Regulating against False Corporate Accounting: Does the Companies Act 71 of 2008 Have Sufficient Teeth?

• Pages: 1-24
• Published date: 22 October 2021
• DOI: https://doi.org/10.47348/SAMLJ/v33/i1a1
• Date: 22 October 2021
• Citation: (2021) 33 SA Merc LJ 1
• Author: Olivier, E.A.

1

https://doi.org/10.47348/SAMLJ/v33/i1a1

Articles

REGULATING AGAINST FALSE CORPORATE

ACCOUNTING: DOES THE COMPANIES ACT

71 OF 2008 HAVE SUFFICIENT TEETH?

ETIENNE A OLIVIER*

Lecturer, University of the Western Cape

Abst rac t

is article questions whether the enforcement mechanisms in the

Companies Act 71 of 2008 (the Act) are adequate deterrents to nancial

reporting misconduct and whether they provide suitable sanctions to

punish wrongdoers. e South African regulatory approach to company

directors and nancial reporting compliance places great emphasis

on stakeholder protection and board accountability. By criminalising

the publication of false nancial statements, providing civil remedies

to prejudiced stakeholders and robust protection for whistleblowers,

empowering regulatory agencies to investigate allegations of accounting

fraud and penalise transgressors, and by creating a broad net of liability

for corporate decision-makers who allow or cause the publication of

false nancial reporting, the Act takes a rm stance that accounting

fraud must be discouraged. e Act’s enforcement mechanisms in respect

of nancial reporting are commendable, but detection and enforcement

will likely remain challenging unless a concerted eort is made to

educate the public about nancial reporting misconduct and its dangers,

sucient funding is provided to the regulatory agencies, consistent use is

made of the available criminal, civil, and administrative remedies, and

Parliament reconsiders the appropriateness of the maximum penalties

for accounting fraud.

Keywords: corporate governance, directors, nancial reporting, account-

ing misstatements, liability, oences

* LLB LLM LLD (University of the Western Cape).

(2021) 33 SA Merc LJ 1

© Juta and Company (Pty) Ltd

https://doi.org/10.47348/SAMLJ/v33/i1a1

2 (2021) 33 SA MERC LJ

I INTRODUCTION

Accurate and reliable nancial reporting in respect of companies

can benet society.1 Conversely, misleading and fraudulent nancial

reporting can have a negative impact on society.2 One need not look

too far back in history to note the severe nancial losses (and resulting

socio-economic prejudice) caused by improper accounting practices

seen in recent times: Enron Corp’s (Enron) undisclosed related party

transactions (which led to the company’s eventual liquidation) remain

legendary,3 while the more recent revelations of accounting irregulari-

ties at Steinho International Holdings N.V. (Steinho) provide an out-

standing South African example.4

Raab suggests that fraudulent accounting practices can best be

reduced by ‘focusing on persons within the reporting entity itself’.5

Within a company, several persons and bodies may contribute to the

compilation and review of nancial statements, including accounting

sta, executive management, internal auditors, and the audit committee.

In most cases, the responsibility of ensuring a company’s compliance

with its legal obligations will rest with its board of directors.6 However,

a company’s board can (and oen does) delegate the nancial reporting

function to any person, including internal or external accounting pro-

fessionals. Quite clearly, there is a need for the eective enforcement of

1 ‘Investors need this information to make good choices about how to invest their money.

Financial reporting is essential for eective capital allocation, which, in turn, is critical to our

economy’ (Peirce, ‘Pondering nancial reporting: Remarks before the 2018 Leet Business

Law Symposium’ (2019) 69(4) Case Western Reserve LR 849 at 853).

2 Raab, ‘Detecting and preventing nancial statement fraud: e roles of the report-

ing company and independent auditor’ (1987) 5(2) Yale Law & Policy Review 514 at 514.

Accounting failures ‘undermin[e] the credibility of the accounting profession and the inher-

ent reliability of the nancial reporting model as an evaluative tool in shaping investor con-

dence and awareness’ (Rodriguez, ‘e numbers game: Manipulation of nancial reporting

by corporations and their executives’ (2002) 10(2) Miami Business LR 451 at 451).

3 For a discussion of the factors and practices that led to the demise of Enron, see Powers,

Troubh & Winokur, ‘Report of Investigation by the Special Investigative Committee of the

Board of Directors of Enron Corp.’ (2002) (the Powers Report), available at http://i.cnn.net/

cnn/2002/LAW/02/02/enron.report/powers.report.pdf, accessed on 24 June 2020; Carpenter,

‘Special Purpose Entities: A description of the now loathed corporate nancing tool’ (2002)

72 Mississippi L J 1065 at 1065 and 1067; and Schwarcz, ‘Enron and the use and abuse of

Special Purpose Entities in corporate structures’ (2002) 70 University of Cincinnati LR 1309

at 1309–1318.

4 To these examples can be added the more recent accounting-related share price collapse

at Tongaat Hulett. See De Villiers, ‘Tongaat Hulett scandal: Deloitte replaces senior auditors

and launches an internal investigation’ (2019), available at https://www.businessinsider.co.za/

tongaat-hulett-deloitte-replaces-auditing-leadership-team-launches-investigation-2019-6,

accessed on 21 April 2020.

5 Raab, (1987) 5(2) Yale Law & Policy Review 514 at 519.

6 Section 66(1) of the Act expressly contemplates that a company’s Memorandum of Incor-

poration (MoI) may depart from the default legislative position regarding the board’s colle c-

tive duty to manage the business of the company.

© Juta and Company (Pty) Ltd