RSM South Africa

The secret to growth for SMEs may be found in an audit

An audit is an inspection of your business accounts, including accounting systems documents and invoices. The goal of an audit is to determine if the financial statements are representing an accurate view of the company. However, not all businesses need to be audited.  In the case of companies, the Companies Act (“the Act”) clearly stipulates which companies require an audit and the requirements are confined more to larger companies.

These requirements exclude a large number of small companies, which contribute 98% to the South African economy and they deliver approximately 28% of jobs in the country (Business Tech; 2018). Small companies are excluded because there is generally no distinction between ownership and management, so the audit objective of giving assurance to the owners becomes less important.  Where the owners are not the managers but the company is still small, the Act provides a less onerous “Independent Review” option. 

However, some smaller companies still benefit from an audit process as opposed to a review.  Keeping in mind the cost vs benefit counter argument, recent publications in The Accountant (2018) and by Roberge (2017) explain some of the major benefits are as follows:

An audit:

  • Assists in obtaining funding from investors and banks - Providing these parties with audited financials will provide them with certainty and comfort that investors will get a return on their investments and more certainty that the loans will be repaid.
  • Identifies problems and weaknesses within the company’s accounting system where the system might not be tracking certain transactions correctly.
  • Uncovers fraud – This includes instances where employees or management are stealing inventory or other assets from the company. An auditor may be able to identify discrepancies and assist the company in implementing systems that will eliminate these problems in future.
  • Identify poor accounting practices – It is hard to see these issues unless you can view the overall picture, which is possible with an audit.
  • Improves tax planning – An external audit can assist in ensuring that you are ready for tax season and that you are leveraging tax write-offs and benefits as much as possible. By having proper records and planning, taxes are less stressful and easier to file.
  • Strengthens the credibility of the company’s financial records – This is important if you are planning to sell the business in a couple of years time. When you have documented information that demonstrates the success and progress of your company over multiple years, then it will be easier to prove the financial security of the business and make it more appealing to buyers.
  • Provides a clear understanding of the financial situation of your company - A good audit will ensure that your accounting records give you a precise picture of everything that is occurring within your business so you can make accurate judgements about the financial situation of your company.
  • Educates business owners by emphasising the importance of accounting information in business - Auditors may provide business owners with information on current accounting issues, educational seminars to improve their companies’ accounting process, and other “added value” services.

Despite the cost vs benefit argument and the burden that obtaining an audit places on the company, the advantages may outweigh the disadvantages. Therefore small companies should carefully consider the above points and, if appropriate, volunteer to be audited.  This will not only assist them as they grow, it will also yield other welcome unexpected benefits.

Siyasanga Madikazi,                                                               Henk Heymans

Trainee Accountant, Johannesburg                             Audit Director, Johannesburg
 

Sources:

Companies Act No.71 of 2008

BusinessTech

The Accountant

SLC Bookkeeping


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