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Picture: 123RF/macgyverhh
Picture: 123RF/macgyverhh

Corporate audit reform may soon be under discussion in SA, with implications for mergers and acquisitions (M&A) given the central role audited financial accounts play in them.

The process of auditing has been under review for some time in the UK, and SA has a similar audit regime and typically follows the UK lead. Firm proposals for audit reform are out for discussion in the UK and therefore have major implications for audit reform in SA should they be implemented in their current form.

Conducting proper due diligence is a central aspect of M&A deals, in which the quality of the audit potentially improves the standing of both buyer and seller. Any increase in the reliability of financial information gives a potential buyer confidence in what they are acquiring, and the buyer is more aware of a seller’s financial standing. A solid set of numbers regularly audited instils confidence in the team in place, and buyers are likely to place a higher premium on the business due to the assurances they are granted.

In the absence of a reliable audit uncertainties or unknowns can drive up the cost of capital because of the risk that the buyer has incomplete financial information. Audited financial statements assist a buyer in pricing a transaction more efficiently in relation to the seller’s economic value. They may equally reveal that the company is not as valuable as originally thought, ultimately reducing the buyer’s offer.

For the seller, regular annual audits enable them to show potential buyers they can be trusted as a business entity and are financially well controlled. Quite simply, audits provide stakeholders with comfort and confidence in their business transfer dealings. It means an M&A deal is a more timely, efficient and cost-effective one. In this scenario any changes to the audit system have consequences for M&A.

Potential changes 

Among the many sweeping changes foreseen in the UK is a reform to curb the “unhealthy” dominance of the Big Four audit firms: PwC, Deloitte, EY and KPMG. The UK’s FTSE350 companies and other large firms will be required to conduct part of their audit with a “challenger firm” in a joint audit.

A new regulator called the Audit, Reporting & Governance Authority (Arga) will be charged, among other new powers, with enforcing a market cap of the Big Four client base if the oligopolistic state of the UK market does not improve in the meantime. It is likely that the same caps may in time be implemented in SA.

M&A is not the direct target of this audit reform — rather it aims to reduce the risk of sudden big company collapses — but it may indirectly enhance SA as a destination for much-needed inward investment through the M&A market. Effective corporate reporting and audit ensure that investors and the public can assess the health of large companies. This is crucial for the support of confidence in businesses, stimulating investment and expansion, which in turn helps create jobs.

A joint audit is quite different to a shared audit, of which we already have limited experience in SA. According to the International Federation of Accountants (Ifac), in 2021 joint audits were done in 55 jurisdictions — voluntarily in 22 countries and mandated in 33 countries. Of these only two countries, Canada in 1991 and Denmark in 2005, have abandoned joint audits.

Joint audits are identified as signalling to the market a higher level of audit quality, and even where later abandoned as mandatory many public interest entities continue to voluntarily implement joint audits.

A joint audit of an entity is an audit by two or more auditors to produce a single audit report, with four characteristics: audit planning is performed jointly and fieldwork is allocated between auditors to avoid duplication; the work performed by each auditor is subject to a cross-review by the other auditor; the auditors jointly review the critical issues affecting the entity; the auditors jointly report to the entity’s management, its audit committee and its shareholders.


Recent analysis of joint audit experiences demonstrates that the “four eyes principle” significantly strengthens auditor independence and consensus. It mitigates bias by increasing professional scepticism and facilitating rotation. Each of these plays a significant role in enhancing high audit quality outcomes by decreasing the risk of overfamiliarity.

A joint audit serves to increase auditors’ independence from firms and management as each firm receives a share of the audit fee, which is consequently no longer sufficiently material to encourage “economic bonding”. The probability that both auditors simultaneously acquiesce to client pressure is less than the probability of either doing so individually.

In mergers audits are not only important from a valuation and/or spending perspective, but for saving time as well. This is because the audit provides a level of legitimacy in the business and expedites the transaction. Starting an M&A from scratch will almost always be more time-consuming than reviewing the financials of a business that has gone through annual audits.

In our practice one of the most common reasons for transaction failure is because the timing drags out to the point where the exercise is no longer attractive or has been superseded by external events. An improved audit can only assist in M&A.

• Bahlmann is CEO of corporate & advisory at Deal Leaders International.

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