The Standing Committee on Finance met to facilitate dialogue and to make recommendations on the proposed Mandatory Audit Firm Rotation (MAFR) which had been proposed by the Independent Regulatory Board for Auditors (IRBA), and various stakeholders made submissions on the proposal.
Ernst & Young expressed concern that MAFR was being rushed, and felt that there was a need for further research before it was implemented.
PricesaterhouseCoopers (PwC) submitted that it was against MAFR, as it was not convinced that there was credible and empirical evidence that supported a decision to implement it, or that it was reasonable to conclude that it would strengthen auditor independence. It also noted that there was little evidence to show whether or not there was a failure by the current measures to protect auditor independence. PwC emphasized that it was not anti-transformation. However, there was need to bring in other stakeholders, such as those in basic and higher education, commerce and industry, to work on multi-pronged solutions that addressed fundamental issues right through the life cycle of producing accountants. They submitted that transformation would not be realised through a one-dimensional solution such as MAFR.
The East Rand Member District of Chartered Accountants said they opposed the implementation of MAFR, citing evidence from the European Union, the United Kingdom, India and China, where researchers concluded that there had not yet been any evidence to support the contention that MAFR leads to better audit quality and auditor independence.
The Association for the Advancement of Black Accountants in Southern Africa (ABASA) said that they advocated for the transformation of the audit profession across the board, to better reflect the demographics of the country. They were of the view that MAFR alone would not lead to the transformation of the industry. Efforts in transformation should include the introduction of new players in the market, allowing able smaller and medium-sized players to service large clients, transformation of the demographics of the “Big Four” firms, medium-sized and small firms to have partnership bodies, and ownership structures that were on par with the demographics of the country.
Most submissions from non-affiliated persons expressed support for MAFR. Most pointed out that it was a necessary intervention. Mr Simon Mantell submitted that MAFR represented sound audit as well as business thinking, and its implementation was of vital and urgent relevance to the audit profession in South Africa. However, others felt that it was not enough to bring about holistic transformation and that further research was needed to ascertain its feasibility in South Africa.
The IRBA said it had noted the various arguments from interested stakeholders and would provide a written response. The Board was there to protect everyone with investments in mandated investments such as retirement funds, and this took precedence in the IRBA list of mandates.
South African Reserve Bank (SARB) argued that further research was required to assess possible unintended consequences of adopting MAFR. It pointed out that some countries had rejected MAFR, while others had retracted from initial adoption.
Members commented that there was need for transformation in business in general, and commended the IRBA for tabling the issue for discussion. Most Members agreed that MAFR was just one instrument, and that there was need for holistic and multi-pronged strategies to transform the business sector.
The Chairperson, in his opening remarks, noted that all the Committee could do was to facilitate dialogue and build consensus around the Mandatory Audit Firm Rotation (MAFR) proposal, then make recommendations. He said the Independent Regulatory Board for Auditors (IRBA) had the final say in the implementation of MAFR.
Mr Ajen Sita, Chief Executive Officer (CEO): Ernst & Young, said Ernst & Young was not aware of any audit failures in the past 20 years that could be attributed to a failure of independence, and that could warrant the implementation of MAFR. The World Economic Forum had assessed South Africa’s audit standards and capital markets and had rated them number one in the world for seven consecutive years.
He appealed to the Committee not to rush into an experimental solution such as MAFR, and requested that more work be done to understand its possible impact and consequences in South Africa. He acknowledged that creating an inclusive society was important, citing the limited number of black auditors as an issue that had to be addressed. He said there was need for deep and lasting solutions to transformation.
Mr Dion Shango, CEO: PricewaterhouseCoopers Inc (PwC) submitted that PwC was against MAFR. PwC was not convinced that there was credible and empirical evidence that supported a decision to implement MAFR or that it was reasonable to conclude that it would strengthen auditor independence. There was also little evidence to show whether or not there had been a failure by the current measures to protect auditors’ independence.
He submitted that MAFR would reduce the quality of the audits in South Africa. He cited case studies of countries where MAFR was rejected and also countries where the policy was adopted and repealed “due to costly and unintended consequences”. He said MAFR reduced competition in the audit market and restricted free market forces, because the current auditor could not compete, even if there was no better alternative. He also said that MAFR reduced the audit committee’s ability to fully discharge its oversight responsibilities, and in turn disenfranchised the shareholders’ ability to obtain the highest quality in the most efficient way.
He submitted that the impact on the transformation agenda could also be acute. In a market where the retention of skilled black professionals was a challenge, such measures may only serve to make the profession that much less attractive. He said with the increased pressure on audit fees and staff compensation, audit firms were already challenged to retain top talent, with better prospects being offered in other markets and other industries.
