A quarter of Johannesburg Stock Exchange (JSE) companies have rotated their audit firms ahead of the 2023 Mandatory Audit Firm Rotation (MAFR) deadline, finds South Africa’s Independent Regulatory Board for Auditors (IRBA).
Of the companies that have rotated audit firms as of the end of April 2020, 47% cited the early adoption of MAFR as the reason for the rotation, which was by far the main reason for a change of auditor.
The IRBA mandated audit firm rotation in 2017 following a number of audit failures resulting from a lack of independence and lengthy tenures of audit firms with the same clients, which in some cases exceeded 100 years.
The early adoption of MAFR has seen a number of companies opt for firms outside of the Big Four, and there has also been some partnering between Big Four and black-owned firms, says IRBA.
IRBA CEO Bernard Agulhas said: "We are very pleased to see that rotations are not limited to changing between the big four and are confident that we will see this trend continuing. Increased access to work on listed entities will enhance the depth of experience at next-tier and black-owned firms.
“We have noted some audits rotating to firms such as BDO, PKF Octagon, Mazars, RSM, SNG GT and Ubucule. Also, we are pleased to see that both EY and PwC have joined with SNG GT and won joint audit business. Another new joint audit pairing being Thawt Incorporated and Crowe JHB also recently won two audits in the listed market. As there is very little past experience of joint audit arrangements outside of the banking sector, the IRBA has been developing a Guide to Joint Audits which is at an advanced stage. Such guidance will go a long way to assisting audit firms to agree and formulate sound working arrangements around a joint audit.”
Commenting on the benefits of changing audit firm before the effective date, Agulhas said: “Given the steady uptake over the last three years, we can already foresee that in the years 2027 to 2030 these companies will again be able to rotate with minimal disruption to the audit profession, and without any hindrance to the companies, as Audit Committees can already be sure to limit the procurement of prohibited services from any firm they may wish to rotate to in future. The forward planning for these companies will be made easier by the fact that not many companies will be rotating in those years.”
Following the promulgation of MAFR, in 2017 18 companies rotated their audit firm, and 2018 and 2019 saw 34 and 32 rotations respectively.
Agulhas said: “The important thing to bear in mind is that there are only three years left for voluntarily early rotation and 75% of companies have yet to rotate and a large percentage of these with audit firm tenure exceeding ten years at 1 April 2023 will be required to rotate in that year or the year prior, depending on the company year end.
“This naturally suggests that audit firm rotation should pick up in number of rotations per year over the next 18 months as audit committees attempt to avoid a mass rotation in the period 2022-2023. We would fully expect that by next year there will be between 60 and 100 rotations in the one-year cycle.
“The reason for this is that audit committees will want to avoid the additional pressure of a large number of rotations in the final months before the effective date, as it could impact the selection and appointment process. Audit committees which are waiting until late 2022 or 2023 to execute the required rotation may want to plan for an extended lead in period for the request for proposal, selection and appointment process, as the audit firms which they may prefer will be responding to numerous new business acquisition requests or may have already been appointed by a significant competitor in the same sector. Naturally some companies may not wish to be in the same stable as a significant competitor and so therefore preferred choices at that time may be eliminated automatically because of conflicted interests.