Mandatory Audit Firm Rotation in South Africa. What is at stake?

Economic crime is one of the biggest challenges to organisations globally. Businesses continuously review their systems and controls in order to identify and prevent instances of Economic crime, however, these measure alone are not sufficient in managing the risk.After a considerable process of local and international consultation lasting a year, the IRBA (Independent Regulatory Board for Auditors) recently announced plans to implement Mandatory Audit Firm Rotation (MAFR) in South Africa. The directive effectively puts a time limit on the relationship between auditor and client. The decision now made, what is up for discussion and further consultation is the details of implementation. The possibilities include mandatory audit tendering and joint audits, where responsibility is shared between companies.

Essentially, the key argument in favour of MAFR is that it will substantially contribute to the independence of auditors from clients, traditionally a cornerstone of the profession’s business and professional standing. Aligned with this is an assumption that quality will be generally enhanced and that MAFR will contribute to the credibility and transparency of audited accounts. This, says IRBA, will lead to greater investor and general public confidence in financial reporting. In this way, the IRBA decision has underlined the very important relationship between auditors and the audit profession and shareholders of companies, whether listed or otherwise.

The South African context is also an important backdrop to the decisions that have been made. IRBA use statistics to show that the industry is concentrated in too few hands and that MAFR could have the effect of stimulating transformation. Without MAFR, there is a feeling that there is a risk of stagnation and that current “closed shop” perceptions will only get stronger. The implementation of rotation is seen as a way to create opportunities for more companies.

The counter argument is obviously strong. One of the practical concerns is around newly appointed auditors needing the time to get up to speed and to learn the ins and outs of the clients business. An auditor-client relationship builds substantial intellectual property which in MAFR is culled in the name of independence. For many, it is too high a price to pay and this has been the main argument against mandatory rotation.

If the intention is to open new opportunities to audit firms, there is also an opinion that this may be self-defeating. If a company knows that it may get business only to lose it again after a certain period, how does one plan to invest for the future, particularly in human resources?

Our position at Nolands is certainly not opposed to MAFR.

However we believe it should only apply to Public Interest Entities where the need for transparency is paramount. Also, considering the practicalities, we would welcome a period in excess of 5 years. We are also very much in support of any directives aimed at transformation in our industry.

It is a brave decision on IRBA’s part, given the fact that many countries globally have considered it,  but decided against implementation while others have implemented it only to repeal, owing to negative experiences on both client and audit sides. That said, there are countries where it is still applied. The fact that China, Brazil and India still apply rotation in their countries may mean that it will find relevance in South Africa.