are auditors unnecessarily difficult?

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Traditionally, the audit function's success rested on the auditor's ability "to discover the mistakes" of the person being audited.

The auditor tended to begin from a position of suspicion. The client, would on the other hand, pronounce himself "guilty" until cleared by the auditor. The auditor acquired the name tag of a "policeman", and the client always considered himself a "victim".

Habits and traditions do not die easily. Even, at the level of development, that suspicion between the auditor and the client has not completely ceased. A number of auditors have continued to "scare" the clients. In response, the client is unwilling to provide information in full. The audit process then fails to proceed as envisaged.

The position at Law

The appointment of the auditor is governed by the Companies' Act (Cap.486), Laws of Kenya. The law requires that every company appoints an auditor whose role will be to examine the accounts and make a report to the members at the annual general meeting.

In order that the auditor makes his report conclusively, he must examine all the necessary accounting books kept by the client, familiarise himself with the client's business activities, assets and liabilities. This process may involve putting a number of questions to the clients, including discussions on the viability or otherwise of some of his business decisions. If the auditor fails to adequately carry out this process of examination, his report is unlikely to be complete.

Reciprocal assistance

The basis of the success of audit lies on trust between the auditor and the client. This trust is supported by the principle of confidentiality between the two parties. With full information available to the auditor, the auditor will then be able to offer additional assistance beyond the traditional role of auditing.

Look at the list of persons interested in the auditor's report :

• Shareholders
• providers of credit, e.g. banks and debenture holders
• employees, customers and suppliers
• The Government, more particularly for tax purposes
• the general public. Your business needs their goodwill
• competitors and potential investors or partners, etc.

The audited accounts will have the following characteristics :

• Normal human errors will be eliminated
• Any possible fraud will be identified
• There will be misleading information, whether deliberately or inadvertently
• All relevant information is disclosed

In short, audited accounts are given genuine credibility.

A New Auditor?

Yes, the modern auditor does much more than a confirmation of system compliance process. He is trained in Commerce, Management & Law. He is himself an excellent businessman, shareholder, investor, provider of credit, etc., sitting and

participating in the battlefield with a view to winning.

The modern auditor is a "partner" in the business of a client. His analysis of the past is aimed at developing a basis for discussion with the client in order to :

• anticipate any possible problems and devise strategies to solve them
• review areas of operation with a view to continually improve them
• determine the impact of economic, legislation, regulatory and technological factors which have a bearing on the business performance.
• exploit additional sources of finance, markets for products and opportunities for expansion and growth

It is therefore clear from the above that the auditor and the client need each other. The need is even greater now where businesses face severe competition, and in some cases, from unfair sources.

We invite clients to explore additional potential for themselves with us. The audit benefit is just an element from where to begin.

TAX REMINDER

Going to the market

If you own a successful private company, you may be asking yourself "Should I go public?"

What are the advantages?

Obtaining a public quotation creates a market for your company's shares. As a result, the company and shareholders benefit in the following ways :

• additional finance becomes available;
• existing shareholders are able to realise their holdings ;
• prospects for growth by using shares for acquisition are improved ;
• your company's status is enhanced ; and
• motivation and reward for employees can be improved through the more effective use of share option schemes

What are the disadvantages?

There are a number of disadvantages in going to the market which should be considered carefully before deciding whether or not to proceed. These include :

• the activities of your company will be more in the public eye ;
• your company will need to disclose more information ;
• your company will be exposed to predators ;
• there will be additional constraints on the Director's freedom of action, in particular, in dealing in the company's shares and on transactions with the company ;
• short term expectations of third party shareholders might conflict with your company's long-term plans ;
• liquidity in the market for the company's shares may be limited, particularly for smaller companies, thereby limiting fund raising and acquisition opportunities ; and
• the substantial demands on management and energy made by the flotation process and continuing investor relationships should not be underestimated

Is your company suitable?

The following criteria will be used to assess a company looking to go public :

• quality and continuity of management;
• history and profit record over at least a three year period ;
• prospects and, in particular, likely developments in markets and products ;
• commitment of existing shareholders;
• strength of financial controls and accounting procedures ; and
• no material litigation

What will it cost?

Companies find that the most expensive element in any flotation is the demand that it places on the company's own management time. The other principal costs of going public are :

• underwriting commission ;
• advertising and printing ; and
• professional fees

Total costs can vary enormously, depending largely upon the market capitalisation of the company and the nature and complexity of the flotation.

Alexander Grant can advise on the costs and help achieve the considerable savings that are available by forward planning.

What should you consider?

You should consider what action needs to be taken well in advance of the proposed flotation - preferably at least two years before. In particular, consideration should be given to :

• corporate strategy ;
• group and capital structures ;
• all aspects of tax and pension planning ;
• management organisation ;
• management information systems to meet additional reporting requirements ;
• memorandum and articles of association ;
• accounting policies ;
• selection of sponsors ; and
• the establishment of share option schemes and other employee incentives

What are the continuing obligations?

Once a company has gone to the market, there are a number of continuing obligations which must be fulfilled. The extent of these varies from market to market, but they include:

• restrictions on share dealing by Directors ;
• compliance with The Regulations of Capital Markets Authority on Take-overs and Mergers and The Rules Governing Substantial Acquisitions of Shares ;
• provision of circulars to shareholders on substantial acquisitions and disposals of assets ;
• additional disclosures in financial statements to comply with the Companies' Act and Stock Exchange regulations ; and
• the preparation of half-year financial statements

ALEXANDER GRANT & ASSOCIATES

VICTOR HOUSE, 4^TH FLOOR, KIMATHI STREET, NAIROBI, KENYA

Telephones : 002542 221306 / 245694 Facsimile : 002542 224314

Although all reasonable care has been taken in the preparation of this news briefing, Alexander Grant & Associates cannot accept any responsibility in law for its contents. Clients are advised to seek independent professional advice before taking action in consequence of anything contained herein.