Mandatory Rotation of Auditors & Transformation of Auditing Profession

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Finance Standing Committee

21 June 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee heard submissions on Mandatory Audit Firm Rotation (MAFR).

The South African Institute of Chartered Accountants (SAICA) did not believe MAFR was an answer to the challenges of transformation and audit independence. More investment in skills development was paramount. SAICA was convening a multi-stakeholder forum- a single reference point to ensure that all players in the profession are heard. However, the only players not yet part of the forum were the regulators. SAICA had come up with a new charter, ready for gazetting, in an effort to equalise opportunities for all auditors. However, the Independent Regulatory Board for Auditors (IRBA) was rejecting the charter. Exploiting the capacity that seats in commerce and industry was paramount and none of this was going to work without the buy-in of regulators. Transformation and market access was crucial, and SAICA believed tenure could not be an issue when it came to audit independence and quality. Therefore, the reasons brought forwards as justification for MAFR were not enough. Also, the impact of MAFR on the economy had to be analysed, and ample time was needed before implementation.

Black Chartered Accountants Practitioners (BCAP) welcomed the introduction of MAFR. MAFR had the potential of levelling the audit market playing field. Whilst the main objective of MAFR was auditor independence, BCAP believed that the other objectives of transformation and market concentration were equally important and need to be urgently attended to. BCAP recommended the following: consideration of legislative and policy frameworks that would encourage development of large indigenous firms; contracting by Office of the Auditor-General to be used as lever; outlawing the practice of imposing restrictions on appointment of auditors to big four firms, as this further entrenched the market dominance of the big four firms.

The Association of Black Accountants in Southern Africa (ABASA) viewed MAFR as the first move towards challenging the status quo. The accounting profession had to be radically transformed.  It implored the lack of clarity in the means of determining how the audit rotation would be worked out. Small firms should be given an opportunity to render services to public interest entities. ABASA believed in an integrated value chain to ensure inclusivity.

Members acknowledged that proponents and opponents of MAFR seemed to be closing ranks. They pointed out that if not explicitly stipulated, rotation could easily happen between the big four. Also, the need for the small and growing audit firms to pool resources together and become one formidable force was identified- this would strengthen their ability to be competitive. The Chairperson said the Committee would seek to meet stakeholders on MAFR twice a year, beginning from January 2018. Also, the Committee would decide in due course whether to send Members or a researcher in MAFR stakeholder meetings. 

Meeting report

The Chairperson, in his opening remarks, noted that there was broad sympathy for Mandatory Audit Firm Rotation (MAFR). What the Committee was unclear about was the extent to which MAFR would contribute towards transformation of the auditing profession. It was possible that- if not handled correctly- the MAFR could undermine the audit profession. Also, there was need to reach a compromise with aggrieved parties, and final decisions would not be taken anytime soon.

South African Institute of Chartered Accountants (SAICA) submission

Mr Terence Nombembe, CEO, SAICA, emphasised the need for the profession to respond to stakeholder expectations. More investment in skills development was paramount. Currently, although the racial profile of the profession stood at 25% black and 75% white, a promising pipeline of 75% black and 25% white in final years at universities existed. Such a sustainable pipeline needed to be capacitated, and working collectively to intensify the efforts was important. SAICA was convening a multi-stakeholder forum- a single reference point to ensure that all players in the profession are heard. However, the only players not yet part of the forum were the regulators.

SAICA had come up with a new charter, ready for gazetting, in an effort to equalise opportunities for all auditors. However, the Independent Regulatory Board for Auditors (IRBA) was rejecting the charter. Exploiting the capacity that seats in commerce and industry was paramount and none of this was going to work without the buy-in of regulators. Transformation and market access was crucial, and SAICA believed tenure could not be an issue when it came to audit independence and quality. Therefore, the reasons brought forwards as justification for MAFR were not enough. Also, the impact of MAFR on the economy had to be analysed, and ample time was needed before implementation.

In conclusion, SAICA did not believe MAFR was the answer to the challenges of transformation and audit independence.

