Time to change BEE certificates
BEE certificates are expected to be a true reflection of a company’s current BEE status but due to misunderstanding and incorrect application of the codes this opens a door to controversy and misrepresentation.
This is why BEE specialist, Keith Levenstein, CEO of EconoBEE, calls for an adjustment to the current BEE certificate validity format.
His concerns lie in the item called “date of issue”. Found on all BEE certificates, this represents the date on which the verification agency issued the certificate. All certificates are valid for a period of one year from date of issue.
Uncertainty arises for some as the codes talk of a “measurement period”. As suggested this represents the period under measurement, which is usually aligned to the financial year on which the verification is based.
Typically, this period is used in order to provide a company’s turnover figures. It is also used for procurement and skills development expenditure; enterprise development and social-economic development spend as well as to determine the measured entity’s net profit after tax.
Levenstein explains that verification can take place many months, or even years after the end of the financial year. Most verifications make use of audited financial statements, and producing audited financials can take anywhere between 3 month to over a year.
In fact, verification can take many months from the initial appointment of the agency, to gathering the information, verification, queries and appeals until the final certificate is issued.
“It sounds wrong that a certificate that is based on financials for the year ended 2009 can be issued today, and it remains valid for the rest of 2011. On the other hand a certificate issued in March 2010 based on the same financial period would be valid from March 2010 until February 2011,” states Levenstein.
Levenstein also warns that some verification agencies wrongly use current information for some of the other indicators including ownership, management and employment equity.
One of the key principles of the codes is that “the basis for measuring B-BBEE initiatives under the codes is the B-BBEE compliance of the measured entity at the time of measurement”.
“The period of measurement in the case of financials is the period used for the financial statements. But it would not make sense to use disparate measurement periods, like 2009 for financials, but 2010 for ownership,” Levenstein points out.
“We would propose that the measurement period and validity date of the certificate be aligned. A new certificate based on two year old data is not an accurate representation of the BEE status of the measured entity, certainly not as it stands today, yet that certificate is regarded as valid because it was issued today and is valid for another year,” continues Levenstein.
Levenstein elaborates: “One option we have considered is that the certificate be valid for one year after the end of the measurement period: if your year-end is December 2010, then your certificate issued based on that period is valid for a year until 31st December 2011, no matter when the certificate was actually issued. If a measured entity delays getting its financial statements until October 2011, then its certificate will only be valid for 2 months.”
Levenstein admits that whilst it may seem harsh as it is true that it would be impossible for the audited financial statements to be available on the last day of the financial year; the JSE and SARS have deadlines as to when financial statements should be issued.
“Our suggestion is that this be incorporated into certificate validity dates, for example: give leeway of six months. If the financial year end is December 2010, then the measured entity would have a gap until June 2011 to get its financial statements and obtain a verified certificate. That certificate would be valid until June 2012. If the entity was only verified in December 2011, then its certificate is also only valid until June 2012, and not December 2012,” proposes Levenstein.
“This would encourage entities to be verified as soon as possible after year-end, and to use current information. It will also ensure that the certificate is a more accurate representation of its BEE status,” Levenstein explains.
It should also be noted that audited financial statements are not a pre-requisite for verification. Signed management accounts are also acceptable – though the verification agency will have to perform extra checks to confirm some data.
“Therefore undue delays in preparing financial statements is not a good excuse for not obtaining an accurate and up to date verification certificate,” concludes Levenstein.