Accounting Records and Audit

. DEFINITION

By audit, one should understand a mission of investigating entrusted to a professional (named auditor sometimes) by a person in quest of information on a concerned operation or on a situation of an enterprise that consists depending on the agreement in verifying the conformity of the operation or the situation under study to the rules of the law in general or those of a determined sector, it can also aim at assessing the risks of the initiative or the activity considered or even its degree of efficiency and eventually draw a report to the assignor.

Some provisions related to the auditors

These provisions hinge on the appointment, fees and expenses, resignation of an auditor, etc.

Concerning an auditor’s nomination article 238 specifies that a company shall, at each annual meeting, appoints an auditor. Where at that annual meeting, the company fails to appoint an auditor during that annual meeting or the post continues to fall vacant for a one month period, the Registrar General shall have the powers to have the company appoint its auditor within thirty (30) days.

When during a yearly assembly of the company, no auditor is named or takes back to his/her/its station and that the station remains vacant since one month, the Registrar General is authorized to order to the company to name a auditor within (30) days at most.

An auditor of a company shall be automatically reappointed at an annual meeting of the company unless:

  • the company passes a resolution at the annual meeting appointing another person to replace the auditor;
  • a small private company passes a resolution that no auditor shall be appointed;
  • the auditor has given notice to the company that he/she does not wish to be reappointed.

Where an auditor gives the Board of Directors of a company written notice that he/she does not wish to be reappointed, the Board shall, if requested to do so by that auditor :

  • distribute to all shareholders and to the Registrar General, at the expense of the company, a written statement of the auditor’s reasons for his/her wish not to be reappointed;
  • permit the auditor or his/her representative to explain at a shareholders’ meeting the reasons for his/her wish not to be reappointed.

Regarding an auditor’s qualification, article 242 says that no person shall be appointed or act as auditor of a company, other than a small private company, unless he/she possesses qualifications of, or equivalent to those of any institution or association of chartered accountants.

It is worth highlighting that Small private companies need not to appoint an auditor according to article 251 of the law. Where a small private company decides to appoint an auditor, the provisions of this Law shall apply.

Where at, or before the time required for the holding of the annual meeting of a small private company, notice is given to the Board of Directors of the company, signed by a shareholder who holds at least five per cent (5%) of the shares of the company, the company shall appoint an auditor. Such resolution shall cease to have effect at the next annual meeting, and the auditor shall thereupon be re-appointed unless the shareholders by unanimous resolution agree not to appoint the auditor.

With regard to fees and auditor’s expenses, they are determined by the meeting of the shareholders or by the Board of directors when it is specified by the articles of association of the company.

Where from a report of an inspector it appears that any qualified auditor:

  • has been guilty of misconduct;
  • has conducted an audit in a manner that is not appropriate;

 

the Registrar General shall refer that matter to competent authorities for necessary action.

 

Concerning an auditor’s resignation, an auditor may resign prior to the annual meeting of the company. This shall, after receiving the notification thereof, call on the Board of Directors to a special meeting to receive the auditor’s notice of resignation. The auditor shall provide a written report which gives to him/her representative the opportunity to give an explanation why he/she does not wish to be re appointed as auditor. Also during that meeting, the Board of Directors or the meeting of shareholders shall appoint of a new auditor (article 245).

 

Where from a report of an inspector it appears to the Registrar General that in the management and administration of a company, there is a shareholder who, by virtue of his/her company, shares and voting rights deriving from the classes of such shares and other benefits, alters the decisions that were taken through the vote, causes mismanagement for him/her to maintain control and where the latter helps him/her to unfairly discriminate other shareholders, the Registrar General may lodge a case before the Court following this Law.

Auditing report

According to the article 241 of the law, an auditing report required to be signed on behalf of a firm appointed as auditor of a company, by a member of the firm who is a qualified auditor.

Article 247 says that the auditor of a company shall prepare an auditing report and submit it to the company’s shareholders. The auditor’s report shall state the following:

  • the work done by the auditor;
  • the scope and limitations of the audit;
  • the proof that there is no relationship, no interests and debt which the auditor has in the company;
  • whether the auditor has obtained all information and explanations he/she needed;
  • whether, proper accounting records have been well kept by the company;
  • whether, in the auditor’s opinion, the financial statements give a true and fair view of the matters to which they relate, and where they do not, shortcomings are identified;
  • whether, the financial statements comply with the international accounting standards; 8. the auditor’s opinion and problems that are linked with the company’s management;
  • the auditor makes recommendations with regard to the identified problems.

