Cape Town – Africa's largest internet and media group Naspers [JSE:NPN] added its voice to objections to a proposed new framework of how companies appoint auditors, challenging the way the Independent Regulatory Board for Auditors (Irba) wants to introduce the new measures.
Naspers, with investments in 130 countries, said in a statement it has made a formal submission to Irba objecting to its proposal of Mandatory Audit Firm Rotation (MAFR) for South African corporates. The primary objective of MAFR is to strengthen auditor independence, Irba said in a note on its website, and the body is of the view that the measure will also increase access to the audit market as well as promote transformation in the profession.
MAFR - tried and failed elsewhere
Naspers, however, argues that MAFR has been tried and failed in most major markets. The company therefore calls on Irba to conduct a thorough investigation into the potential impact of its proposed framework. It also called for a proper public consultation process – involving National Treasury – because of the negative impact MAFR could have on the South African economy.
In the statement, Naspers said concerns about MAFR have already been raised by, among others, the JSE, the Standing Committee on Company Law (SCCL), the King Committee, the Institute of Directors (IoD), the South African Institute of Chartered Accountants (Saica) and the CFO Forum – a public interest group involving chief financial officers from some of the largest South African corporates.
“South Africa’s auditing standards are consistently rated as the best in the world, which makes us – and many others – question why Irba is looking to introduce this failed concept here,” said Naspers Group chief financial officer Basil Sgourdos.
“Mandatory audit firm rotation has proved to be a disaster in virtually every market where it has been introduced. In Europe, for example, it cost an estimated €16bn to implement, although the private sector believes the cost could be as much as €32bn. As in other markets that went down this road and later reversed its decision, there is no evidence to date that it has done anything at all to increase audit independence.”
'No evidence for MAFR rationale'
In its submission, Naspers says the regulator has failed to provide evidence to back up its rationale for MAFR. “Irba says MAFR is the solution, without providing any evidence that there is a problem, or how it came to conclude that there is a problem. It flatly refuses to provide us with this evidence.
“On top of that,” Sgourdos said, “Irba hasn’t conducted any independent research or produced an economic impact assessment on the potential consequences of MAFR. The body has also not carried out a proper consultation process, and consistently ignores the views of those who do not agree with it. We believe the potential impact of MAFR requires a proper and meaningful consultation process.”
Sgourdos said the formulation of a White Paper and the undertaking of independent research should be part of such a consultative process.
“In addition, we would urge the active involvement of the CFO Forum, SCCL, the JSE, the King Committee and the IoD.”
In its submission, Naspers outlines its concerns as follows:
- The proposed implementation of MAFR has implications far beyond the audit profession. MAFR is not simply a regulation for the auditing profession – it has a profound impact on companies, investors and many other stakeholders.
Among other things, it cuts across existing legislation, such as the Companies Act, is in conflict with the King 4 governance framework, and fundamentally dilutes the rights of shareholders. Irba’s Consultation Paper simply ignores these wide-ranging consequences.
- Irba’s Consultation Paper simply assumes (but does not demonstrate) that audit independence is an issue and it assumes there is a problem with audit independence and that difficulties with independence lead to audit failures. No real evidence is included to support this assumption and no evidence is provided to demonstrate how MAFR will address this.
- The Consultation Paper does not include the research that Irba has apparently conducted. Accordingly, it does not demonstrate how Irba has reached the conclusion that MAFR will fix a perceived problem relating to audit independence. It also does not engage with the fact that international research is less than unequivocal in its support for the alleged benefits of MAFR.
- The introduction of MAFR will result in a massive cost for South Africa, something that the Consultation Paper does not reflect in a meaningful or informed way. Naspers estimates the cost of introducing MAFR in its proposed form to be between $12m and $15m in the first year alone. Given that we operate in 130 countries, the company may in fact be unable to manage a transition uniformly, which would increase audit risk and costs even further.
- Irba is giving mixed messages concerning the objectives of MAFR. The Consultation Paper states the rationale for MAFR is an attempt to increase audit independence. In other forums and the media, however, Irba has argued that it wants to use MAFR to address transformation and market concentration – again without any evidence of how MAFR will assist in this regard.
Experience in other markets suggests that MAFR increases rather than decreases concentration as smaller firms need to cycle out established clients to comply with rotation requirements; creating significant volatility to its revenue and income base making it harder to build the business.
- Naspers says there are alternatives to MAFR that could more effectively address auditor independence, transformation and market concentration. These alternatives should be explored by Irba in conjunction with all relevant stakeholders.
“In our view,” Sgourdos says, “Irba is missing a real opportunity to engage with all stakeholders and consider a broader range of proposals to further improve governance in South Africa and to enhance transformation in the audit profession – if this is indeed an objective that Irba is pursuing.”
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