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Calculating a company’s Public Interest Score (PI score) should be a two-minute exercise for any SME company.
The term has however managed to intimidate and confuse many small business owners. We’d love to shed some light on the topic and summarise what you need to know.
WHY YOUR COMPANY’S PUBLIC INTEREST SCORE MATTERS
First off, the Companies Act actually requires all companies to calculate their PI score. This score serves as an indicator of a company’s public interest. Why is it important to understand the extent of a company’s public interest? It determines the specific regulations and reporting requirements that a company will have.
Your company’s PI score determines:
- If your company’s financial statements should be audited or independently reviewed.
- The financial reporting standards apply to your company, e.g. IFRS or IFRS for SMEs.
HOW TO CALCULATE YOUR COMPANY’S PI SCORE
Before the number-crunching can commence (joking – it’s really a simple process), you need your company’s latest financial figures. The most important figures you’re looking for includes:
- Total turnover
- Total third-party liabilities
- Total fiduciary assets held
Assets held on behalf of another person e.g. a bank holding its clients’ funds.
To save you even more time, CQS developed a super savvy PI score calculator to get your company’s PI score in seconds. Let’s look at the following example:
|No:||Parameter as stipulated in the Companies Act:||Example:||Points:|
|1||The number of points equal to the average number of employees of the company during the financial year.||Employees at the beginning of the year: 41 Employees at the end of the year: 44 Average number of employees: (41 + 44) / 2 = 42.5, thus 43 employees.||43|
|2||One point for every R1 million (or portion thereof) in turnover during the financial year.||Turnover = R32,320,000.00||33|
|3||One point for every R1 million (or portion thereof) in third party liability of the company, at the financial year end.||Total third-part liabilities = R17,115,000.00||18|
|4||One point for every individual who (at year-end) has a direct/indirect beneficial interest in any of the company’s issued securities.||Number of shareholders = 4||4|
I’VE CALCULATED MY COMPANY’S PI SCORE – NOW WHAT?
After you’ve calculated your company’s PI Score, you’ll be able to determine if your company’s financial statements should be audited or independently reviewed. Remember, the following companies will always be subject to an audit (irrespective of their PI score):
- State-owned companies
- Public companies (listed and non-listed)
- Companies holding fiduciary assets > R5,000,000
- Any company with a Memorandum of Incorporation (MOI) that requires an audit.
For private companies, the following table can be used:
|PI SCORE||NOT OWNER-MANAGED||OWNER-MANAGED|
|Internally Compiled||Independently Compiled||Internally Compiled||Independently Compiled|
|350 +||· Audit · IFRS or IFRS for SMEs||· Audit · IFRS or IFRS for SMEs||· Audit · IFRS or IFRS for SMEs||· Audit · IFRS or IFRS for SMEs|
|100 – 349||· Audit · IFRS or IFRS for SMEs||· Independent Review · IFRS or IFRS for SMEs||· Audit · IFRS or IFRS for SMEs||· Compilation · IFRS or IFRS for SMEs|
|< 100||· Independent Review · No prescribed framework||· Independent Review · IFRS or IFRS for SMEs||· Compilation · No prescribed framework||· Compilation · IFRS or IFRS for SMEs|
From the above, you’ll note that there’s a difference between:
- Owner managed VERSUS Non-owner managed:
In an owner-managed company – the shareholders of the company are also the directors who manage the company. The general assumption is that directors will apply added due care in managing a company when their own interests are at stake. Therefore, the risk of misconduct is less.
- Internally compiled VERSUS Independently compiled:
Financial statements are internally compiled when for example; a company’s own financial director prepared the financial statements. It is independently compiled when an external accountant/auditor prepared financial statements of the company. Naturally, independently compiled financial statements are subject to less risk of misstatement.
HOW CHOOSING THE RIGHT ENGAGEMENT CAN SAVE YOU MONEY
The different types of engagement offer different levels of assurance to stakeholders in respect of the company’s financial statements:
- Compilation: Basic level of assurance
- Independent review: Limited level of assurance
- Audit: Highest level of assurance
It boils down to the following: As each different engagement type requires a different amount of time and work performed by a professional – the cost of each engagement will differ significantly. For smaller private companies, compiled financial statements will suffice 90% of the time, saving you bucket loads of cash.
Finally, the last step is to find a professional to assist you in preparing your financial statements. Trust in this business relationship is key: When it comes to your company’s financial statements, you need a quality product – even if it was only subject to a compilation engagement. In the end, you need a product that you’ll be proud to present to all stakeholders.