Article 250 lays down modalities for submitting auditor’s report in these words, where the auditor of a company completes his/her report, he/she submits it to the company in a period not exceeding seven (7) days and reserve a copy of the same for the debenture holders or their representatives.     

 FINANCIAL STATEMENT AND ANNUAL REPORT

Financial Statement

The Board of Directors of every company shall ensure that, within three (3) months following the end of a financial statement the audit is made and signed by at least one representative of the company. Such an audit shall be submitted to the Registrar General (article 253).

The financial statements of a company shall comply with international standards. Members of the Board of directors shall provide such information and explanations as are necessary for auditing process to be conducted (art. 254).

Concerning registration of the financial statement, all company, with the exception of the small private companies, must insure that in the thirty (30) days that follow the date required for the signature of the financial states of the company and the financial states of the whole group, the copies of these financial states accompanied by a copy of the audit report on these financial states are deposited to the office of the Registrar General for registration.

With regard to the content of the financial statement, article 266 states that the consolidated financial statements shall, in the case of companies which are required to comply with the International Accounting Standards, contain:

  • a consolidated balance sheet for the group as at that balance sheet date;
  • a consolidated income statement; 

Annual report

The Board of Directors of every company shall, within six (6) months after the company’s financial statement date, prepare an annual report on the affairs of the company during the accounting period (article 267 of the law) ending on that date.

The Board of Directors of a company shall cause a copy of the annual report to be sent to every shareholder of the company not less than fifteen (15) days before the date fixed for holding the annual meeting of the shareholders.

Concerning the format, every annual report for a company shall be in writing and be dated and shall:

  • describe, so far as the Board believes is material for the shareholders to have an appreciation of the state of the company’s affairs and is not harmful to the business of the company or of any of its subsidiaries, especially any change during the accounting period in:
    • the nature of the business of the company or any of its subsidiaries;
    • the classes of business in which the company has an interest, whether as a shareholder of another company or otherwise;
  • include financial statements for the accounting period and any group financial statements for the accounting period completed and signed in accordance with this Law;
  • where an auditor’s report is required in relation to the financial statements or group financial statements, included in the report, include that auditor’s report;
  • state particulars of entries in the interests register made during the accounting period;
  • state the amount which represents the total of the remuneration and benefits received by or due and receivable from the company and any related corporation by:
    • executive directors of a company engaged in the full time employment of the company and its related corporations, including all bonuses and commissions received by them as employees;
    • separate statement, the non-executive directors of the company;
  • state the total amount of donations made by the company and other subsidiaries during the accounting period;
  • state the names of the persons holding office as directors of the company as at the end of the accounting period and the names of any persons who ceased to hold office as directors of the company during the accounting period;
  • state the amounts payable by the company to the person or firm holding office as auditor of the company as audit fees and, as a separate item, fees payable by the company for other services provided by that person or firm;
  • be signed on behalf of the Board of Directors by two (2) directors of the company or, where the company has only one director, by that director;
  • disclose related party transactions and full information about the nature and extent of the conflict of interest;

 

  1. any other details that are necessary for the report to be well understood.

A Company whose subsidiary companies is located outside Rwanda shall also comply with the provisions of this article within eight (8) weeks after the dates contained therein.

 MANDATORY INVESTIGATION

Besides the inspection of the documents of a company made by the Shareholder(s), the law set out a series of provisions related to the inspection of the activities of a company and that is made by the inspector.

Mandatory investigation and appointment of an inspector

Where the Minister in charge of companies is satisfied that:

  • for the protection of the public, the shareholders or creditors of a company, it is desirable that the affairs of a company should be investigated;
  • it is in the public interest that the affairs of a company should be investigated;
  • in the case of a foreign company, the appropriate authority of another country had requested that an investigation be made under this article in respect of the company; he/she shall issue the instructions to the Registrar General as to investigating into the business of a local company or of a foreign company having its branch in Rwanda (article 274).

 

An inspector of the business of a company shall be appointed by the Registrar General and have the power to investigate the business of a company.

The appointed inspector should be a qualified, skilled and experienced professional manager.

This expert shall prepare a report according to the format required by the Registrar General (art. 175).

However, the article 283 allows a company, with the exception of a declared company can, to appoint an inspector by ordinary resolution, to investigate its business.

In the same vein, article 294 provides that a foreign company with subsidiary companies in Rwanda may appoint inspectors for such subsidiary companies and the Registrar General shall be notified thereof.

Expenses and operating cost of the inspection of a declared company are paid by the office of the Registrar General.

