The principle of Mandatory Audit Firm Rotation (MAFR) was discussed in a previous article, when the parliamentary Standing Committee on Finance had just finished their first round of hearings on the subject and we were anxiously awaiting the second round of public hearings.

These hearings were held on 17 March in Cape Town and RSM South Africa was invited by the committee to present our views on the topics.  

As background, Manditory Audit Firm Rotation (MAFR) refers to the principle whereby businesses are forced to change their audit firm after a certain number of years.  There are already rules in place for the mandatory rotation of audit partners, but generally in South Africa the firm does not need to be changed.

Our views on the subject have been communicated to the Independent Regulatory Board for Auditors (IRBA), who has decided to implement MAFR in South Africa, and these are the views that we have also presented to the parliamentary committee:

In principle, it should first be stated unequivocally that RSM South Africa and the entire RSM network of firms is unashamedly in favour of any measures that would strengthen audit quality.  Auditor independence is an important element of audit quality and it would follow, therefore, that we would also be in support of the strengthening of independence. 

We are, however, not convinced the MAFR is the best way to strengthen auditor independence as the unintended consequences of such a step would far outweigh the marginal benefits.

In the first place, we do not believe a strong enough case has been made that any change is necessary to auditor independence.  Many cases of audit failure can be listed, but the most infamous of these occurred twenty to thirty years ago, or at least before there were measures such as the Companies Act, 2008, IESBA code, King, etc.  

Recent research (https://www.accountingtoday.com/news/study-questions-value-of-auditor-rotation) suggests that long association with audit clients doesn’t have the negative impact on audit scepticism that is widely assumed.  In fact, the researchers conclude that there is a “healthy balance at the heart of this interpersonal relationship that merits leeway from regulators.”  As far as MAFR is concerned, they “found no significant relation between auditor skepticism and the length of companies' relationships either with audit firms or engagement partners.”

Furthermore, if the relationship between auditor and client was a concern, there are more efficient ways to address this directly and not in an indirect way that might have the effect of reducing familiarity but also unintended consequences of removing years of experience and knowledge from the situation.

The removal of market concentration is another motivation that has been provided for MAFR.  No matter which of the major jurisdictions you look at, more than 90% of listed entities are audited by the so-called “Big 4” auditing firms.  The reasoning seems that MAFR will force entities to change auditors and thereby give other firms the opportunity to enter the listed company market.

Surely as one of the next tier of firms, RSM South Africa would be expected to be supportive of such a move if we were to consider it from an economic point of view?  But that is not the case.  Firstly, because we don’t believe it would be appropriate to consider what we can gain from it. Additionally, because international experience has proven that MAFR does not help to combat audit concentration at all.  In fact, some jurisdictions report that concentration increases because current “Big 4 audits” tend to just rotate between the bigger firms while other engagements tend to go to bigger firms when they become available.

This could be one of the reasons why MAFR has been tried overseas and withdrawn in many cases, and South African commentators share the concern.  At the public hearings, presentations were also made by other stakeholders and most agree that, at best, more research is needed before MAFR can be considered.  The public hearings were reported on in more detail in the press, see for example Accounting firms voice disapproval of mandatory audit firm rotation and even the International Federation of Accountants has pointed out careful consideration and analysis is required – governments and regulators should not try to replicate arrangements from another jurisdiction and apply them to their own.

Henk Heymans

Partner, Johannesburg

Also read:  Mandatory Audit Firm Rotation