Audit vs Review - The "employee" debate?

By Professor Steven Firer

The public interest score determines whether a company’s annual financial statements require an audit or independent review and the number of staff employed by a company is a key determinant of that score. So are companies considering restructuring their human resources in order to avoid an audit?

The question arises as to what constitutes an employee. The Companies Regulations of 2011 state that an employee is defined in terms of the Labour Relations Act of 1995. In terms of this Act it is the employment contract that forms the basis for the relationship between the employer and the employee. The essential elements of an employment contract are:

• A voluntary agreement
• Between two parties (employee and employer)
• In terms of which an employee places labour potential at the disposal of and under the control of the employer
• In exchange for some remuneration by the employer.

Therefore an employee could consist of casual, temporary, and permanent employees. The Labour Relations Act does not in include or cover labour brokers.

So the prospect exists for a company to exceed the public interest score audit-threshold because of the number of people it employs, Take the farming industry for example; farmers generally hire additional employees specifically to harvest their crops. These would not be permanent employees but would consist of casual or temporary staff. The farmer at this point does not have any income as there is normally a lengthy time between harvesting and converting the crop into a condition that it could be sold. So, just based on the number of employees, a farmer may require an audit even though he does not have any income.

This may result in directors restructuring their companies to ensure that they are not required to be subject to an audit. The question also arises as to whether in fact an audit is not the correct assurance for an entity with 350 points. Could it be said that an entity that employees 350 points is deemed to be in the public interest? The number of employees is clearly in my opinion an adequate indicator of whether the entity is in the public interest. Whether it should be set at 350 is a different debate. However I think quite correctly that if one can employ a vast number of employees the entity has sufficient need of an audit to ensure that the rights of these employees are protected.