Audit rotation wheels on bumpy path
CRITICS SAY THEORY HAS NOT YET PRODUCED ANY CONCRETE RESULTS Mandatory rotation of auditing firms is being punted as a means of increasing auditing independence, but critics say it tries to fix ‘what ain’t broke’.
The Independent Regulatory Board for Auditors (IRBA) insists it is not trying to fix something that isn’t broken by introducing mandatory audit firm rotation (MAFR).
But it’s facing stern opposition to its efforts to strengthen auditor independence and quality. Critics say it’s a “failed concept” because South Africa’s auditing standards are considered the best in the world. The World Economic Forum’s Global Competitiveness Report 2016/17 ranks SA’s auditing and reporting standards first out of 138 countries.
But Bernard Agulhas, CEO of the IRBA, says the ranking is not based on the quality of audits or auditors. The IRBA has received more than 65 public submissions on MAFR, which is set to take effect on April 1, 2023, with rotation pencilled in for every 10 years.
But several parties have questioned whether MAFR is necessary. Naspers Group CFO Basil Sgourdos says rotation is a failed concept that “proved a disaster in virtually every market it has been introduced”.
In Europe, there is “no evidence to date that it has done anything at all to increase audit independence”.
The South African Institute of Chartered Accountants says it remains unexplained why MAFR should be implemented urgently before the impact in other jurisdictions become clear.
The Association of International Certified Professional Accountants argues MAFR may undermine audit quality, increase market concentration and hinder transformation.
MAFR has not had intended benefits in some jurisdictions “and its continuation is either being questioned or discontinued”.
It says MAFR removes the key responsibility of audit committees and directors to “ensure that companies are obtaining high quality audits to protect the investing public”.
But Agulhas believes MAFR will enhance competition and “a fresh set of eyes on a new client will be more sceptical and able to challenge accounting practices and management judgments”.
He says the total absence of any complaints “from audit firms or partners against a partner in the same firm where the partner delivered poor quality audits” indicates a lack of independence and a need to rotate auditing firms.
A long tenure and close relationships “can lead to complacency, unconscious bias or familiarity”, he says. Agulhas says data shows costs do not increase substantially when a new auditing firm is appointed.
“In every jurisdiction, except Italy, the period for which MAFR has been implemented is too short to say empirically whether it works,” he says.
“In our review of G20 and International Forum of Independent Audit Regulators member countries, 30 have or will implement MAFR.”