The global financial crisis brought to the fore questions surrounding the scope and quality of external audit, market concentration and auditor independence. The crisis reopened concerns about auditor tenure and its consequences for auditor independence and audit quality. More specifically, regulators expressed concerns that the desire to retain clients and the familiarity created between auditors and management might over time impair auditor independence, which in turn could adversely affect audit quality. This resulted in a global debate on how best to address the issue.
The two most notable regulators in the world, namely the European Commission and the regulator in the United States, embarked on very different paths in their quest to achieve auditor independence. The EU, after having implemented partner rotation in 2006, decided in 2014 to adopt MAFR at 10 to 24 year intervals, depending on certain criteria. The US implemented mandatory partner rotation in 2002 through the Sarbanes-Oxley Act, but decided, after involving academics and public hearings, not to introduce the rule at the audit firm level, at least for now.
It seems that South Africa’s intention has been to respond to the current global trends and recent international legislative measures which have been implemented in respect of strengthening auditor independence. However, the Independent Regulatory Board for Auditors (“IRBA) considerations are broader and pertain to the following three objectives:
To strengthen auditor independence and thus protect the public and investors, which is part of IRBA’s strategy;
To address market concentration of audit services and create a more competitive environment, which will positively influence audit quality; and
To promote transformation by creating more opportunities for small and mid-tier audit firms to enter certain markets, provided they are competent to audit in those markets.
In compliance with section 10(1)(a) of the Auditing Profession Act, IRBA has published the rules on Mandatory Audit Firm Rotation (“MAFR”) for auditors of all public interest entities (“PIEs”).
- An audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years;
- Thereafter, the audit firm will only be eligible for reappointment as the auditor after the expiry of at least 5 financial years.
Who does the rule apply to?
The rule applies to all Public Interest Entities (“PIE”) including (i) listed companies, and (ii) any entity defined by regulation or legislation as a public interest entity, or any entity for which an auditor is required by regulation or legislation, to be conducted in compliance with the same independence requirements that apply to the auditing of listed entities. Such regulation may be promulgated by any relevant regulator, including an audit regulator.
Examples of entities regarded as PIEs include major public entities; banks, insurers, pension and provident funds, portfolios within collective investment schemes, medical schemes and financial service providers, etc.
Effective Date and Matters of Timing
- The requirement is effective for financial years commencing on or after 1 April 2023. Therefore, if the audit firm has served as an appointed auditor of a PIE for 10 or more consecutive financial years before the financial year commencing on or after 1 April 2023, then the audit firm shall not accept re-appointment as auditor.
- When the auditor determines that a client becomes a PIE, the length of time the audit firm has served the client as the auditor before the client becomes a PIE shall be included in determining the timing of the audit firm rotation.
- If, at 1 April 2023, the PIE has appointed joint auditors and both have had audit tenure of 10 years or more, then only one audit firm is required to rotate at the effective date, and the remaining audit firm will be granted an additional two years before rotation is required. This provision will only be applicable at 1 April 2023.
- After the audit firm rotation, five financial years must pass before the same audit firm can again be appointed.
Part 2 in this series of articles will examine the pros and cons of MAFR, the impact of MAFR on the entity including multinational groups and the role of the audit committee.
Legal Assistant, Johannesburg