Mandatory rotation opposed
Industry players reject proposed audit firm changes
The Association of International Certified Professional Accountants (the association) has voiced its strong opposition to a plan by SA’S Independent Regulatory Board for Auditors (IRBA) to implement mandatory audit firm rotation (MAFR).
In a written response to the IRBA’S consultation paper, the association, which has offices in locations including Johannesburg, Colombo, Kuala Lumpur, London, New York and Shanghai, wrote that MAFR “may have a negative impact on audit quality, increase market concentration to a more limited number of auditing firms, and will hinder — rather than promote — transformation of the profession”.
The letter, signed by association CEO Barry C Melancon, CPA, CGMA, includes analysis of the most significant factors supporting the profession’s longstanding position. It notes that mandatory audit firm rotation:
● Negatively affects audit quality;
● Causes loss of institutional knowledge and experience;
● Limits auditor specialisation;
● Creates resource strains; ● Could increase audit market concentration;
● May result in unintended costs;
● Limits the audit committee’s ability to determine the best audit firm for the company; and
● Limits ability to attract and retain talent.
“The association believes that each of these factors demonstrates that MAFR should be rejected,” the letter stated.
“It is clear from at least some of the regulatory regimes that have adopted it that MAFR has not had the intended benefits and its continuation is either being questioned or discontinued. MAFR takes away the key responsibility of audit committees which, along with the board of directors, are in the best position to watch management actions and ensure that companies are obtaining high-quality audits to protect the investing public.”
Concluding that: MAFR is not in the public interest, risks harm to audit quality, would impose significant costs on businesses and shareholders without commensurate benefit, would be economically disruptive and create other negative consequences, the association asks that the IRBA reject a move to require it.
In its MAFR submission to parliament the SA Institute of Chartered Accountants (Saica) said the auditing profession and the users of audit services should continuously challenge the status quo in the interest of investor protection, protection of the public interest and ensuring the best possible quality and value of the external audit.
“The further enhancement of existing codes of conduct; quality control standards and audit and assurance engagement standards; and requirements of laws and regulations should also be on the agenda; alongside considerations related to the strengthening of corporate governance oversight mechanisms (audit committees) — that is evaluating the total ‘mix’ of measures that are available to strengthen auditor independence and enhance audit quality.
“There is always room for improvement, with a measured approach that includes the careful consideration of potential benefits and potential risks and unintended consequences.”
However, Saica said it is not clear why MAFR should urgently be implemented as opposed to waiting to understand the impact that recent changes (such as the new auditor report, the inclusion of the period of tenure in auditor reports and enhanced governance practices regarding the role and functions of the audit committee) have had.
Saica contends that it will also be prudent to consider international experiences of their regulations with effective dates in 2016 and 2017.
“Based on our process of undertaking various initiatives to raise awareness and facilitate discussions and engagements among our diverse member constituents and stakeholders, we are left with the distinct impression that there are still a lot of unanswered questions, uncertainty around the persuasiveness of evidence in support of decisions, and a lack of understanding of the fuller picture in terms of impacts.
“The discussion on transitional arrangements for the implementation of MAFR seems to be premature and not in the best interests of the public and affected stakeholders. Therefore, Saica cannot currently express its unreserved support for the adoption of MAFR in SA,” said the submission.
Saica believes that such a significant decision should be based on robust, comprehensive research. “Saica endeavours to facilitate the broad consultation with stakeholders and to assist the IRBA in conducting the required research on this topic,” it said.