Mr Shango emphasised that PwC was not anti-transformation. He would be pleased to see a profession that reflected the demographics of the country. However, there was need to bring into the fray other stakeholders, such as those in basic and higher education, commerce and industry, towards multi-pronged solutions that would address fundamental issues right through the life cycle of producing accountants. Transformation was not to be realised through a one-dimensional solution such as MAFR.
He pleaded that the Committee allow more time so that a holistic and sustainable solution could be found that would enable the country to achieve radical transformation.
Ms Gugu Ncube, President: Association for the Advancement of Black Accountants in Southern Africa (ABASA), said that ABASA advocated for the transformation of the audit profession across the board. MAFR alone could not lead to the transformation of the industry. Efforts in transformation should include the introduction of new players in the market, allowing able smaller and medium-sized players to service large clients and transformation of the demographics of the “Big Four” firms, and medium-sized and small firms to have partnership bodies and ownership structures that were on a par with the demographics of the country.
She said that ABASA believed that the IRBA could do much more to assist in ensuring that there were more black partners who were accredited to service Johannesburg Stock Exchange listed entities and the likes. She noted that potential threats in the South African context were the market concentration of firms serving listed companies. Ms Ncube also cited a number of investigations which showed that MAFR had not been proven to improve auditor independence to enhance quality, and would therefore not be the ideal vehicle to achieve independence.
Mr Henk Heymans, Head of Audit: RSM South Africa, submitted that there was not enough justification for the change in audit regulations. There was a need for further research before the implementation of MAFR. Worldwide research showed that MAFR was “at best experimental, at worst disastrous for the economy”.
He said that MAFR would have little effect on market concentration. He cited research that seemed to indicate that MAFR would serve only to entrench the Big Four firms’ domination of the market. Businesses that were already audited by the Big Four would likely rotate to another of the Big Four auditors, while big firms would also be forced to tender for clients further down the market, closing it out for potential entrants, including Broad-based Black Economic Empowerment (BBBEE) firms and other small and medium-sized firms.
Mr Heymans commented that MAFR did not belong in the Auditing Profession Act (APA). Insofar as it was considered necessary at all, audit firms should be regulated by the Companies Act and not by the APA or regulations, as proposed by the IRBA.
Mr Simon Mantell, Founder: Mantelli’s Biscuits, submitted that MAFR was a necessary intervention. He said that MAFR represented sound audit as well as business thinking, and its implementation was of vital and urgent relevance to the audit profession in South Africa. MAFR would lead to greater independence and quality, and other consequences would be better pricing and improved competitiveness, with the added benefit of transformation. He said the benefits which would flow from its implementation were of vital relevance to the audit profession in South Africa.
On audit independence, he cited the failures of Wall Street banks and the African Bank, which were at odds with the clean audit reports that were issued before the collapse of these banks. He said the clean reports appeared to confirm serious audit shortcomings flowing from what could be best described as a lack of audit independence MAFR would enhance independence, as audit firms would know that an appointment was for a limited period of time and that the “fee income” was not guaranteed. For this reason, audit firms would more easily “stand their ground” and not buckle in the face of client pressure -- they could be independent.
On audit quality, he submitted that it was already unsatisfactory. It was public knowledge that gross mismanagement, material procurement irregularities and failure of internal controls, combined with serious breaches of statutes, were commonplace at many of the state-owned enterprises (SOEs), yet the report of the auditor included in the financial statements of these SOEs invariably offered clean audit opinions. He said that the quality of audit planning and audit work conducted would improve as an incumbent firm would be well aware that the incoming firm would effectively perform a peer review when it took over the appointment and reviewed the former firm’s audit working papers.
Mr Mantell said that MAFR would lead to transformation, as audit committees would be compelled to request bids from competing audit firms. This process would provide the opportunity for second tier firms, many of whom were black-owned, to pitch for business and open doors which were currently locked. Audit committees would need to apply their minds as they assessed different audit proposals, and the standards of performance for these audit committees would improve.
Mr S Buthelezi (ANC) said that government was concerned that the business sector was not yet transformed and was over concentrated, and that was the context of MAFR. The Big Four firms were an oligopoly, and oligopolies constituted a market failure. There was need to regulate and address monopolistic tendencies. He felt that the MAFR would give small audit firms the opportunity to be role-players within the audit market. Although Big Four firms shared work with smaller firms, they had a tendency of wanting to share work on public sector companies, not private sector companies. He asked if PwC was prepared to share work with small auditing firms to audit JSE-listed companies.
Mr B Topham (DA) asked about the empowerment levels of the Big Four firms, so that the premise of their argument was understood. He commented that there was more to transformation than shareholding. He said the Big Four firms had played an important role in transformation, as most of the small firms’ auditors were trained by these companies. He did not buy into the idea of MAFR improving audit quality. Mandatory audit tendering was a more viable and less intrusive option.
