The South African audit regulator, the Independent Regulatory Board for Auditors (IRBA), has issued a rule requiring public interest entities (PIEs) to rotate their auditor every 10 years, as well as introducing a five year cooling off period before the auditor can be reappointed by the PIE, effective 1 April 2023.
This rule which has been a long time coming is part of a series of proposals made by IRBA to enhance audit quality in South Africa.
In particular, mandatory audit firm rotation was suggested as IRBA was concerned about auditors’ independence in South Africa with some audit firms having audited companies for sometimes as long as a 100 years.
The original proposal was to introduce mandatory rotation for listed companies only, but following a public consultation, IRBA changed the obligation to all PIEs. This includes for example non-listed pension funds and organisations that operate in the public interest.
IRBA CEO Bernard Agulhas said: “The issuing of this Rule is aligned to global concerns expressed by other international audit regulators that the compromised independence of auditors impacts negatively on audit quality and can result in inappropriate audit opinions which may result in flawed investment decisions. Independence is the cornerstone of the profession and the independence of auditors provides investors with the assurance that the financial statements on which they rely are credible.”
The South African government on the other hand highlighted mandatory audit firm rotation as a way to break up Big Four concentration and foster capacity building amongst other firms and especially black-owned firms.
“There are 4283 registered auditors in South Africa and over 300 JSE-listed entities which have a combined spend in audit fees amounting to around R4bn, making it an important part of the financial sector. Despite there being many audit firms, much of the JSE-listed audit market is still retained by the big four global audit firms. This concentration has made it difficult for South African black-owned and other audit firms to gain access to the market,” South Africa Finance Minister Malusi 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 we believe 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.”
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