Government supports audit firm rotation rule

Friday, June 2, 2017

Pretoria – Government supports the Independent Regulatory Board for Auditor’s (IRBA) decision to implement Mandatory Audit Firm Rotation, but remains concerned about transformation in the sector, Finance Minister Malusi Gigaba said on Friday.

“The board of the IRBA has informed me of its decision to implement Mandatory Audit Firm Rotation. I have indicated that we support the measure but remain concerned about transformation and increasing access to markets because we have stressed that we really need to internalize the mind-set that growing black business is good for South Africa,” said the Minister.

At a media briefing in Pretoria, Minister Gigaba said while Mandatory Audit Firm Rotation will address the independence concern, it might not immediately address the need to broaden capacity and increase access to opportunity although the board believes that these outcomes could be advanced in the long term.

“The Board has assured us that it shares our concerns around broadening access and transformation, and will work to develop complementary initiatives to address the broader transformation of the profession,” said the Minister.

According to the IRBA, which is a public protection statutory body established to protect the financial interests of the public ensuring registered auditors and their firms deliver services of the highest quality, the mandatory audit firm rotation rule will force the audit committee or those charged with governance to reconsider the appointment of the current auditors.

“When we look at audit tenures of a 100 years, clearly they have considered any long audit tenure but ultimately decided to appoint the same audit firm for 100 years, which means that for 100 years certain other audit firms were excluded automatically. So the opportunity was never provided to those firms. When you force the audit firm to rotate, at least the markets can be opened for the rest of the audit firms,” said IRBA Chief Executive Officer Bernard Agulhas.

South Africa has about 2 000 audit firms and a lot of those audit firm are connected to the international global networks.

Auditor independence study

In July 2015, the IRBA began a process to investigate how to strengthen auditor independence, looking carefully at issues and threats to independence, but also in the South African context, examining the effects of market concentration and the progress of the profession with regards to transformation.

It examined the distribution of audits of the Johannesburg Stock Exchange (JSE)-listed companies to establish the level of concentration of the market. The study found that despite there being many audit firms, more than 90% of the market capitalisation of the JSE, in companies whose audit reports are signed off by South African Engagement Partners, was audited by a member of the Big Four (PWC, Deloitte, KPMG and Ernst &Young) global audit firms.

With much of the JSE-listed audit market still retained by the big four global audit firms, South African black-owned and other audit firms have struggled to gain access to the market and broaden their capacity.

Progress of the transformation of the auditing sector

On progress of the transformation of the auditing sector, the study revealed that of the 353 companies whose audit reports were scrutinised, it was found that the audit reports of 72% of the companies listed on the JSE that were actively trading as at 31 December 2015 were signed off by white registered auditors.

It was also found that 16% of the companies listed on the JSE that were actively trading at that time were signed off by non-South African partners. Only audit reports of the remaining 12% of actively trading listed companies were signed off by South African non-white registered auditors of which only 3% were black South African.

Minister Gigaba said it is important to look to those structures which have the responsibility of appointing auditors.

“If they themselves are not transformed, it cannot be expected that we will ever transform the auditing profession,” said the Minister.

South Africa has over 4 200 registered auditors and over 300 JSE listed entities that have a combined spend in audit fees of around R4 billion.

Minister Gigaba said the IRBA’s first responsibility is to protect the public from material adverse events affecting the capital markets that could be avoided through an incorrect audit opinion.

“To put the need for protection into perspective, the biggest proportion of investments of both black and white South Africans is held through mandated investments (indirect investment), not individuals. The largest of these is the largest retirement fund being the Government Employees Pension Fund (GEPF), with assets of R1.6 trillion, providing for 1.2 million active members and more than 400 000 beneficiaries.”

He said in the financial sector, retirement is big business adding that a report  by a large audit firm showed that around 100 retirement funds invest a total of R375 billion into the stock exchange.

“So, who is this indirect and often unaware investor?  It is ordinary pensioners and working South Africans who have contributed throughout their working lives to retirement savings which easily can be lost if invested in businesses which ultimately fail,” said the Minister.

The Minister said the inability to transform the economy has left the poor and unemployed vulnerable to shocks of economic growth and that the cost to the broader economy of a business collapse or audit failure would be devastating.

“So in the matter of independence and maintaining audit quality we support the IRBA in its efforts to protect the public,” said the Minister.

The effective date of the mandatory audit firm rotation is 1 April 2023.

“The reason we’ve given six to seven years before implementation is to allow audit firms and companies to prepare themselves for the change. They don’t have to rotate on that date, they can do it any time before that provided they’ve gone through the process of considering the audit tenure of their auditors,” said Agulhas. -