The Measurement Period Problem

Original publish date – Fri, 01 Jun 2012 07:41:38 +0000, Keith

The measurement dates are becoming a problem again. I have a situation where a company was verified in December 2011, using March 2009 to February 2010 financials. The audited financials showed the company to be a QSE and they stated that more recent audited financials were not available. The verification agency did not ask for management accounts, or if they had now become a generic.

However the company’s revenue for the year March 2010 to February 2011 was more than R35 million making them a generic entity. The verification was carried out in December 2011 but by using older data the company was measured as a QSE. Surely this is wrong in terms of B-BBEE?

The Verification Manual states:

“10.1.3 In order to determine if the measured entity is classified correctly the Verification Agency shall obtain the audited financial statements and agree the amount recognised as revenue to the thresholds set by the Codes. When the measured entity is not audited the Verification Agency shall perform some or all of the following procedures as a minimum to verify the accuracy, completeness, occurrence and cut-off of revenue as shown in the financial statements:”

I know that it does not state which audited accounts must be used. However the codes define Total revenue as being determined under generally accepted accounting practice (GAAP). This surely also implies that an entity should be in compliance of the laws, ie be audited where required and financials submitted to SARS, CIPC, JSE etc within the allotted time period (e.g. 6 months after year-end). Therefore, if audited statements are not available, as in this case, the accreditation bodies, SANAS and IRBA should ask agencies to perform the procedures as outlined in 10.1.3. This would have shown that the entity is not longer a QSE, and must follow the generic scorecard. Moving from a generic to QSE and vice versa is a material change that verification should pick up.

We also note the key principles:

2.1 The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.
2.2 In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.
2.3 The basis for measuring B-BBEE initiatives under the Codes is the B-BBEE compliance of the measured entities at the time of measurement.
2.4 Any misrepresentation or attempt to misrepresent any enterprise’s true B-BBEE Status may lead to the disqualification of the entire scorecard of that enterprise.
2.5 Initiatives which split separate or divide enterprises as a means of ensuring eligibility as an Exempted Micro-Enterprise, a Qualifying Small Enterprises or a Start-Up Enterprise are a circumvention of the Act and may lead to the disqualification of the entire scorecard of those enterprises concerned
2.6 Any representation made by an Entity about its B-BBEE compliance must be supported by suitable evidence or documentation. An Entity that does not provide evidence or documentation supporting any initiative, must not receive any recognition for that initiative.
2.7 Wherever a Standard Valuation Method applies to measuring an indicator, the same standard should apply, as far as reasonably possible, consistently in all other applicable calculations in this statement.

What is even more concerning is that most agencies measure ownership, management and employment equity as at the date of verification, but revenue, profits, skills, procurement, ED and SED as at the last audited financials, even if three years older. Surely this is in conflict with 2.7 above?

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