The members have not required the company to have an audit; and • The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of financial statements

11. Appointment of auditors – private companies • For companies requiring an audit, auditors must be appointed within 28 days of the earlier of: • The day on which the annual financial statements of the previous period are sent out to members • The latest date on which such financial statements should have been sent out.

12. Appointment of auditors – private companies • Directors may appoint an auditor if the company did not previously have an auditor (i.e. the initial appointment) or to fill a casual vacancy • Otherwise the members appoint the auditor by ordinary resolution • Failing which, the Minister may appoint an auditor

13. Appointment of auditors – private companies • The auditor is deemed to be reappointed unless: • Appointed by the directors • Articles require reappointment • Notice has been received from members • Members resolve that he shall not be reappointed • The directors have resolved that no auditor be appointed

14. Appointment of auditors – public companies • Broadly similar to the requirements for private companies except that there is no provision for deemed reappointment

15. Auditors’ remuneration • If appointed by the members - fixed by members by ordinary resolution • If appointed by the directors – fixed by the directors • If appointed by the Minister – fixed “at a reasonable rate” by the Minister Remuneration includes expenses and benefits in kind.

16. Disclosure of terms of audit appointment • The Minister may issue regulations requiring disclosure of the terms on which the auditor is appointed, remunerated, or required to perform his duties i.e. there is no requirement within the Act to disclose auditor’s remuneration within the financial statements

17. The auditor’s report Shall include: • An introduction identifying the financial statements and the financial reporting framework • A description of the scope of the audit identifying the auditing standards • An opinion …

18. The auditor’s report (continued) … whether (for an ‘individual statement’) the financial statements give a true and fair view of and(sic) present fairly in all material respects the financial position at the end of the year and its financial performance for the year; and • Whether the financial statements have been prepared in accordance with the relevant financial reporting framework and the requirements of the Act

19. The auditor’s report (continued) … whether (for ‘group financial statements’) the financial statements give a true and fair view of and present fairly in all material respects the financial position of the company(sic) at the end of the year (and) its financial performance and profit or loss for the year of the undertakings included in the consolidation as a whole, so far as concerns members of the company; and • Whether the financial statements have been prepared in accordance with the relevant financial reporting framework and the requirements of the Act

20. The auditor’s report (continued) … whether the information given in the directors’ report is consistent with the financial statements; and • For quoted companies: whether the auditable part of the directors’ remuneration report has been properly prepared in accordance with the Act

21. Auditor’s right to information • Section 431 gives the auditor wide ranging rights of access to information • Section 432 extends these rights to foreign subsidiaries of a Kenyan company • Knowingly or recklessly providing misleading or false information to an auditor is an imprisonable offence • The auditor has the right to receive notice of and attend any general meeting

22. Signing of the audit report • The audit report shall be signed by the senior statutory auditor in his own name, for and on behalf of the auditor (guidance to be issued on identifying the senior statutory auditor) • Any person who knowingly or recklessly causes an audit report to be misleading, false or deceptive is liable to imprisonment

23. Resignation of an auditor • An auditor may resign by submitting written notice to the registered office, accompanied by a statement of the circumstances connected with his ceasing to hold office (copied to the Registrar) • If the auditor ceases to hold office before the end of his term of office he, and the company, shall notify the appropriate audit authority (for major public interest entities – the Minister)

24. Voidness of indemnities given to auditors • Any indemnity given to the auditor by a company directly or indirectly against any liability in connection with negligence, default, breach of duty, or breach of trust, is void • But a company can indemnify an auditor against costs incurred in defending himself in proceedings where judgement is given in his favour or he is acquitted

25. Liability limitation agreements • Liability limitation agreements will be allowed if authorised, one year at a time, by the members by ordinary resolution • Cannot limit the liability to less than such amount that is fair and reasonable having regard to the auditor’s responsibilities • May require disclosure

26. Audit committees • Each quoted company shall have an audit committee • For a quoted company that is a subsidiary of another quoted company, the audit committee of the parent may assume responsibility for the audit review function of the subsidiary

27. Audit committees (continued) The audit committee: • Shall set out the corporate governance principles that are appropriate, establish policies and strategies for achieving them, and measure annually adherence to them • Organise the company to promote effective and prudent management • Establish standards of business conduct and ethical behaviour for directors, managers, and other personnel

28. Audit committees (continued) The audit committee is responsible for: • Overseeing the operations of the company • Providing the BoD with recommendations on objectives, strategy, business plans and major policies • Providing the BoD with comprehensive, relevant and timely information to enable it to review its objectives, strategies and policies, and to hold senior management accountable for its performance

29. Part XXII – Statutory auditors

30. Eligibility … • An individual or firm is eligible for appointment as statutory auditor if the individual or every partner in the firm is the holder of a practising certificate i.e. companies will not be eligible to be statutory auditors

31. Independence of the statutory auditor … A person may not act as statutory auditor if that person is: • An officer, partner, or employee of the auditee • An officer, partner, or employee of an associated undertaking of the auditee

32. Partnership as statutory auditor Where a partnership is appointed as statutory auditor, the appointment is of the partnership and not of the partners The appointment can extend to a successor partnership or individual

33. Foreign qualifications The Minister may declare that certain persons are regarded as holding an approved foreign qualification [so what? A statutory auditor still needs to hold a practising certificate issued under the Accountants Act]

34. Part XXIII – Company investigations

35. Appointment of inspector The court may appoint ‘competent’ inspectors: • On application by more than 200 members or by members holding 10% or more of the issued share capital or, for a company not having a share capital, 20% or more of the registered members The application should be supported by evidence that the applicants have good reason for requiring an investigation

36. Appointment of inspector (continued) The court may appoint ‘competent’ inspectors: • If the company by special resolution declares that its affairs ought to be investigated • If it appears to the court upon a report from the Registrar that an investigation is needed

37. Powers of inspectors • An investigator may, if necessary, extend the investigation to other companies within a group • All officers and agents must provide all the assistance they are able to give • The inspector may examine officers and agents on oath, and they can be found guilty of contempt of court if they refuse to answer questions

38. Inspector’s report • An inspector shall issue interim (if required) and final reports to the court • The court may cause the report to be published • If it appears to the court that any person has been guilty of a criminal offence, the court shall forward a copy of the report to the Attorney-General • The inspector’s report shall be admissable in court as evidence of the inspector’s opinion

39. Inspector’s expenses • The expenses of the investigation shall be borne in the first instance by the Registrar, who may seek recovery from any person convicted of an offence

40. Investigation of ownership • The Registrar may, where there are good reasons to do so, also appoint an inspector to investigate and report on the membership of a company; or • The Registrar can carry out his own investigation into the ownership of any shares or debentures in a company

41. Thank you Any questions?