Concentration of work in Big Four behind SA audit industry’s plummet in rankings

SA’s audit profession is in the midst of a crisis of public confidence — from being ranked first in the World Economic Forum Competitiveness index for strength of auditing standards and reporting every year between 2010 and 2016, it collapsed to a low of 55th in 2018, since recovering slightly to 49th out of 141 countries in 2019.

Though falling trust levels are a global problem, that SA’s ranking against its peers has fallen so substantially points to an even more serious challenge locally. This most likely is attributable to an even greater concentration of audit work among the Big Four audit firms in SA compared to most countries.

This points to the need for a culture of change within the profession. Audit reform is a necessary journey not only to restore stakeholder confidence in the assurance provided by auditors but also faith in the very profession itself. A recent Mazars report titled “The Future of Audit” has served to highlight what clients most want from an audit, and 61% say that is “confidence”.

The quantitative survey had a sample of 501 respondents, 9% of them based in SA, nearly half based in Europe and 42% from public interest entities. All respondents held strategic positions (CFOs, CEOs or members of audit committees), and among this highly influential group 61% strongly endorsed stakeholder confidence as what they particularly want from an audit. There is no question that what is required is the exercise of greater professional judgment in the audit opinion by well-trained professional and skilled auditors.

Second only to the top response of “providing an objective opinion on financial statements”, business leaders say they want an audit to “provide assurance and confidence for the benefit of investors, stakeholders and regulators (61%)”. The report clearly states: “Business expectations towards audit: objectivity, confidence and performance improvement top the list. Asked what an audit will provide them with, business leaders expect an audit to deliver increased stakeholder confidence and support that drives future performance.”

In any industry with limited choice you tend to see a decline in service delivery, including quality. Greater service delivery attends greater competition, and this is what audit reform is hoping to achieve in SA with its first leg in 2023 of expanding mandatory joint audits to include the major insurance companies and mandatory audit firm rotation for entities that are listed on the JSE.

This leg of reform has already been agreed, together with an implementation date. While this may not in itself restore trust in the auditing profession, it will go a long way to restoring confidence in the audit process. However, this can be taken a step further by expanding the requirement for mandatory joint audit as is the model in France. The report also found that 87% of respondents are favourable (50% strongly favourable) to the audit market evolving towards joint audit carried out by more than one statutory auditor.

Challenger firms at a minimum match the skills of the Big Four firms when it comes to performing audits, as all firms regardless of their size must comply with the same audit standards. Joint audit will provide these challenger firms with the opportunity to gain valuable exposure to, and experience in, sectors or clients they may not have previously been able to audit due to the size or specialised nature of the client.

In effect, joint audit allows for a transfer of skills from the Big Four audit firms to challenger firms by way of practical experience, knowledge sharing and exposure, as was seen in France after the introduction of joint audit. However, the ultimate benefit of this reform will be seen not so much in improving the competitive position of or growing challenger firms and providing the market with more choice, as in the ultimate transformation of the entire audit profession and restoration of stakeholder confidence in it.

Under joint audit there are two sets of eyes on the process and both firms have to agree and sign off the accounts to attest that they have both applied their mind and professional judgment to the reasonableness of the accounts, which they are satisfied with. When you have two audit teams from competing audit firms challenging each other — and especially challenging the client — in making professional judgments, that’s when you get a truly independent view and improve audit quality.

Dynamic process

In recent years the audit opinion has become a much more dynamic process — even before the idea of joint audit took hold. Previously, it was the norm to issue a standard audit opinion, with the only deviation being whether it was modified or not, and why. Today, the auditing standards require auditors to be a lot more transparent about the high-risk audit areas they have identified, the work they did and the professional judgment they applied.

This translates into the current audit opinion for listed or public interest entities listing the key audit matters, areas of judgment and how each of these matters has been addressed and the auditors’ conclusion based on this. It is seldom clear cut, which further strengthens the argument for the joint audit and the benefits it holds.

A further step towards improving public confidence is up for discussion internationally. This phase of the reform process involves the ending of potential conflicts of interest by separating out audit practices from their advisory arms. This would be another huge step towards re-establishing trust in the profession. This discussion has been taking place since the Enron collapse of 2000/2001, and while it still has not been formalised some firms are voluntarily implementing the separation already.

Challenger firms have long taken the view that once you have signed up an audit client, especially a listed or public interest entity, you could never provide significant advisory services to it. This is to safeguard independence. Some of the Big Four firms are now taking heed and have announced that they will no longer be providing these services to audit clients.

Change is imminent and irreversible, and this requires a change of mindset by both the audit profession and clients, many of which have often not looked beyond the Big Four.

• Ferreira is joint head of audit at Mazars SA and co-leader of the firm’s global audit & assurance service line.