South Africa's audit exemption threshold: an international comparison

Abstract

Audit plays an important role in society as it keeps management honest and shareholders informed. There are many benefits to the performance of an audit. Previous research has shown that the performance of an audit in a company leads to reduced interest rates and increased confidence in its financial statements. However, the argument many have against an enforced audit on the small company is that it unnecessarily increases the costs of doing business. In many instances the shareholders are already aware of the transactions and affairs within a non-listed company without the need of an audit. The question then follows at what point should government step in and decide that an audit is needed for public interest, specifically with reference to the non-listed companies. South Africa calculates a threshold for audit exemption by using four qualifiers, namely turnover, employees, shareholders and third party liabilities. These numbers add up to the Public Interest Score (PI score). This score determines whether a non-listed company must undergo an audit. The research focused on audit exemption across six countries selected for the sample, namely Australia, Brazil, Canada, Russia, the UK and the USA. The aim of the study was to compare the point of audit exemption specifically for non-listed companies in these countries with that of South Africa. The study further attempted to determine which companies are allowed to forego an audit. For this reason, the SME thresholds were also compared across the seven countries to triangulate the data gathered on these thresholds. The study found a few similarities among the countries, for example most countries make use of revenue and employees as two of their qualifiers for audit exemption and for the SME definition. However, significant differences were found between South Africa and the other countries. These include the way in which the audit exemption threshold is calculated and the fact that South Africa is the only country which distinguishes between internally compiled financial statements and externally compiled financial statements in relation to its audit exemption threshold. Lastly, South Africa uses different qualifiers in its calculation for audit exemption than the other countries in the study. The study further considers the role which agency theory and stakeholder theory plays in the context of a non-listed company. The study finds that there are complex interactions between the need for audit which can be explained through both the agency and the stakeholder theories. The study concludes with recommendations to improve the audit exemption threshold in South Africa were made by taking into account the limitations of the study. One of the main recommendations made in this study is the suggestion to simplify the audit exemption threshold in South Africa to reduce the burden faced by non-listed companies.