Terence Nombembe. Picture: TREVOR SAMSON
Terence Nombembe. Picture: TREVOR SAMSON

Strong opposition to mandatory audit firm rotation was mounted in Parliament on Wednesday. The CFO Forum, the South Institute of Chartered Accountants (Saica) and the King Committee were among those that argued against the plan of the Independent Regulatory Board for Auditors (Irba) to introduce mandatory audit firm rotation as a way of strengthening auditor independence.

Parliament’s standing committee on finance held a public hearing on the Irba plan at which both Saica and the King Committee said more research was needed to investigate the implications of introducing the measure in SA.

Saica CEO Terence Nombembe said mandatory audit firm rotation could not address problems of transformation, market concentration and independence of the auditing sector. He doubted that mandatory audit firm rotation would contribute meaningfully to these problems and would, in effect, have the unintended consequence of increased concentration and slowed transformation.

Nombembe said comprehensive research and an impact assessment of the proposal was required before it could be implemented: "Sufficient time is needed for proper research and for proper change management."

The CFO Forum chairperson Christine Ramon noted that the Irba plan would also result in disempowering audit committees and would reduce effective competition in the audit industry. Audit committees would be forced to change auditors and would not be able to make decisions that were in the best interest of the company, limiting their choice and adding to costs.

It would also reduce audit quality rather than increase it, Ramon said, as audit quality was derived to a large extent from the cumulative knowledge of the company’s people, processes, controls and risk, built up over time by the audit firm. This was key for large, complex companies and should not be equated, she stressed, with over-familiarity with management.

"Studies undertaken globally have indicated that the risk of audit failure increases in the first two years after a new auditor takes over," Ramon said. "The increased risk in a new audit arises from lack of business knowledge and experience." Audit partner rotation, rather than firm rotation, would address many of the concerns which were intended to be addressed by mandatory audit firm rotation.

King Committee representative Lindie Engelbrecht also opposed the Irba plan saying it would undermine the powers and responsibilities of shareholders and audit committees, which had the responsibility of ensuring the independence of auditors, and would deprive shareholders and audit committees of the ability to appoint auditors.

A further round of public hearings will be held on March 17.

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