An inspection cannot be ordered by the Minister, in this case the article 277 The Registrar General may :

  • in the case of a company having a share capital, on the application of:
    • one shareholder or a group of shareholders holding at least one-tenth (1/10) of the issued shares;
    • debenture holders holding not less than one-fifth (1/5) in nominal value of the issued debentures;
  • in the case of a company limited by guarantee, on the application of not less than onefifth (1/5) in number of the persons on the share register;
  • where he/she considers that the appointment of an inspector is necessary to safeguard the interests of shareholders or debenture shareholders or is necessary in the public interest, require an inspector to investigate the affairs of a company or such aspects of the affairs of a company as are specified in the instrument of appointment and in the case of a debenture agency deed, the conduct of the debenture holders’ representative, and to make a report on his/her investigation in such form and manner as the Registrar General may direct.
Publication or submission of copies of the reports

The Registrar General may, where he/she is of the opinion that it is necessary in the public interest to do so, ask the organ that requested for the investigation to cause the report to be published (art. 280).

A copy of the inspector’s report shall be forwarded to the Registrar General, at the registered office of the company and to those who requested for it. (art. 279).

On the conclusion of the investigation, the inspector shall report his/her opinion in such manner and to such persons as the company’s general assembly indicated (art. 284).

Procedure and powers of the inspector

Every person concerned shall, if required to do so by the inspector, produce to the latter every book in his/her custody, control or possession and give to the inspector all assistance in connection with the investigation which he/she is reasonably able to give for the investigation to be smoothly carried out (art. 287).

An inspector may by written notice require any person concerned to appear for examination on oath in relation to the business of a subsidiary and the notice may require the production of every book in the custody, control or possession of the person concerned (art.288).

Where an inspector requires the production of a book in the custody, control or possession of a person concerned, he/she:

 

  • may take possession of those books;
  • may retain those books for such time as he/she considers necessary for the purpose of the accomplishment of his/her mission;
  • shall, where those books are in his/her possession, permit the company to have access, at all reasonable times to the book.

 

 AMALGAMATION OF COMPANIES

It first fit to give the definition and types of amalgamation before speaking of the procedure of the amalgamation.

Definition and types of amalgamation

The term amalgamation has not been defined in the Companies Act, though this voluminous piece of legislation contains 44 definitions in Article 2. The terms amalgamation and merger are synonyms and the term ‘amalgamation’, as per Concise Oxford Dictionary, Tenth Edition, means, ‘to combine or unite to form one organization or structure’.

There is amalgamation when a company is absorbed by another one that subsists alone or when two companies disappear to constitute a new company. It is therefore a legal operation that consists in bringing together several companies in one company.

According to article 295 of the law, two (2) or more companies may amalgamate and continue as one company, which may be one of the amalgamating companies or may be a new company.

Article 49 para.1 of the law of 1988 provided: “The amalgamation of two or several companies may be either by the absorption of one or several companies by another, either by the constitution of a new company “.

The amalgamation is characterized at a time by:

  • a dissolution of the company absorbed that disappears as moral person.
  • a transfer of the universality of properties of the absorbed company to the absorbing company or the new company emerging from the amalgamation.

PRELIMINARY PROCEDURE OF THE AMALGAMATION

Amalgamation proposal

As put by article 296, an amalgamation proposal shall set out the terms of the amalgamation, and in particular:

  • the name of the amalgamated company where it is the same as the name of one of the amalgamating companies;
  • the registered office of the amalgamated company;
  • the full name or names and address or addresses of directors of the amalgamated company;
  • the address for registered office of the amalgamated company;
  • the share structure of the amalgamated company, specifying :
    • the number of shares of the company;
    • the rights, privileges, limitations and conditions attached to each share of the company;
  • the manner in which the shares of each amalgamating company are to be converted into shares of the amalgamated company;
  • the consideration that the holders of those shares are to receive instead of shares of the amalgamated company;
  • any payment to be made to a shareholder or a director of the new amalgamated company;
  • details of any arrangement necessary to complete the amalgamation and to provide for the subsequent management and operation of the amalgamated company;
  • a copy of the proposed constitution of the amalgamated company;
  • the date on which the amalgamation proposal will be effective.

 

Concerning the resolution for amalgamation, article 297 disposes that the Board of Directors of each amalgamated company shall resolve that in its opinion, the amalgamation is in the best interest of the company and it is satisfied on reasonable grounds that the amalgamated company shall, immediately after the amalgamation becomes effective, satisfy the solvency test.

The directors who vote in favor of a resolution of amalgamation under this article shall sign a certificate stating that the amalgamation will benefit the company and the latter will satisfy the solvency test.

