Despite the strong opposition that initially greeted the introduction of mandatory audit firm rotation, a number of JSE-listed companies have already taken this step.

Between January 2017 and March 2019, 17% of the entities listed on the JSE in 2017 had rotated their audit firms. Of these, 38% cited the introduction of mandatory audit firm rotation by the Independent Regulatory Board for Auditors (Irba) in 2016 as the reason for changing their audit firm.

Other reasons given were cost, termination of contract, resignation of the auditor, or the merger of audit firms.

Irba which regulates the approximately 4,500 auditors in the country and ensures they comply with set standards in the public interest, has given notice that audit firm rotation every 10 years will become mandatory from 2023.

Irba CEO Bernard Agulhas told parliament’s finance committee during a training programme that a number of firms had introduced the measure voluntarily ahead of its introduction. The reason for Irba’s introduction of the measure is to strengthen auditor independence and break the often “cosy” relationship that develops between and auditor and auditee when one auditor is retained for many years. This can affect their objectivity, Agulhas said.

He told MPs that mandatory audit firm rotation was one of the pillars of Irba’s bid to restore confidence in the auditing profession, which has recently been rocked by a number of scandals related to state capture and corruption. KPMG has been the most seriously affected by suspect auditing practices.

These scandals have resulted in a loss of confidence in the SA market and a breakdown of trust in the profession.

The Auditing Profession Amendment Bill, which has already been introduced before parliament, will, once it becomes law, see an increase in sanctions that can be imposed on auditors for irregularities from R200,000 to an amount to be decided by the finance minister. Agulhas said the increased sanctions would act as a “real deterrent and disincentive to unethical or negligent behaviour by registered auditors”.

Search, seizure and subpoenas

The bill also provides for search and seizure powers, the power to subpoena in the investigation process, and the simplification of the disciplinary hearing process.

Agulhas said the ability of Irba to regulate internal auditors would strengthen regulation of the profession. This is part of the proposal on comprehensive regulation Irba will submit to finance minister Tito Mboweni. It would involve all auditors and professional accountancy bodies falling under one single regulator, which would require that professional organisations exercise greater oversight of their members and have a code of ethics, standards, minimum quality requirements, a disciplinary process, and so on.

In accordance with this model, auditors would continue to be individually regulated by Irba. Agulhas said the benefit of comprehensive regulation would be to overcome fragmented regulation.

Now, only auditors in the financial reporting chain are regulated, but the chain includes other stakeholders, such as financial managers, directors, managers, CFOs, audit committees and boards. Agulhas noted that when there is an audit failure it is a systemic one rather than simply a failure of the auditor.

Irba is also involved in strengthening audit committees, which, in cases such as Steinhoff’s have failed to exercise proper oversight over audits. Agulhas suggested that Irba might set standards to enable auditors to uncover fraud, as expected by the public.

The increase in the number of cases being dealt with by Irba — there are 219 open matters and 11 cases referred for disciplinary hearings — has prompted the board to budget for R44m in legal costs for disciplinary processes in the 2020 budget. It also needs to increase its capacity.

Agulhas said this will contribute to a total deficit of about R110m in the three years from 2020/2021 to 2022/2023. Irba has asked Mboweni for a R27m allocation in terms of criminal asset recovery for the current matters.