Transition from CC to (Pty) Ltd Financial Statement Format
Member Query
I would like to enquire about the appropriate procedure and professional approach where financial statements for a (Pty) Ltd company were previously prepared using the DraftWorx format and terminology applicable to a Close Corporation (CC), despite the company having always been registered as a private company under the Companies Act, 71 of 2008.
The matter came to light during a review of a new client’s historical records. The 2020 financial statements were compiled using "Entity Name cc" and CC references such as “members” instead of “directors,” and follow the general CC presentation structure. We are now preparing to catch up on our 2021 financial statements in full compliance with the Companies Act and the relevant reporting framework (IFRS for SMEs). Still, we would appreciate guidance on the following points:
Is it necessary or advisable to recompile the previously submitted AFS to align with the (Pty) Ltd requirements?
Should a disclosure note be included in the subsequent year’s AFS to explain the change in presentation and correct prior reference errors?
Are there any professional conduct considerations or reporting obligations when identifying past non-compliance of this nature?
Our Response
Based on the information provided, the financial statements for the 2020 financial year were compiled using terminology and formatting applicable to a Close Corporation (CC), despite the entity being a private company, - (Pty) Ltd - registered under the Companies Act 71 of 2008. This is a material presentation error and requires appropriate rectification to ensure alignment with both the Act and your professional obligations.
We offer the following guidance:
1. Recompilation of Prior Year Financial Statements
While there is no statutory obligation under the Companies Act to recompile previously issued annual financial statements unless they were materially misstated or misleading, in this case, the misapplication of the CC format for a (Pty) Ltd may give rise to a misleading impression of the legal structure and governance of the entity.
If the 2020 financial statements were not submitted to CIPC (e.g. as part of the CoR30.2 process for audited or independently reviewed companies), then rectification through disclosure in subsequent AFS may be sufficient. However, suppose the 2020 statements were formally submitted or relied upon by third parties (e.g. SARS, financial institutions, shareholders). In that case, it is advisable—though not mandatory—to recompile and reissue them with the correct terminology and structure. This approach would demonstrate proactive compliance and safeguard both the practitioner and the client.
2. Disclosure in the 2021 Financial Statements
As a minimum, a note should be included in the 2021 financial statements acknowledging the correction in presentation and terminology. This disclosure ensures transparency and reflects sound professional judgement. An appropriate note may read as follows:
"In the prior financial year, the financial statements were presented using terminology applicable to a Close Corporation, including references to 'members' and CC-style formatting. The entity has been registered as a private company since its incorporation under the Companies Act 71 of 2008. The current year financial statements have been compiled to reflect the correct legal structure and comply fully with applicable legislative and reporting requirements."
Such disclosure clarifies the nature of the correction while avoiding unnecessary alarm.
3. Professional Conduct Considerations
You are correct to consider your professional responsibilities. According to the Code of Professional Conduct and Section 29 of the Companies Act, financial statements must not be false or misleading in any material respect. They must fairly present the company's state of affairs. Using incorrect legal terminology may impair the fair presentation principle, even if the underlying financial data is accurate.
This does not, in itself, require formal reporting to CIPC or other authorities, unless the misstatement has a regulatory impact (e.g., incorrect compliance disclosures or director/member approvals that affect legal outcomes). However, your responsibility is to advise the client of the nature and impact of the error, and to take appropriate corrective action—whether through restatement or detailed disclosure. This protects both your client’s legal standing and your professional reputation.
4. Advice to the Client
We recommend that you document your communication with the client regarding this issue, the recommended corrective action, and the rationale behind your approach. Encourage the client to retain the corrected 2020 statements (if recompiled) or the 2021 statements with the explanatory note as part of their formal record.
Please don’t hesitate to reach out should you require assistance drafting the disclosure note or structuring your engagement file to demonstrate due care
