Auditor rotation tops PIC’s list of governance issues
The Public Investment Corporation (PIC), the largest investor on the JSE, has strongly endorsed the push for mandatory rotation of audit firms by voting against the reappointment of audit firms at JSE-listed companies where there has been a 10-year plus relationship.
The PIC’s voting results for annual general meetings (AGMs) held during the December quarter show it voted against the reappointment of auditors at 14 of the 40 AGMs it attended.
This means mandatory rotation of auditors is now at the top of the PIC’s hit list of corporate governance issues, along with independence of directors and flawed remuneration policies.
Resolutions to reappoint auditors at Distell, Impala Platinum, Group Five, Imperial Holdings, Northam Platinum, Clover, MMI Holdings, Harmony, Kap International, Woolworths, African Rainbow, Aspen Pharmaceutical, Blue Label and Spur all received a thumbs down from the PIC.
In no instance did the PIC’s vote result in an audit firm not being reappointed.
Chris Logan of Opportune Investments said on Friday that while he had sympathy for the view of Remgro CEO Johann Rupert that auditors needed time to become familiar with a company’s operation, he also felt increasing concern about the need for independence.
“The issues around the Guptas and KPMG do raise concerns about independence,” he said.
In early June 2017, the Independent Regulatory Board for Auditors (Irba) issued a rule prescribing that after 10 years, listed companies had to implement mandatory audit firm rotation with effect from April 1 2023.
Ahead of that implementation date the resolution relating to the approval of an auditor is an ordinary one, which means a 50% plus one share vote against could block reappointment.
However, substantial blocs of other shareholders would have to back the PIC in such a vote as in most cases its stake is from 5% to 10%. The exception is Distell, in which the PIC lifted its stake to almost 28% two months after the October 2016 AGM.
Reflecting its dominant position in the South African market, PwC was the audit firm that received the most “no” votes from the PIC. Research recently released by Irba revealed that PwC was the largest audit firm by far in terms of clients. It audits 48% of companies on the JSE. Deloitte comes second with 22%, EY audits 14% and KPMG audits 12%.
These same four firms dominate the global industry after years of consolidation both locally and internationally.
The research revealed that audit tenure frequently lasted several decades.
Although there is no reference to audit firm rotation in its proxy policy, the PIC began to take a position on the matter in the September 2016 quarter, which coincided with Irba raising it as a governance issue.
The approach may be too new for consistency from the country’s largest fund manager.
On Friday, the PIC did not provide an explanation as to why it did not vote against the reappointment of PPC’s auditor Deloitte despite its 15-year tenure. Lewis’ auditor PwC also escaped despite its 26-year relationship with the company.
Legae Securities, which always recommends that shareholders vote against reappointing auditors after nine years, said mandatory rotation brought SA in line with global best practice.
The AGM voting results show that the PIC continued to take a firm stand against directors it deemed to lack independence and remuneration policies that were inconsistent with best practice or that did not contain sufficient detail.