BUSINESS DAY TV: Audit firm rotation is important but must not be mandatory
Christine Ramon, chairperson of the CFO Forum, speaks to Business Day TV about the forum’s objection to mandatory audit firm rotation, which has received the support of Finance Minister Malusi Gigaba
Christine Ramon is chairperson of the CFO Forum.
BUSINESS DAY TV: The issue of mandatory audit firm rotation (MAFR) has got the usually staid accounting fraternity in a sweat. The regulator, the Independent Regulatory Board for Auditors (Irba), has decreed that companies must replace their audit firms every 10 years, citing independence issues and the need to include smaller firms.
Now the new finance minister, fresh in this post, has come out in support of the move. Meanwhile the companies who pay the hefty audit fees have strongly voiced their concern. My guest in studio will take us through this complex debate. Christine Ramon is the chairperson of the CFO Forum.
Christine … why are you against this?
CHRISTINE RAMON: Quite important is that the CFO Forum is not against audit rotation as such. We are against mandatory audit firm rotation.
Quite importantly, the two main reasons are: one, it will dilute the oversight role that the audit committees play because they should actually be making the recommendation for audit firm rotation, and it is also an abrogation of shareholder rights.
Shareholders appoint audit committees and shareholders have to confirm the appointment of auditors. So we believe that there are sufficient mechanisms in place in terms of a governance framework that does actually safeguard the independence and the audit quality, and so why implement mandatory audit firm rotation?
BDTV: Yes, so because shareholders have rights are we leaning towards the legal aspect to see this going to court?
CR: It could very well end up there. Currently bear in mind that Irba regulates auditors. The Companies Act regulates companies. And right now, there is a conflict with this gazetted regulation and it conflicts with the Companies Act in terms of cooling off periods. And it is, as I said, impacting shareholder rights.
This is going to impose a significant cost burden on our economy that you are aware, is in a recession. And when one actually looks at the research and where MAFR has been implemented in the EU, it cost the EU about €16bn. In SA, its estimated to cost about R10bn over a 10-year period.
BDTV: Okay, lots to unpack there. But I want to focus on independence. Irba is saying that one of the reasons its doing this is because they see a lack of independence and some audit firms have been auditing their clients for 100 years. Surely that is a very real issue?
CR: Lets break that down. Yes, there are some long tenures out there and Irba has quoted the Enron failure, but post-Enron one has to look at what measures have been put in place to address the issues of independence. For one, audit partner rotation has been adopted, or introduced. So every time companies…
BDTV: …that’s in terms of the Companies Act?
CR: That’s in terms of the Companies Act. Every five years the audit partner has to rotate. There are limits on nonaudit services….
BDTV: But let’s go back on that rotation of the audit partner. Is that not just cosmetic? It’s the same audit firm and the person who signs is different.
CR: Quite important is that relationships develop between people. It does not develop between firms and the client, and also bear in mind that where an audit partner rotates, that partner is not involved and not allowed to be involved in the audit at all.
Then when you look at the practical realities, management … as much as an audit firm may have been auditing for a long period of time, you don’t have the same management in place. Your chief financial officers change, your CEOs change, the audit teams change. As a matter of fact, the firms struggle to retain people that are doing their articles or their training post their qualifications. So there is this natural rotation that actually happens and I don’t really think that that is a valid concern.
BDTV: Okay, I accept your point on that. What about trying to build up smaller audit firms who basically have been excluded from the big listeds, because they’re dominated by the big-four?
CR: Yes, there are valid concerns around market concentration and transformation, and the CFO Forum is committed to helping address this. We just believe that MAFR is not the blunt instrument that should be used to address this. As a matter of fact, when you look at what’s happened in other markets, where it’s been implemented its actually increased market concentration. So there are different solutions that we should be looking at. We just don’t believe that this is the right solution.
BDTV: Yes, and just listening to the smaller audit firms, if they do come in right now there’s quite a lot of risk to them because the auditors are the first ones to get sued if anything goes wrong. And there’s also a whole lot of investment in terms of time and resources and getting the people, coming into a new audit.
CR: Yes, you’re absolutely correct. One then also has to look at the needs of your clients and whether if a small audit firm can service the need of a big multinational company. One thing that is very clear is that a multinational company does require an audit firm that can have global capacity — the geographic spread but also the skills and expertise. So that is a challenge to address as well.
And then when you look at companies that are not only listed in SA but they’re listed on the New York Stock Exchange, they need to have been Public Company Accounting Oversight Board (PCOAB) registered and listed and many of those small firms…
BDTV: …and they have their own requirements?
CR: Precisely. And that’s where you’re going to find this challenge.
BDTV: We are out of time but I have to ask you, in your view why is Irba doing this? Some people say that its one man on a mission, before his contract comes to an end in 10-months’ time?
CR: I don’t want to speculate on it but the regulator has been very single-minded about it. He has ignored all stakeholder concerns. There are very significant concerns that have been raised, not around costs but also the fact that SA is rated number one in auditing standards. The cost impact on the economy, so it was probably a predetermined outcome. There was a process that was under way with the standing committee of Parliament. We had two hearings and the parliamentary committee urged IRBA to go back and reopen the consultation process and bring its stakeholders on board. That’s has been completely ignored.
In the meanwhile, we’ve had a change of the Finance Minister and here it just gets gazetted. So we think that clearly concerns have been ignored, due process has not been followed, and there are conflicts with the Companies Act that need to be addressed separately.
BDTV: Absolutely and as you alluded to, SA is number in the world, seven years in a row, so why mess up something that is clearly working so well?