STRENGTHENING AUDITOR INDEPENDENCEMandatory Audit Firm RotationBERNARD PETER AGULHAS, CEO
The role of audit andassurance By promoting integrity in Financial Reporting and building a basis for providing confidence, auditors reduce financing costs and contribute to the efficiency of capital markets, thereby promoting economic growth.
World leader in Audit Standards • The world’s number one for auditing and reporting standards • As measured by the World Economic Forum’s Global Competitiveness Report (published 28 September 2016) • Seventh consecutive year that the country holds this position • Signals robust standards setting process, sound inspections methods and ‘right – touch’ regulation • Recommendations from the World Bank (2013)
Creatinga Competitive Market Place • Audit Failures • Recent fines payable by audit firms • Market Concentration and dominance of large firms • Comprehensive Regulation to address systemic failure • Measures introduced (e.g. MAFR, Prohibition of Non-audit Services)
Background Corporate failures that continue to shape regulatory reforms • Corporate failures and global financial crises drive focus on the independence of Auditors and the responsibility of Regulators. • High profile cases include: Enron, WorldCom, Parmalat, Tyco International, Royal Dutch Shell and Siemens. • Local cases include: Leisurenet, Randgold and Regal Bank Global developments • The European Union (EU) introduced measures such as mandatory audit firm rotation, mandatory audit tendering and joint audits in order to strengthen auditor independence effective from 17 June 2016 • 32 countries across Europe Risk of failure of one of the major audit firms • In 2016 alone all the “Big 4” firms globally have been fined, sued or settled court cases with amounts running up to billions of dollars
Current measures in place Mandatory audit partner rotation • In terms of Section 92 of the Companies Act, the same individual (engagement partner) may not serve as the auditor or designated auditor of a company for more than five consecutive financial years. Prohibition of non-audit services • Section 90(2) prohibits an auditor to provide audit and certain specified services to the same client Disclosure of audit tenure • The IRBA published a rule that makes it mandatory that all auditors’ reports on Annual Financial Statement of all public companies shall disclose the number of years that the audit has been the auditor of the entity (audit tenure). Reporting, including <IR> and KAM
Scope and objectives of research The objectives of the initiative are as follows: • Strengthening auditor independence • Addressing market concentration / Provide access to markets • Promote transformation in the profession The scope of the project considered the following three measures: • Mandatory Audit Firm Rotation (MAFR); • Mandatory Audit Tendering (MAT); and • Joint Audits (JA).
What the EU initiatives aim for • Clarifying and better defining the role of statutory audit regarding public-interest entities • Improving the information that the audit firm provides to the audited entity, investors and other stakeholders • Improving the communication between auditors and audited entities • Preventing any conflict of interest arising from the provision of non-audit services • Mitigating the risk of any potential conflict of interest around selection, fees, and appointments • Broadening the choice and improving independence
Research Findings Independence
Threats to independence • Familiarity threat between CFOs and the incumbent auditors • Familiarity threat between audit committee chairs and incumbent auditors • PIC concerns regarding the independence of auditors and company directors • Inspection findings relating to ethical requirements • Long audit tenure • Global developments on strengthening auditor independence
Research Findings Market concentration
Audit market share for listed companies * Concentration measured by share of market capitalisation on the Johannesburg Stock Exchange.
Research Findings transformation
Further solutions suggested from consultation • Strengthening of audit committees • Public disclosure of firms’ inspections report • Enhance audit committee report and auditor reporting • Increase the IRBA penalties • Provide audit quality indicators to relevant stakeholders • Strengthen the audit regulator
Challenges • Resistance to change in age old practices and patterns • Acceptance of the IRBA’s authority as the audit regulator appointed to deliver on the State’s mission • Motives which could be marred by possible self-interest • Conflating independence, concentration and transformation • Threats of legal challenge
Timeline of consultation process Initial research phase and Consultation Process • July 2015 – July 2016 Public Consultation Process • 25 October 2016 – 20 January 2017 The IRBA consulted with, and reported progress to the Ministry and Treasury throughout the process.
Proposed requirements Requirements • An audit firm shall not serve as the registered auditor of a listed company for more than 10 consecutive financial years. Effective date • The requirement is effective for financial years commencing on or after 1 April 2023. Transitional provisions • If at the effective date, the listed company has appointed joint auditors and both has 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.