It’ll pay to prepare now for joint audit if subject to auditor rotation

AUDITOR rotation for entities that are listed on the JSE will become mandatory in South Africa from 2023 – a reform which may have an impact on auditor choice in South Africa.

A further reform in the auditing profession which is currently being debated is that of joint audit, which is believed to have a greater impact in improving audit quality.

Currently, only major banks are required to appoint joint auditors to perform the audit engagements, soon to be expanded to the major insurance companies. A recent report by Mazars, titled The Future of Audit, has served to refute a common fallacy that companies are adverse to the concept of joint audits and auditor rotation.

The report finds to the contrary: “Joint audit is clearly understood and called for. Companies see it as a way to improve audits and increase stakeholder confidence in the financial report.” The quantitative survey had a sample of 501 respondents, with 9 percent of respondents based in South Africa, nearly half based in Europe and 42 percent from public interest entities. All respondents held strategic positions (chief financial officers, chief executives, or members of audit committees), and among this highly influential group there was massive support for audit reform with 93 percent responding that the audit market should be reformed.

Some 87 percent of respondents are favourable (50 percent “strongly favourable”) to the audit market evolving towards joint audit carried out by more than one statutory auditor.

In addition, more than nine in 10 (91 percent) of the global respondents have direct experience with joint audit and a vast majority (88 percent) of those who have experienced it are in favour of the approach; more than half (54 percent) are “strongly favourable” to it and 34 percent of them are “somewhat favourable”, according to the survey.

When asked for the expected benefits of joint audit, respondents list: “increased stakeholder confidence”, “reduced risk of corruption or human error” and “enabling companies to benefit from a broad range of technical expertise”. While auditor rotation has become mandatory in some jurisdictions, joint audit has so far only been made mandatory in Mazars home country, France, for all companies listed on the CAC. Yet even in South Africa and elsewhere, many companies are already starting to voluntarily rotate their auditors. However, one of the challenges dogging the process of audit reform is the obstinate desire of the Big Four firms to maintain their dominance of the profession by controlling the reform discussion. It is evident that this is not in the public interest as clients have expressed the view – as seen in the Mazars report – that they want more choice than just the Big Four. One of the weaknesses of the audit profession is the concentration of auditors among the Big Four. Change is imminent and irreversible, and this requires a change of mindset by the Big Four, the entire audit profession and even client companies which have often not looked beyond the Big Four.

Highlighting the need for a mindset change, is that the current set of proposed reforms might not even prove sufficient, requiring perhaps a further round of reform.

In the UK, for instance, the introduction of mandatory auditor rotation has not fully addressed the issue of auditor independence, and further reforms are now under discussion.

The corporate world should not wait until 2023, but should anticipate events already, by planning and studying auditor firms outside of the Big Four.

They will find that many of these Tier 2 or “challenger firms” as we call them, are well resourced and offer a high level of personalised service directly from a hands-on partner.

In contrast, many clients of the larger audit firms may be used to dealing only with a senior manager, or even a clerk. Challenger firms often have a deeper skills-set within their area of specialisation, as many opt to specialise rather than be generalists – or at a minimum match the skills of the Big Four. To correct one of the misconceptions of challenger firms – they are not small. In our case, Mazars, we are one of the larger international global firms. Any of the others, like ourselves, may have thousands of staff in South Africa, and up to 40 000 or more globally – resources that can be called upon locally.

From discussions we have had with clients that have already transferred to ourselves, almost invariably they cite ‘level of service’ as their reason for changing. At a firm such as ours, clients do not need to wait up to a few months to have a meeting with the audit partner.

With a challenger firm, that partner is on site throughout the audit process, with a higher level of engagement from the entire audit team than clients are typically used to. That is significant in giving reassurance to the client. This is typically the immediate response we get from new clients – and this is not just our experience, but for many challenger firms.

Auditor concentration is the root cause of most of the scandals and corporate failures that have been seen not only in South Africa but globally.

Reform is therefore not about improving the competitive position of challenger firms, or even just offering clients more choice, but about reform of the entire audit profession and restoring public confidence in it.

Not only in France, but in South Africa and shortly India too, there is a requirement that banks and other financial institutions have joint audits. That is in place to protect the public, and that it is seen as appropriate to such public interest organisations suggests the concept should be more broadly applied – which it will be from 2023.

This is not just for the sake of the client, but to give the incoming auditor a year to work alongside the outgoing (or sharing) auditor to be prepared to take over. A joint audit is not about duplication of effort and work – but it is about having two sets of eyes, and both firms agreeing to and signing off the accounts.

In light of the above, and with 2023 just 18 months away, it is our opinion that for those companies subject to audit rotation it would serve them well to re-evaluate their position regarding their audit firm as soon as possible, and seriously consider a challenger firm.