Business is about to get tough for SA multinationals
Doing business in the current global economic environment is challenging enough for South African companies, given the level of policy uncertainty, economic uncertainty and currency fluctuations.
But for companies operating in a multi-jurisdictional environment – in other words, where they trade in more than one country outside South Africa – life is about to get even more difficult.
That’s because of a new proposal by the Independent Regulatory Board for Auditors (IRBA) – which regulates South Africa’s audit profession – to introduce a concept known as Mandatory Audit Firm Rotation (MAFR).
The IRBA is pushing for MAFR because it believes will enhance the independence of auditors while at the same time enhancing transformation in the auditing profession.
But the reality is a very different one.
MAFR has been tried in a number of other countries and has proved to be what can only be described as a global failure – it has been rejected or abandoned in the majority of countries in which it has been considered.
The EU is the only major financial centre that has implemented it and there was extensive opposition from countries like the UK and Spain. The estimated “cost” of introducing MAFR in the EU is approximately 16-billion Euros and there is no clear evidence that it improves audit quality.
A number of other countries around the world have considered MAFR and decided not to implement it, including the USA, Japan, Australia, Canada and New Zealand. Eleven countries have implemented it, and then repealed it because of its unworkability. These include South Korea, Singapore, Argentina and Brazil.
At home, there is mounting opposition to the concept. Concern has been expressed by, among others, the CFO Forum, the SA Institute of Chartered Accountants, the Institute of Directors and the majority of listed companies consulted by the JSE.
So what exactly is mandatory audit firm rotation – and why does auditing profession’s regulator think we need it?
Essentially, IRBA believes that the relationships between corporates and audit firms are “too cosy”, ostensibly because some audit firms have worked for the same corporates for a significant period of time. IRBA also believes these long-term relationships are blocking black-owned audit firms, and smaller firms, from securing contracts.
Many measures have already been put in place to increase auditor independence, including mandatory audit partner rotation, limiting what non-audit services can be provided, and formal independence review by the audit firm and the audit committee.
There are strict ethical and independence requirements in place and the Companies Act, King Code and JSE rules. It’s the duty of a company’s audit committee to assess when and if auditor rotation is required, while shareholders must approve the appointment. It’s concerning that the IRBA believes shareholders, boards and their committees are unable to make these decisions. The reality is that MAFR fundamentally undermines the rights of shareholders, by impinging directly on their ability to identify and appoint auditors.
IRBA itself acknowledged just this month that South Africa has – yet again – been ranked as the world's number one for auditing and reporting standards, making it the seventh consecutive year that we hold this position.
IRBA points to failures to indicate that there is an issue but fails to mention that many of those either occurred decades ago before regulations were strengthened globally or were not South African companies.
IRBA then makes claims about breakdowns it has identified in its own quality reviews but fails to show a direct link between the breakdown and independence and where there is a clear link to point out that this is only a small percentage at best and often not related to the Big 4 audit firms. So if the system isn't broken – and is, in fact, the best in the world – why the urgent need to try and fix it?
Research reveals that the majority of audit failures happen in the first three years of an audit engagement as auditors still build their knowledge of the business, the systems and the financial and reporting risks. This is particularly true for larger multi-jurisdictional businesses. Therefore the reality is that regular audit rotation has the potential to degrade rather than improve audit quality.
What is of particular concern is the potential impact on South African companies working in global markets, where MAFR will be unworkable. Many multi-jurisdictional entities, because of the geographical spread of their assets, probably only have the Big 4 audit firms to choose from. It would be increasingly difficult, costly and time-consuming for management and audit committees to manage the rotation of auditors across various jurisdictions.
Then management need to spend significant time educating the new auditors, managing the transition and revisiting work undertaken and audited in previous years. This takes significant time away from driving strategy, managing the business and related risks, engaging with stakeholders while incurring considerable cost only to potentially increase the risk of an audit failure as the new firm takes time to get to grips with the business. The board and shareholders should decide when it is in their interest for management to do so and not IRBA.
IRBA is currently undertaking a process to gather the views of corporates, auditors and other stakeholders. It is not being completely transparent in how it does this and is trying to influence the conversation in one direction. All key stakeholders involved in initial conversations have unequivocally stated that there has been no adequate and transparent consultation. The reality is that the independence of auditors can only be enhanced through a substantive consultation and in a comprehensive manner through amendments to the Companies Act, King Code and JSE rules and IRBA refuses to acknowledge and accept this which is very concerning.
That’s certainly not in the best interests of all involved, and many financial decision-makers – and other stakeholders – are trusting that in trying to do what they believe is the right thing, they don’t go about it the wrong way.
* Basil Sgourdos is CFO of Naspers.
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