Proposed criminal sanctions for directors unfair, says ACCA
Proposed amendments to the Companies Act will lead to directors being unfairly held liable for false and misleading financial statements, ACCA (the Association of Chartered Certified Accountants) has warned.
ACCA has called for a review of the proposals in the Companies Amendment Bill dealing with company director's liability for false or misleading statements. ACCA believes that the new law should allow for a situation where one director might not agree with a particular contentious statement, they should have the opportunity to defend themselves against a legal charge by being able to prove that they registered their objection at the time and tried to persuade their colleagues not to approve a misleading or incorrect statement.
" While we support the concept of collective responsibility in a board, where legal punishments are concerned it is only fair that individuals who are in the minority in respect of particular board decisions are able to defend themselves," said Irene Christopher, ACCA's Head of Policy Development, Southern Africa.
And in relation to there being an offence of being a party to misleading statements, ACCA has also called for a review of the civil liability of auditors, which means that while they should bear their share of the blame, they should not be the sole scapegoats for misleading statements.
" If a company's directors are to be made personally criminally liable for false and misleading statements included in a company's accounts, it must follow that, under the civil law, an auditor who has failed to identify those statements should not as a matter of course be wholly liable to shareholders for all the losses incurred by them," said Irene Christopher.
" Where an auditor is negligent and has failed to properly protect the interests of shareholders, then those shareholders should have a right of redress against that auditor under the civil law. But where the auditor has not been the only party at fault, and the company's directors have successfully withheld certain information from the auditor or misled him, then it should be the case that the financial liability for meeting shareholders' claims should be shared between the directors and the auditor in proportion to their respective faults. We suggest that this must be the inevitable consequence of the new criminal sanctions being proposed," Irene Christopher added.
The Bill also makes it a basic legal requirement for companies to appoint audit committees which are comprised of at least three non-executive directors who each satisfy the test of independence set out elsewhere in the Bill.
Irene Christopher said: " This will create significant difficulties for smaller companies, who not only have to identify and appoint suitable individuals to become directors in the first place, but who are then able to take on the role of audit committee members. Given the extensive responsibilities of audit committee members, and the strict test of eligibility, it will not prove easy, even for the largest companies, to find suitable individuals to take on these roles. But for smaller companies in particular, the requirement as drafted is likely to prove onerous and even impractical."
The Bill would also require public interest companies, which will include organisations such as charities – to appoint audit committees. This means that companies which do not have the same level of complexity and the same heightened need for transparency as listed companies would be regulated by the same strict standards.
" We believe that the Government must think again about the heavy demands that its proposals would place on smaller companies. It should re-consider whether it would be proportionate and cost-effective regulatory practice to require smaller public interest companies to appoint audit committees on the proposed basis. The proposals on this matter go much further than the equivalent rules in the US or the UK."
"We would favour the requirement for audit committees to be restricted to listed companies, either by legislation or alternatively by a listing rule. If unlisted companies were to be subjected to the same requirements as listed companies in this respect, this could act as a disincentive to businesses incorporating as public interest companies," said Irene Christopher.
For further information please contact:
Head of Policy Development ACCA Southern Africa
(011) 537 1760 / 083 284 0715