The IRBA announces timeline for public participation process around mandatory audit firm rotation

The requirements are likely to affect JSE-listed and other public interest entities, although the regulator stresses that the proposed scope and transitional arrangements currently may well be influenced by feedback obtained during the consultation.

Says the IRBA CEO, Bernard Agulhas: “As a public entity tasked with public protection as it pertains to investments in public interest entities, it is important to obtain a broad perspective on this requirement from the broader public and those with an interest in audit and audit quality. Whether you are an institutional investor, an individual direct investor or whether your pension funds are invested indirectly on your behalf, we would like all investors to consider how ensuring increased independence of the auditor from the clients they audit can ensure that financial reporting has been independently tested and found to be credible.

“Our goal is to ensure that all investors can have confidence that the information upon which investment decisions are made, are not in any way influenced or affected by a close or long-term relationship between the company and its external auditor.”

The issue of lack of independence first came to the fore with high-profile audit failures in the United States, amongst others, Enron, which collapsed in 2001 following misrepresented accounts and valuations which were overlooked by its auditor of 16 years. Finally, it declared losses in excess of 8m on October 16 which precipitated a collapse in the stock price and resulted in substantial losses for investors and heralded the end of the audit firm, Arthur Andersen.

Since then, regulators and oversight bodies, as well as standard setting bodies have focused on strengthening accounting practices, auditing standards and audit regulation. Following the global financial crisis of 2008, measures to ensure audit quality have become more robust.

The IRBA is the public entity in South Africa that is mandated by law, under the Auditing Profession Act, to regulate and to oversee the auditing profession, in the interest of protecting the public. The decision to introduce MAFR was taken by the Board of the IRBA based on research findings gathered over a 12-month period regarding possible measures for strengthening auditor independence.

The board considered alternatives such as mandatory audit tendering and joint audits in the process, including possible combinations. The decision to implement MAFR was taken by the IRBA board during its board meeting of 28 July and the Minister of Finance informed accordingly. The requirements and transitional arrangements are currently being drafted and will be presented to the board for adoption before being opened for public comment.

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More about the IRBA:

The IRBA is a public protection statutory body established to protect the financial interests of the public by ensuring registered auditors and their firms deliver services of the highest quality. It upholds audit firm independence to ensure that audit quality is such that it enhances the accuracy and credibility of financial performance reporting. In this way, the IRBA has an important role to play in building the reputation of South Africa as an investment market for both local and global investors and driving economic growth for the country.

As an internationally recognised regulator of the auditing profession and other assurance services relevant to the South African environment, it has been recognised by the World Economic Forum as the top independent audit regulator worldwide for six consecutive years for the strength of its audit controls and standards. The IRBA also registers suitably qualified accountants as auditors, who must adhere to the highest ethics standards, and promotes the auditing profession through the effective regulation of assurance conducted in accordance with internationally recognised standards and processes.