The Board of Directors of each amalgamating company shall send to each shareholder of the company, not less than thirty (30) days before the amalgamation is proposed to take effect :

  • a copy of the amalgamation proposal;
  • copies of the certificates given by the directors of each Board;
  • a summary of the principal provisions of the articles of association of the amalgamating company, if it has one;
  • a statement that a copy of the constitution of the amalgamated company shall be supplied to any shareholder who requests it;
  • a statement setting out the rights of shareholders of each company;
  • a statement of any material interests of the directors, whether in that capacity or otherwise;
  • such further information and explanation as

The amalgamation proposal shall be approved by the shareholders of each amalgamating company and any other interested parties by special resolution (art. 300)

The company’s creditors must not be caught by surprise as article 301 provides that the Board of Directors of each amalgamating company shall, not less than thirty (30) days before the amalgamation is proposed to take effect, give written notice of the proposed amalgamation to every creditor of the company.

Article 302 determines types of documents needed for the registration of amalgamation in these words, For the purpose of effecting an amalgamation, the following documents shall be delivered to the Registrar General for registration:

  • the approved amalgamation proposal;
  • a certificate that is signed by the Board of Directors of each amalgamating company;
  • a certificate signed by the Board of Directors of the new company resulting from the amalgamation;
  • the proof that the amalgamation will not jeopardize the interest of those creditors of amalgamating companies;
  • a document in the prescribed form, signed by each of the persons whose name is indicated in the amalgamation proposal as a director or employee of the amalgamated company consenting to act as a director or employee of the company.

Regarding the issue of certificate of amalgamation, articles 303 and 304 give the following precisions: On receipt of the application for amalgamation, the Registrar General shall forthwith :

  • where the amalgamated company has the same name as one of the amalgamating companies, issue a certificate of amalgamation;
  • enter the particulars of the company on the register; issue a certificate of amalgamation;
  • issue a certificate of incorporation.

An amalgamation shall be effective on the date shown in the certificate of amalgamation.

Effects of the amalgamation

The absorbing company (or the new company) is going to acquire the assets of the absorbed company that will disappear (art. 305). It thus inherits the rights and liabilities of the absorbed companies (art. 307). The absorbed companies stop existing; they are however supposed to exist for the purpose of the possible nullity actions, for the period of proceeding until the court’s decision becomes definitive. The shareholders of the absorbed companies become shareholders of the absorbing company according to the modes specified in the project of amalgamation. The third parties keep all rights that they possessed before the amalgamation.

 

 ALTERATION OF THE NATURE OF COMPANIES

This section undertakes to explain the notion of the transformation of a company and the types of transformation.

Notion of the transformation of a company

If the law of 1988 on commercial companies laid down in its article 48, the principle of the transformation of a commercial company in its terms: “every company can adopt another form without losing its legal personality”; the new law is content with giving some situations of alteration or transformation of a company.

In a general manner, it essentially sounds like a modification of the articles of association that allows the company to adapt its structure to new needs. It allows the enterprise that grows to choose a form that facilitates a more complex management or to appeal more comfortably on new shareholders.  It also occurs in order to benefit from fiscal advantages recognized to such type of company.

The transformation can be imposed to the shareholders like a necessary condition to the survival of the company.  It intervenes every time a company complies no more with the requirements of current form.  To avoid the dissolution, the company must upgrade its status, or otherwise transform.

Thus, in the terms of the new law related to companies a company limited by shares may be converted to a company limited by guarantee. In the same way a limited company turn into to unlimited one and vice-versa.

 Types of transformation

Transformation of a company limited by shares to a company limited by guarantee

According to article 318 of the law company limited by shares may be converted to a company limited by guarantee when:

  • there is no unpaid shares;
  • all its members agree in writing to the conversion and to the voluntary surrender to the company for cancellation of all the shares held by them immediately before the conversion;
  • a new articles of association appropriate to a company limited by guarantee is filed; The new articles of association of the company limited by guarantee shall be filed to the Registrar General for registration.

The conversion of a company shall –

  • take effect on the issue of the certificate;
  • operate so that all shares are deemed to have been validly surrendered and cancelled;
  • have effect so that every member who has not agreed to contribute to the share capital of the company shall cease to be a member;
  • not affect any right or obligation of the company except as otherwise provided in this section or render defective any proceedings by or against the company.

Transformation of a limited company to unlimited company

Article 320 disposes that a limited company may convert to an unlimited company by passing a special resolution to that effect and by making any necessary amendments to its constitution and filing with the Registrar General a copy of the resolution.

Transformation of an unlimited company to limited company

In the terms of the article 321 of the law, an unlimited company may convert to an limited company by passing a unanimous resolution to that effect and filing with the Registrar General a copy of the resolution.

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