TRANS­FOR­MA­TION at the heart of manda­tory au­dit firm ro­ta­tion

Au­dit­ing board’s im­per­a­tives for greater in­de­pen­dence are dis­missed as be­ing se­condary to BEE, writes Steve Kret­z­man

CityPress - - Business -

The mo­ti­va­tion be­hind the push by the In­de­pen­dent Reg­u­la­tory Board for Au­di­tors (Irba) for a manda­tory au­dit firm ro­ta­tion (MAFR) was not greater fi­nan­cial trans­parency, but trans­for­ma­tion in the au­dit­ing pro­fes­sion. This emerged dur­ing this week’s pub­lic hear­ings be­fore Par­lia­ment’s Stand­ing Com­mit­tee on Fi­nance about the board’s in­ten­tion.

Irba, a statu­tory body es­tab­lished to pro­tect the fi­nan­cial in­ter­ests of the pub­lic, an­nounced in Au­gust that it would im­ple­ment the MAFR from April 1 2023.

Among Irba’s ro­ta­tion re­quire­ments is that au­dit firms not serve a listed com­pany for more than 10 con­sec­u­tive years, and there­after only be el­i­gi­ble for reap­point­ment af­ter at least five years.

This was op­posed in sub­mis­sions put for­ward by KPMG, Deloitte, the King Com­mit­tee, the SA In­sti­tute of Char­tered Ac­coun­tants (Saica) and the CFO Forum, a pub­lic in­ter­est group in­volv­ing chief fi­nan­cial of­fi­cers from some of South Africa’s largest firms.

Al­though Irba’s CEO, Bernard Agul­has, ar­gued that the board’s aim in in­tro­duc­ing the MAFR was to strengthen au­di­tor in­de­pen­dence and en­hance au­dit qual­ity, the fi­nance com­mit­tee picked up on se­condary con­cerns re­lat­ing to the au­dit mar­ket be­ing dom­i­nated by four ma­jor firms – PwC, EY, Deloitte and KPMG – and the need for trans­for­ma­tion in the pro­fes­sion.

Par­tic­i­pants in the hear­ing noted that South Africa was ranked first out of 138 coun­tries for its au­dit­ing and re­port­ing stan­dards by the World Eco­nomic Forum’s Global Com­pet­i­tive­ness Re­port 2016/17.

They also pointed out that nu­mer­ous checks on au­dit­ing in­de­pen­dence were al­ready in place.

As the four-hour de­bate con­tin­ued, the fi­nance com­mit­tee said it was be­com­ing ap­par­ent that mar­ket con­cen­tra­tion and trans­for­ma­tion were the main driv­ers be­hind the MAFR.

“This de­bate is about trans­for­ma­tion. Ex­plain why the pri­mary aim is not re­lated to the se­condary aims,” said com­mit­tee chair Yunus Car­rim.

Car­rim said trans­for­ma­tion and di­lut­ing the au­dit mar­ket con­cen­tra­tion were “not ne­go­tiable” and ex­pressed con­cern that re­spected for­mer au­di­tor-gen­eral Terence Nombe­mbe, in his cur­rent po­si­tion as CEO of Saica, sub­mit­ted that the MAFR in iso­la­tion could not ad­dress these is­sues.

“We need clear re­search on what ex­actly we are con­cerned about,” said Nombe­mbe.

“Dif­fer­ent ob­jec­tives should not be mixed. We doubt the MAFR will con­trib­ute mean­ing­fully.”

He said there were “big­ger things we need to fa­cil­i­tate”, such as small, medium and mi­cro en­ter­prises not show­ing their po­ten­tial to catal­yse eco­nomic growth, and grad­u­ates fail­ing to find em­ploy­ment. He said with­out a full un­der­stand­ing of the ben­e­fits and chal­lenges of the MAFR, it could have the un­in­tended con­se­quences of in­creas­ing mar­ket con­cen­tra­tion and slow­ing trans­for­ma­tion.

Lindie En­gel­brecht, a rep­re­sen­ta­tive of the King Com­mit­tee on Cor­po­rate Gov­er­nance, said au­di­tor in­de­pen­dence was al­ready in place through ex­ist­ing ro­bust mea­sures and the MAFR en­croached on share­hold­ers’ rights to im­pose their choice of au­di­tor.

An­gloGold Ashanti chief fi­nan­cial of­fi­cer (CFO) Chris­tine Ra­mon, speak­ing on be­half of the CFO Forum, said trans­for­ma­tion was not Irba’s man­date and there was no is­sue with au­di­tor in­de­pen­dence in South Africa.

Ra­mon said she “takes ex­cep­tion” to Irba’s sug­ges­tion that the re­la­tion­ship be­tween CFOs and au­di­tors was “cosy” and con­ducive to col­lu­sion, and de­fended trans­for­ma­tion ef­forts by the big four au­dit­ing firms, say­ing they had achieved Level 1 and 2 BEE sta­tus.

But the plea that PwC, EY, Deloitte and KPMG were trans­formed did not hold sway with the com­mit­tee.

Re­spond­ing to Deloitte’s as­ser­tion that it was an in­dus­try leader in trans­for­ma­tion as it was 36% black owned, Eco­nomic Free­dom Fight­ers MP Floyd Shivambu said this showed there was “a real cri­sis”.

“We need to el­e­vate this is­sue to a leg­isla­tive realm. It is an un­trans­formed in­dus­try,” added Shivambu.

The ANC’s Pinky Kekana called the big four – which, ac­cord­ing to Irba, hold 96% of the au­dit mar­ket for listed com­pa­nies – “an oli­garchy”.

Car­rim said a sec­ond round of pub­lic hear­ings would be held on March 17.

Irba’s cur­rent board lapses at the end of March, and the reg­u­la­tor ex­pressed his wish to fin­ish the two-year process to gazette the MAFR be­fore a new board was ap­pointed.

Speak­ing af­ter the hear­ing, Agul­has said Irba would not coun­te­nance any in­ten­tion to de­lay the pub­lic con­sul­ta­tion process, in the hope that a new board would change its mind.

“That we can­not do,” he said.

We need clear re­search on what ex­actly we are con­cerned about. Dif­fer­ent ob­jec­tives should not be mixed. We doubt the MAFR will con­trib­ute mean­ing­fully


CLASS CLOWNS Demon­stra­tors dressed as clowns take part in a protest on Wed­nes­day in front of the Euro­pean Par­lia­ment in Stras­bourg, France, against the con­tro­ver­sial Com­pre­hen­sive Eco­nomic Trade Agree­ment be­tween the EU and Canada. The EU na­tional par­lia­ments must ap­prove the agree­ment be­fore it can take full ef­fect

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