Three companies slapped with 10% of turnover fines

Three companies have been hit with fines equivalent to 10% of turnover for failing to file annual financial statements within six months of the year-end.

The case was brought against the companies by the Companies and Intellectual Property Commission (CIPC), whose job it is to ensure compliance with the Companies Act.

The CIPC says it brought the case after receiving irregularity reports from the Independent Regulatory Board for Auditors (IRBA). The Auditing Profession Act requires auditors to report irregularities, such as failure to file annual financial statements or failure to register for Vat.

The fines are also a sign that the auditing profession is taking its obligation to report irregularities more seriously.

The Companies Act requires companies to prepare annual financial statements within six months of the end of their financial year, and in some instances file them with regulators. The companies in question and their directors were notified of the irregularities, but the Compliance Notices were ignored. It was at this point that the CIPC took them to court.

The three companies are CitiConnect, Blue Sky Air and Sisao Project. They have been ordered to pay 10% of their turnover for the period of non-compliance.

Lettie Janse Van Vuuren CA, head of technical at SA Accounting Academy, says this is the first time an order of this nature has been granted to the CIPC for reporting irregularities.

“It is a sign that the CIPC is getting serious about enforcing compliance with the Companies Act,” she says. “Until now, companies have been able to get away with this kind of behaviour, but clearly those days are over.”

She adds that the fines are particularly severe, and in worst-case scenarios could result in some companies closing their doors. Responding to questions from Moneyweb, the CIPC says in the event that a company had to close its doors due to the severity of the fine, it would pursue the directors for the shortfall.

Christina Pretorius, director of mergers and acquisitions at Norton Rose Fulbright, says companies shouldn’t panic over the severity of these fines as they are given plenty opportunity to comply with the law: “The first step is the auditor finds an irregularity and reports this to IRBA. It then engages the company. If the company does nothing to fix the irregularity then the auditor confirms the irregularity to IRBA, which is obliged to report this to the regulator at CIPC. The CIPC will then issue a compliance notice warning you of further action unless the irregularity is sorted out. Only if you also fail to engage at that stage can CIPC apply to court. You would also have notice of the application. These three companies that were given fines obviously chose to do nothing despite all the warnings they have been given and have been punished accordingly.”

Pretorius says the 10% of turnover fines are similar to that allowable for breaches of the Competition Act.

In a statement, the CIPC says the judgments against non-compliant companies should “raise awareness to all registered companies to adhere to the provisions of the Companies Act.”

The Reportable Irregularities include: failing to file annual financial statements within six months of the end of its financial year end; trading recklessly and with gross negligence with the intention to defraud; giving financial assistance to directors without proper due diligence and in violation of the Companies Act;  and where directors’ conduct violates the Companies Act.

Pretorius says the imposition of such hefty fines suggests the CIPC is becoming more proactive in enforcing the law, and companies can avoid this by rectifying instances of non-compliance where required to do so by their auditors in the first instance, or when issued a compliance notice by the CIPC.

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