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MAFR may be too late to prevent another audit firm fall-out

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South African auditing firms’ proud record of no audit failure in the past 20 years attributed to a failure of independence might come crashing down following the KPMG fall-out after the Gupta-related entity audits and the South African Revenue Service (SARS) “rogue unit” report.

According to Melanie De Nysschen, Corporate Finance Principal at Bravura, an independent investment banking and advisory firm specialising in corporate finance and structured solutions, this must be the biggest scandal so far in the South African audit profession.

The KPMG fall-out also coincides with the support by Parliament’s finance committee for the Independent Regulatory Board for Auditors’ (Irba) decision to introduce mandatory audit firm rotation (MAFR) for financial years commencing on or after 1 April 2023.

In adoption its report on Irba’s decision last week, the finance committee supported the widely opposed decision on the basis that the case for it is stronger than the case against it, even though the committee stressed that it is not convinced that the introduction of MAFR will advance transformation of the accounting profession as claimed. Finance Minister Malusi Gigaba has endorsed the Irba decision, which is strongly opposed by the chief financial officers of the top 100 companies listed on the JSE. It is also opposed by the Association for Savings and Investment SA, the Institute of Directors, the King Committee and the Audit Committee Forum.

With the developments around KPMG, auditor of Gupta-related entities since 2002 – a period of fifteen years – the introduction of MAFR can be too late to save South African audit firms from becoming embroiled in corruption and fraud.

Says De Nysschen: “The latest turn in events has shown that auditor independence is an absolute necessity rather than an idealistic concept in the prevention of corruption and fraud. All eyes will be on corporate SA and how it responds next.”

According to De Nysschen audit committees of public companies have a statutory duty to assess the independence and quality of their choice of auditor and make a recommendation accordingly to their shareholders.

She said, “The IRBA issued a regulation in December 2015 requiring audit firms to disclose the length of tenure of an audit in the independent auditor’s report to shareholders. This was to ensure that shareholders were aware of the tenure of the relationship between the auditor and their client, which should have also been considered by the audit committee when the auditors were considered for reappointment. In June 2017, the Independent Regulatory Board for Auditors (IRBA) issued a rule prescribing that all South Africa Public Interest Entities (including all listed companies) must rotate their audit firms after a period of maximum audit tenure. This tenure is set at ten consecutive financial years, after which an audit firm will only be eligible for reappointment as the auditor after the expiry of at least five financial years.”

“The mandatory rotation rule experienced very strong resistance from a number of parties.  One of these were the audit profession itself. EY Africa CEO Ajen Sita and PricewaterhouseCoopers (PwC) CEO Dion Shango told members of Parliament’s finance committee as recently as March 2017 that “SA did not have a known crisis of the independence of its auditing profession, so should not rush into changing the system”.

The committee said it was opposed to the monopolisation and market concentration in the auditing sector, where the four big firms — PwC, Deloitte, KPMG and EY — audited more than 90% of JSE-listed companies.

It fully supported the transformation of the sector including through “creating more space for smaller and medium-sized companies and ensuring the growth of companies that are owned by blacks, particularly African people and women”.

Bernard Agulhas, CEO of the IRBA, says a visible trend towards voting against the reappointment of auditors is developing, with 27% of the ordinary resolutions tracked at AGMs increasing the opposing votes by up to 40%.

“What is clear is that the shareholders are beginning to make their voice heard at AGMs regarding the necessity for firm rotation to end excessively long relationships. Where audit committees may feel a 20-year, 50-year or longer relationship might not impair auditor independence, shareholders are saying otherwise.”

Following the announcements made by KPMG on Friday, Irba has announced that it will continue with its own independent investigation in order to bring the KPMG matter to the necessary conclusion.

https://www.businesslive.co.za/bd/companies/financial-services/2017-09-15-audit-firm-rotation-gets-the-nod/

https://www.iol.co.za/business-report/bravura-says-mandatory-rotation-of-auditors-is-too-late-to-prevent-kpmg-scandal-11229941