An accountant lobby has asked President Uhuru Kenyatta not to assent to the new Company law on grounds that it was rushed through Parliament and lacked industry input.
The Institute of Certified Public Accountants of Kenya (ICPAK) says the new Companies Bill 2015 exempts more than 60 per cent of local companies from audit having set the threshold at Sh50 million.
ICPAK says the definition of a small company’s regime and the qualifying conditions for such could end up stifling economic development. The classification is based on a monetary threshold of a turnover of not more that Sh50 million and net assets of not more than Sh20 million.
“We recommend that the threshold for turnover be based on Sh5 million as per the VAT Act. This is because the threshold still remains high and many companies will be locked out from being audited. This puts small businesses at risk because they will not access prudent financial advisory on the health of their businesses,” ICPAK Chairman Fernandes Barasa said in a statement.
The lobby argues that this classification has implications on reporting and auditing requirements of the affected companies. It could negatively affect the economy if ‘small companies’ are exempted from these crucial requirements. The law was passed two weeks ago and is now awaiting presidential assent.
“We implore upon the President to reconsider assenting to the Bill until there is consensus from all the industry players on contentious provisions,” Mr Barasa said.
The Companies Bill 2015 is expected to bring about reforms on the business environment. It has also provided clearer divisions between the several aspects of a company law and is being promoted as modernising company law by recognizing the use of Information Technology.
The new law also provides accountability mechanisms in management of resources especially for quoted companies. If it receives presidential assent, directors of a quoted company will now be required to ensure that companies have Audit Committees appointed by the shareholders of a size and capability appropriate for the business conducted by the company.
“The Institute is of the considered opinion that the legislative process, especially in regard to the Companies Bill 2015 was done in haste without building consensus from industry players on some of the contentious issues therein,”Mr Barasa says.
This is based on the fact that the capital providers (shareholders and lenders) and the Kenya Revenue Authority are expected to require reliable financial information from these businesses to assess their performance and tax obligations while the proposed thresholds will make nearly 60 percent of Kenyan companies exempt from audit.
“What will financial institutions rely on to give credit to the Small and Medium sized Companies who fall under this category? Will these exemptions avail credit opportunities to “Wanjiku & Company’’. Will financial institutions increase the cost of funds to cater for the risk factor?”
ICPAK maintains that the new law ought to have considered the threshold factor. It point out that tax collection will remain a challenge when tax assessment is left at the discretion of the business owner without professional advice on tax planning and compliance.
It also says that the Alternative Dispute Resolution (ADR) that was launched recently may face implementation challenges as it seeks to settle tax disputes within 45 days. “Without audited financial statements this may be a pipe dream as business performance will not have been certified for information reliability,” he adds.
It however, welcomed the move to require the Cabinet Secretary in charge of Finance to seek its recommendation before recognizing foreign qualifications for purposes of auditing financial statements.
“Authorizing foreigners to practice in Kenya without consultations with ICPAK which licenses accounting practitioners (auditors) would have jeopardised the local CPA qualification which has taken several decades to be where it is today,” it says.
ICPAK wants the Bill to be revised to provide a minimum set of qualifications and competencies for members to Audit Committees. “This ensures that the audit committee is well grounded on matters of finance and accountability. The Committee should have at least one member of ICPAK in good standing,” the lobby adds.