Ms T Tobias (ANC) commented that there was a misconception that the government was antagonistic towards big business. This was not the case, and big business should understand that. She said that South Africa had a mixed economy and government had a role to play in redressing past injustices. MAFR spoke to transformation to address racial imbalances, and government was there to facilitate the process.
She was impressed by Mr Mantell’s submission outlining his support for MAFR. Transformation was not to be misconstrued to mean the removal of white faces and replacing them with black faces in companies. Therefore statistics relating to the number of blacks in Big Four companies was immaterial. She noted that there had been a number of adverse findings made in South Africa, citing the South African Airways case. There was a problem that had to be addressed within the auditing field.
She further commented that the lack of competition in South African markets had to be addressed, citing the recent allegations that certain banks had colluded in devaluing the rand.
The Chairperson commented that the Committee was not expecting comprehensive responses from those who had made submissions. Comprehensive responses could be submitted in writing for consideration after the Parliamentary break.
Mr Sita responded that Ernst & Young was not disputing the fact that there was need for holistic transformation in the business sector. However, it felt that MFRA was not the right vehicle towards that goal because there was enough track record to show that it did not work in other markets. In response to the question on clarity on their empowerment level, he said Ernst & Young was 96%-owned by South African citizens and 4% of its shareholding was by foreign African nationals.
Mr Shango replied that 52% of the PwC staff was black, and that it was a Level 1 BBBEE contributor. PwC did partner with small firms -- for example, it did audit work for Exxaro, in partnership with Ngubane and Partners. He said PwC would support mandatory tendering should it be an option. It was not PwC’s view that government was antagonistic to business. Government and the public sector were one of PwC’s largest clients.
Ms Ncube said that ABASA agreed with Ms Tobias that transformation was not just a question of black people occupying spaces in big businesses.
Mr Mantell said that decisive action was required, as delays would lead to the conflation of issues. MAFR was a piece of legislation that South Africa had to embrace.
The East Rand Member District of Chartered Accountants submitted that they opposed the implementation of MAFR as proposed by the IRBA. It cited findings in Italy which concluded that MAFR adversely affected audited earnings. It also cited evidence from the European Union, the United Kingdom, India and China, where researchers concluded that there had not yet been any evidence to support the contention that MAFR leads to better audit quality and auditor independence. It submitted 17 alternatives to MAFR which included strengthening small and medium-sized firms’ practices, and enhancing the duties of audit committees under the Companies Act, among others.
Mr Michael Harber, lecturer in the School of Accounting at the University of Cape Town (UCT), said that academic research did not support MAFR, and recommended that the Committee should not implement MAFR before compelling evidence from rigorous research proved that it was effective. He outlined studies carried out in Italy, Australia and Spain for consideration by the Committee. The IRBA had not provided convincing evidence that MFRA would enhance audit independence. He cited case studies worldwide where attempts at MAFR had failed. He also made reference to international research which shows that audit tenure did not impair audit independence and quality. He said academic research should inform legislation and regulation.
Mr Ignatius Sehoole, Chartered Accountant, submitted that MAFR was not the solution. He said MAFR would affect sections of the Companies Act, but would not bring any of the benefits with respect to transformation in general and market access for black firms. He identified experiences among SA’s trading partners and the European Union. He was not in support of MAFR because it was not going to address the question of transformation -- it was not the right vehicle to achieve that end. He said efforts were to be directed towards capacitating the training of black students, from primary school right up to professional level.
Mr Neil Maree, Acting Deputy Head of Banking Supervision: South African Reserve Bank (SARB), submitted that further research was required to assess the possible unintended consequences of adopting MAFR. He noted that some countries had adopted it, while others had retracted from initial adoption. The benefits versus costs, and the unintended consequences of the framework, had to be taken into account. The SARB acknowledged that there may be concerns related to auditor independence. However, in order to address these concerns, it felt that IRBA should propose different approaches, depending on the areas of concern identified. A blanket approach for all listed entities was not the most ideal way to address this challenge. SARB’s request was that MAFR requirements not be imposed on complex sectors such as banks, as joint audits, together with stringent prudential requirements, were already imposed by the SARB as the regulator on audit committees.
Mr Victor Sekese, Interim Chairman: Black Chartered Accountants Practitioners (BCAP) said that they supported MAFR. The audit playfield was not level, and MAFR was going to assist in the development of black firms. Market access was one key challenge exacerbated by the insistence by banks that its clients should be audited by the Big Four. He said that examples from other European countries should not inform decisions in South Africa, as the country had unique challenges.
Mr Bhekabantu Ngubane, Director: Ngubane & Co, submitted that MAFR was consistent with the government’s objective of promoting competition and spearheading the transformation agenda. Transformation would see the certification of more accountants and the building of indigenous firms. MAFR would create more opportunities after 20 years of the democratic dispensation. He added that countries where MAFR failed should not be compared to South Africa, as they did not have the same government imperatives.
