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What are the implications of BEE on the going concern assumption for companies? This

question was asked by a first year trainee accountant from Port Elizabeth. This got me

thinking about the far reaching implications of the trickle down effect of BEE on theeconomy. The way that the BEE legislation is crafted is that it does not force anyone to

contribute to BEE. The Broad-based BEE Act in section 10 however provides that every

organ of state and public entity must take into account and as far as is reasonably possibleapply any relevant code of good practice issued in terms of this Act in:

determining qualification criteria for the issuing of licences, concessions or other

authorisations in terms of any law; and

developing and implementing a preferential procurement policy, amongst other

requirements.

This is the section in the Act that makes BEE a business imperative because it uses the

economic leverage that government has in procurement, licensing, and granting of any

concessions to drive BEE forward.

The way that the trickle down effect works is that a public sector entity will say that if

companies want to conduct business with it they need to show the contribution they havemade to Broad-based BEE, which includes how much they have bought from black

companies and those companies that contribute meaningfully to Broad-based BEE. These

first tier suppliers then need to see how much their suppliers buy from BEE companies inorder for them to get affirmative procurement points on their BEE scorecard. The chain

goes down to numerous tiers until it affects all companies within the economy. All

companies that operate within the South African economy are affected by this trickledown effect.

The impact of this trickle down effect is that when one values companies using, for

example, the discounted cash flow model or any other model that requires forecasting of

earnings, BEE is a factor that needs to be taken into account. Companies that do notcontribute to BEE will see their future cash flows decreasing, which leads to a lesser

value to be attributed to the company as a whole. Furthermore when assessing thediscounting factor of the company, contributions to BEE are important to factor into the

risk analysis because any contribution will count towards decreasing the companys

business risk. Contributions to Broad-based BEE allow companies to at least maintaintheir current business or at best increase their business especially if they are ahead of

their competitors. The reality is that the economic leverage exercised by the government

has ensured that even valuations of companies in South Africa will be influenced to a

greater extent by BEE.

Clearly then BEE is an issue that needs to be considered when evaluating the goingconcern assumptions of companies. The going concern assumption states that a companyis assumed to be a going concern in the foreseeable future. This foreseeable future can

range from one year to three years. This assumption is influenced by the financial and

operational factors that affect the companys sustainability going forward. If the differentfactors indicate that the sustainability of the company is in question then the auditors will

have to qualify their audit report depending on the gravity of the factors considered. The

implication for the company is that they may have to write down the value of their assets

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to net realizable value which would decrease their profits in a substantial manner

depending on the level of assets held. This may also have some tax implications

especially for VAT if they decided to sell off their business not as a going concern,because certain exemptions may fall away.

Some of the high risk factors that would highlight going concern issues are: The company engaging in fronting practices and entering into unsustainable BEE

deals. This may cause the company to be black-listed which would negatively

affect their future business. No reputable company will want to take a risk byhaving economic dealings with a front.

The company has no BEE contributions whatsoever and there are no plans in

place or no intention to contribute to BEE.

The key medium risk factor may be that the companys BEE is lagging way behind itscompetitors and is therefore likely to lose business. This risk can be mitigated by the fact

that sustainable transformation takes time and as long as the company is showing good

progress towards meeting the targets as set out in the codes and charters then they will beable to weather the storm.

Auditors will not be able to sidestep taking BEE into account when evaluating the goingconcern assumption of companies they audit because in the South African economic

environment BEE is a business imperative that can make or break companies fortunes

and sustainability.