Black Chartered Accountants Practitioners (BCAP) submission

Mr Victor Sekese, BCAP Acting Chairman, said BCAP welcomed the introduction of MAFR. MAFR had the potential of levelling the audit market playing field. Whilst the main objective of MAFR is audit independence, SAICA believed that the other objectives - transformation and market concentration - were equally important and need to be urgently attended to.

Mr Sekese noted that the Office of the Auditor-General applies mandatory firm rotation on work done by auditing firms on its behalf. BCAP members compete with the big four audit firms for public sector audits and consulting work. Opportunities were not open to BCAP members.

Market concentration can not self-correct. Market forces are not able to self-correct, and therefore there was need for deliberate strategic intervention. The auditing profession is made up of three categories of firms; the big four (made up of four major firms with diverse international links, networks and histories), the mid-size firms – made up of various firms which generally have international links and networks that are significantly less sophisticated than the big four; and small firms – made up of firms with a local footprint and limited international presence. There are about 2044 registered audit firms. It was well documented that the market is 95% dominated by the big four. That means that 5% of the market is shared by 2040 firms. The situation was exacerbated by financial institutions that restrict audit appointments at their respective clients to big four audit firms. BCAP believed that MAFR has the potential, if applied appropriately, to address market concentration.

BCAP recommended the following: consideration of legislative and policy frameworks that would encourage development of large indigenous firms (like was done in China); contracting by Office of the Auditor-General to be used as lever;  outlawing the practice of imposing restrictions on appointment of auditors to big four firms, as this further entrenched the market dominance of the big four firms.

Association of Black Accountants in Southern Africa (ABASA) submission

The Association of Black Accountants in Southern Africa (ABASA) viewed MAFR as the first move towards challenging the status quo. The accounting profession had to be radically transformed.  It ivoiced concern about the lack of clarity in the means of determining how the audit rotation would be worked out. Small firms should be given an opportunity to render services to public interest entities. ABASA believed in an integrated value chain to ensure inclusivity.

ABASA believed transformation must be included in regulations. The regulations should stipulate the participation particularly of black-owned accounting service providers.  ABASA was looking forward to the signing off of more black partners in JSE listed entities, and was committed to working with IRBA in devising such mechanisms. ABASA was satisfied that MAFR does not conflict with its desire to see changes within the accounting landscape. More directed efforts were needed to ensure a more inclusive accounting services sector.

Discussion

Ms T Tobias (ANC) felt the submissions reverted to the initial discussions on the merits of MAFR rather than providing the Committee with more answers. She emphasised the need to fight for freedom and economic transformation- ‘freedom for black people was never served on a silver platter’. Therefore, the urgency of economic transformation had to be understood. Also, there was need to unlock the dynamics behind the IRBA rejecting the said SAICA charter.

Mr M Hlengwa (IFP) supported MAFR. Having an element of rotation was necessary because having the same firms involved in auditing could lead to a collapse in oversight. He commented on the 2040 growing firms. Small firms had to work on joint venture models. The fragmentation of firms fighting the same cause undermined the struggle; 2040 small firms were fighting against a conglomerate of big four firms. Where were the bottlenecks in having the 2040 becoming an alternative big four? He pointed out that when 2040 firms are competing with the big four for clients, the temptation would be to go with reputational credibility. Therefore, disjointed small firms might find themselves always in the periphery of the market.

Ms N Louw (EFF) felt SAICA were being ‘cry-babies’ in the audit transformation process- they seemed to be looking for solutions from the Committee. She emphasised that having only four firms monopolising the audit landscape, 23 years into democracy was uncalled for. The market had to be opened up. Also, there was need for specific timeframes rather than to say ‘sufficient time’ as suggested by SAICA.

Mr A Lees (DA) said he was fascinated by the reference to only the big four when the fifth largest auditing firm was the Office of the Auditor-General. He asked about the possible impact of MAFR on clients currently being audited by the Auditor-General- it could be much bigger. Big auditing firms were major players not because of race issues or competence, but because they had the capacity in the form of resources and experience to do so. This was a very complicated subject and all factors had to be taken into account. He asked Mr Nombembe if it was possible to fragment the Office of the Auditor-General and use it as a vehicle to achieve the very important agenda of transformation.