Mr Buthelezi commented that there was no doubt that there was a yearning for transformation. IRBA was correct to put the issue on the table for discussion. However, the IRBA was too far apart from the industry on the matter, and there was need for more dialogue. He noted that black auditors felt left out of the industry, but MAFR was not a panacea to transformation. He asked BCAP what guarantee it had that upon audit firm rotation, black firms would be appointed as auditors. The main issue was how to deal with transformation as a whole, and MAFR was too targeted to be relied upon as a vehicle for significant change.
Mr Topham emphasized that it was important to look at the big picture. He commented that the empowerment of the accounting practice in general was important. BCAP’s view that MAFR would guarantee access was not entirely correct, as audit work could merely rotate among the Big Four. He felt that shared audits seemed to be a better option.
Ms Tobias commented on SARB submission, saying it was interesting that it had requested that the IRBA regulations not be imposed on banks; and that was a problem. She also asked if Mr Harber’s research took into account the peculiarities of the South African situation. Examples from Europe may not apply in South Africa due to the unique challenges the country was grappling with. She noted that the economic cake had to be shared, and transformation was about getting other players into the industry.
The East Rand Member District of Chartered Accountants said they were in support of positive endeavours such as the Thuthuka project, which gave firms a greater pool of graduates to choose from to work for them, and it eased the firms’ ability to bring transformation into workplaces. They did not believe that MAFR on its own would do anything for transformation. They also believed that overseas research did have relevance, as there were uniform standards and international practices to which South Africa subscribed.
Mr Harber maintained that more research had to be done before the implementation of MAFR. It would be useful if IRBA looked into the research findings in other places.
Mr Maree responded that large banks were required to have joint audits in order to enhance audit independence and quality. However, the SARB cautioned against MAFR due to the unknown consequences, as it feared that MAFR could take some of the audit committee responsibilities on which the SARB, as a regulator, relied and depended heavily, to ensure adequate governance within the banking sector.
Mr Ngubane said BCAP was not in favour of mandatory audit tendering, as it was aware that incumbents always had an advantage. He agreed that there was no guarantee that MAFR would succeed. Stakeholders had to be creative and spruce up MAFR with other instruments to ensure that rotation would not be among the big firms. There was need to ensure that space was opened up for indigenous home-grown enterprises towards holistic transformation.
Mr Bernard Agulhas, CEO: Independent Regulatory Board for Auditors (IRBA) said the Board noted the various arguments from interested stakeholders and were going to provide a written response. The role of the IRBA was to protect investors. IRBA was there to protect everyone, more so those with investments in mandated investments such as retirement funds, and this took precedence in the IRBA list of mandates. He pointed out that as had been seen, banks could fail, which could put ordinary citizens like pensioners at risk. He noted that the costs of corporate collapses in South Africa were huge, and pensioners and the investing public were the most affected.
The reality was that there was low participation in JSE markets by the general public due to historical exclusion and low financial literacy. Audit firms determined their fees in terms of revenue rather than risks, and this was a problem. The IRBA was also concerned about the declining quality of audit reports and inspections. He noted that in 2016 alone, auditors signed 56 admissions of guilt related to their audit practises. Auditors missed risks and presented clean reports that were followed by the collapse of businesses.
Mr Agulhas also commented that MAFR was not an academic exercise, but a necessity and a national imperative. He said academic research could not inform regulation, but findings did.
The Chairperson noted that stakeholders had different objectives, which explained the contestation on definitions of terms such as audit independence. The issue of transformation was not negotiable, and de-racialisation was a crucial and indispensable part of it, not the end. Research on both sides of the arguments was compelling. He also commented that the Big Four were not going to transform, and there was need for legislation due to a natural tendency towards monopoly.
Mr Topham commented that evidence did not support the idea that audit firm rotation protected investors from losses.
In his closing remarks, the Chairperson pointed out that Members were not experts and the Committee was there to facilitate the dialogue on MAFR. He said that transformation had to be dealt with more stridently and commended the IRBA for bringing it on to the agenda through the MAFR.
The meeting was adjourned.
- Michael Harber submission
- South African Reserve Bank submission
- ABASA submission on MAFR
- Ernst & Young submission
- Association for Savings and Investment South Africa submissions
- PwC: Our commitment to transformation
- The Power of Being Understood: RSM
- Black Charted Accountants Practitioners submission
- Submission by Ignatius Sehoole
- Fox article
- Business Day Article
- Ignatius Sehoole submission
- Mr S Mantell submission
- East Rand Member of Charted Accontants submission
- South African Reserve Bank presentation
- RSM South Africa submission