Transformation at the heart of mandatory audit firm rotation

The motivation behind the push by the Independent Regulatory Board for Auditors (Irba) for a mandatory audit firm rotation (MAFR) was not greater financial transparency, but transformation in the auditing profession.

This emerged during this week’s public hearings before Parliament’s Standing Committee on Finance about the board’s intention.

Irba, a statutory body established to protect the financial interests of the public, announced in August that it would implement the MAFR from April 1 2023.

Among Irba’s rotation requirements is that audit firms not serve a listed company for more than 10 consecutive years, and thereafter only be eligible for reappointment after at least five years.

This was opposed in submissions put forward by KPMG, Deloitte, the King Committee, the SA Institute of Chartered Accountants (Saica) and the CFO Forum, a public interest group involving chief financial officers from some of South Africa’s largest firms.

Although Irba’s CEO, Bernard Agulhas, argued that the board’s aim in introducing the MAFR was to strengthen auditor independence and enhance audit quality, the finance committee picked up on secondary concerns relating to the audit market being dominated by four major firms – PwC, EY, Deloitte and KPMG – and the need for transformation in the profession.

Participants in the hearing noted that South Africa was ranked first out of 138 countries for its auditing and reporting standards by the World Economic Forum’s Global Competitiveness Report 2016/17.

They also pointed out that numerous checks on auditing independence were already in place.

As the four-hour debate continued, the finance committee said it was becoming apparent that market concentration and transformation were the main drivers behind the MAFR.

“This debate is about transformation. Explain why the primary aim is not related to the secondary aims,” said committee chair Yunus Carrim.

Carrim said transformation and diluting the audit market concentration were “not negotiable” and expressed concern that respected former auditor-general Terence Nombembe, in his current position as CEO of Saica, submitted that the MAFR in isolation could not address these issues.

“We need clear research on what exactly we are concerned about,” said Nombembe.

“Different objectives should not be mixed. We doubt the MAFR will contribute meaningfully.”

He said there were “bigger things we need to facilitate”, such as small, medium and micro enterprises not showing their potential to catalyse economic growth, and graduates failing to find employment.

He said without a full understanding of the benefits and challenges of the MAFR, it could have the unintended consequences of increasing market concentration and slowing transformation.

Lindie Engelbrecht, a representative of the King Committee on Corporate Governance, said auditor independence was already in place through existing robust measures and the MAFR encroached on shareholders’ rights to impose their choice of auditor.

AngloGold Ashanti chief financial officer (CFO) Christine Ramon, speaking on behalf of the CFO Forum, said transformation was not Irba’s mandate and there was no issue with auditor independence in South Africa.

Ramon said she “takes exception” to Irba’s suggestion that the relationship between CFOs and auditors was “cosy” and conducive to collusion, and defended transformation efforts by the big four auditing firms, saying they had achieved Level 1 and 2 BEE status.

But the plea that PwC, EY, Deloitte and KPMG were transformed did not hold sway with the committee.

Responding to Deloitte’s assertion that it was an industry leader in transformation as it was 36% black owned, Economic Freedom Fighters MP Floyd Shivambu said this showed there was “a real crisis”.

“We need to elevate this issue to a legislative realm. It is an untransformed industry,” added Shivambu.

The ANC’s Pinky Kekana called the big four – which, according to Irba, hold 96% of the audit market for listed companies – “an oligarchy”.

Carrim said a second round of public hearings would be held on March 17.

Irba’s current board lapses at the end of March, and the regulator expressed his wish to finish the two-year process to gazette the MAFR before a new board was appointed.

Speaking after the hearing, Agulhas said Irba would not countenance any intention to delay the public consultation process, in the hope that a new board would change its mind.

“That we cannot do,” he said.

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