In-depth details on CIPC 10% turnover-penalty for failure to lodge annual financial statements

In-depth details on CIPC 10% turnover-penalty for failure to lodge annual financial statements

The CIPC won a High Court order empowering them to impose a 10% penalty of annual revenue on companies that fail to prepare annual financial statements (within 6 months of year-end).

Failure to submit annual financial statements to CIPC contravenes Act, 71 of 2008. Continuous non-compliance may lead to a formal investigation by the CIPC. The outcome of such an investigation may lead to the issuance of a Compliance notice and other actions which may be imposed by other regulators too.

Context: The CIPCs serves as custodian of Companies Act 71

The CIPCs main objective is to promote compliance with Companies Act 71:

“efficient, effective and widest possible enforcement of the Act” —Section 186(1)(e)

The CIPC’s primary function is to:

“promote the reliability of financial statements by, among other things – monitoring patterns of compliance with, and contraventions of, financial reporting standards” — Section 187(3)

Companies must submit their annual financial statements

Section 30 of the Act relating to Annual Financial Statements states that:

  • Each year, a company must prepare annual financial statements within six months after the end of its financial year, or such shorter period as may be appropriate to provide the required notice of an annual general meeting — Section 61(7).

Regulation 30 of the Act Regulations relating to Company Annual Returns states that:

  • A company that is required by the Act or Regulation 28 to have its annual financial statements audited must file a copy of those audited statements:

    1. on the date that it files its annual return, if the company’s board has approved those statements by that date; or

    2. within 20 business days after the board approves those statements, if they had not been approved by the date on which the company filed its annual return.
  • A company that is not required in terms of the Act or Regulation 28 to have its annual financial statements audited may, at its option:

    1. file a copy of its audited or reviewed statements together with its annual return; or

    2. undertake to file a copy of its audited or reviewed statements within the time contemplated in sub-regulation (2)(b).

  • A company that is not required to file annual financial statements in terms of sub-regulation (2), or a company that does not elect to file, or undertake to file, a copy of its audited or reviewed annual financial statements in terms of sub-regulation (3), must file a financial accountability supplement to its annual return in Form CoR 30.2.

The CIPC must:

  1. establish a system to select and review a sample of financial accountability supplements, audited annual financial statements or independently reviewed annual financial statements that have been filed in terms of this regulation, with the objective of monitoring compliance with the financial record keeping and financial reporting provisions of the Act;  and

  2. may issue a compliance notice to any such company setting out changes that are required to the company’s practices to better comply with the financial record keeping and financial reporting provisions of the Act.

What are the implications of this?

All companies that require its annual financial statements to be audited must submit them together with its annual return — Regulation 30

The following companies are required to have its financial statements audited:

  • public companies
  • state-owned companies,
  • any company that falls within any of the following categories in any particular financial year:
  1. any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R 5 million;

  2. any non-profit company, if it was incorporated:

    1. directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or

    2. primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or

  3. any other company whose public interest score in that financial year is

    1. 350 or more; or
    2. at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

The aforementioned companies should therefore file a copy of its approved financial statements together with its annual return within 20 business days after approval of the financial statements by the Board.

Reportable irregularities

The CIPC receives notices of Reportable Irregularities submitted to the IRBA in terms of Section 45 of the Auditing Profession Act.

Within 3 to 6 months from receipt of the IRBA notification, the CIPC will issue the company with a compliance notification.  Companies that fail to respond to the compliance notification and remains non-compliant for a duration of time, can be issued with an administrative fine in terms of Section 175 of the Act which states that an administrative fine can be issued for a company where a Compliance Notice has been issued for specific continuous non-compliance with the requirements of the Act.

Grounds for issuing a Compliance Notice—Cold case register and characteristics

A Compliance notice is issued in terms of Section 171 of the Act.  The following are grounds for issuing such a notice:

  • if a company or a person has contravened the Act

  • if a person was implicated in or directly or indirectly benefited from a contravention of the Act.

Typical contraventions that attracts issuing of a compliance notice

Following are some typical contraventions that attracts the issue of a Compliance notice:

  • Section 30 – whereby a company failed to file annual financial statements within 6 months after the end of its financial year end

  • Section 22 – whereby a company was carrying on business recklessly with gross negligence, intent to defraud any person or for any fraudulent purpose

  • Section 45 – whereby financial assistance to directors was given without following due diligence and requirements of the Act

  • Section 66 – relating to the composition of the Board

  • Section 76 – whereby a director’s conduct is not consistent with the ethos of the Act.

Cold case register and characteristics

The CIPC established a “Cold case register” which is made up of cases where a Compliance Notice in terms of Section 171 of the Act is issued and not adhered to or satisfied as per its requirements.  Listed below are some of the characteristics that could result in companies appearing on the “cold case register”:

  • A case (e.g.) reportable irregularity, where a compliance notice was issued

  • No acknowledgement of receipt or lack thereof received by the appointed investigator

  • Acknowledgement received for a compliance notice

  • Non-compliance with the terms stipulated on the compliance notice within the period stipulated therein

  • Continued non-compliance after numerous engagements

By failing to comply with the Compliance notice, the CIPC may either apply to the court of the imposition of an administrative fine or refer the matter to the National Prosecuting Authority for prosecution.

Enforcement developments

The matters mentioned below were enrolled in Court for the imposition of administrative fines.  These matters were unopposed and Orders granted in favour of the CIPC.

CIPC v Citiconnect 9503/18 confirmed CIPCs authority to issue administrative penalties for general non-compliance to the Companies Act, 2008. In addition, CIPC now requires companies to institute criminal and legal action against directors that caused financial statements to be misleading or falsify accounting records (CIPC v Steinhoff).

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Sources: Compiled/researched from various sources—kind permissions attributed to original sources

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