The Companies Act (the “Act”), 2015 became fully operational on 15th June, 2016 through the publication of Legal Notice Number 109 of 2016. One of the parts that is now operational and which introduces changes to the procedural requirements earlier contained in Cap 486 is Part XXVII of the Act which deals with the requirement for auditing of financial statements of a company.
The Part places an obligation on the directors of a company to ensure that the financial statements for every financial year are audited. Small companies are however exempt from this requirement. Under section 164 of the Act, small companies are those that satisfy two or more of the following conditions:-
- has a turnover of not more than fifty million shillings;
- the value of its net assets as shown in its balance sheet as at the end of the year is not more than twenty million shillings; and
- does not have more than fifty employees.
The small company regime does not include a public company, a body corporate (other than a public company) whose shares are admitted to trading on a securities exchange or other regulated market in Kenya; or a person who carries on insurance market or banking activity. Non-profit making companies whose financial statements are subject to audit by the Attorney General are also exempt from this requirement.
Although the Act exempts small companies from auditing their financial statements, the benefit of this exemption may not be enjoyed in practice as the Income Tax Act requires all companies to file audited financial statements when making their annual tax returns to the Kenya Revenue Authority.
The Act also envisions the establishment of an Audit Authority (the “Authority”) which will govern the relationship between auditors and the company. The establishment of the Authority is to be governed by regulations to be made pursuant to the Act. The authority is to be notified where the auditor ceases to hold office before the end of his/her tenure. This means that an auditor is not removed at an annual general meeting only.
Further, a company may enter into a limited liability agreement with its auditor. Such an agreement limits the auditor’s liability as regards the financial statements and accounts of the company. The details of the agreement must be disclosed either in the notes of the company’s financial statements or in the directors report. Failure to disclose is an offence under the Act.
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