Ms P Kekana (ANC) acknowledged that proponents and opponents of MAFR seemed to be closing ranks. She pointed out that if not explicitly stipulated, rotation could easily happen between the big four. This had to be looked into as it would be unfair in as far as competition was concerned. Also, there was need for the Office of the Auditor-General to play a role towards transformation.

Mr Nombembe underscored SAICA’s commitment to utilising the various platforms towards transformation. A multi-stakeholder approach was crucial as MAFR was a complex issue, and all alternatives had to be adequately explored. The profession was fragmented and had never been given time to deal with issues. SAICA asked for ample time.

Mr Sekese suggested a framework that would involve joint audit ventures between established and growing audit firms sharing work. The model was currently being used in auditing public entities. It was a formula that would enable capacity development for growing firms.

ABASA said growing firms could only gain experience if afforded the opportunities to do so. 

Independent Regulatory Board for Auditors (IRBA) submission

Mr Abel Dlamini, IRBA Chairman, said MAFR was considered as an appropriate measure to address independence concerns; ending excessive tenures, broadening access to the market, and creating opportunities for players to participate meaningfully in the economy. IRBA believed MAFR was not intended to address transformation directly. MAFR would impact transformation in the long run through broadening access and creating opportunities. In consultation with the Minister, IRBA agreed to develop complementary initiatives designed to specifically address transformation. Also, comprehensive regulations would be critical to transforming the broader governance environment.

Broader transformation required broad commitment from financial sector regulators; FSB and the Reserve Bank to break current trend of exclusion and preservation by the big four firms. Transformation, comprehensive regulation and independence are the three of the four pillars of the IRBA strategy.

On the role of the accounting profession towards transformation, work of the CA Charter council was critical to success to date. Transformation was no longer about numbers but meaningful participation and equity. Transformation in the profession would require more focus on long term career prospects, equity partnership, senior management and executive responsibility for black partners among other initiatives. Going forward, there was need for mergers and partnerships by small firms into new conglomerate entities with increased black shareholding; encouraging and preparing black, small and medium firms to prepare, collaborate, merge and capacitate themselves to accept larger audits. Also, addressing concerns from Transformation Survey through workshops with partners and managers was crucial.

Discussion

National Treasury indicated that it would continue to lend its support during discussions on MAFR. Treasury urged stakeholders to carry out coordinated rather than fragmented engagements. It commended the collective effort by stakeholders.

Ms Tobias emphasised that South Africa belonged to all its citizens, and the previously disadvantaged had to be afforded opportunities. Improvements noted by IRBA within the auditing landscape were appreciated but a lot more still needed to be done. The principle of transformation was indisputable. The question was how it should be done. Progress had to be realised moving forward. 

Ms Louw said MAFR had to be expedited. She made reference to the racial demographics of audit partners signing off on listed companies. It could not be; 23 years into a democratic dispensation. The sector had to be transformed.

Ms Hlengwa emphasised the need for the small audit firms to pool resources together and become one formidable force. This would strengthen their ability to be competitive. The 2040 small auditing firms had to come together and stare the ‘beast in the eye’ (the big four).

The Chairperson said the majority was clear that transformation in the financial sector was urgent. The challenge was how MAFR contributed to the envisaged transformation. He felt the Committee was not receiving precise answers. Members had to come up with positions and monitor progress towards transformation. He pleaded for greater unity within black auditing constituencies. Also, IRBA had to engage the divergent outlooks for progress.

Mr Dlamini said transformation and MAFR cannot be seen as mutually exclusive. Transformation was a business imperative and would happen. However, it should not be seen as a substitute of MAFR. IRBA had engaged with growing firms outside the big four and they expressed readiness to amalgamate, provided business opportunities were opened up for them. The effective date of MAFR was 2023, and some proponents felt it took too long a time. However, this was to ensure that all stakeholders were brought into the fray.

BCAP indicated that there has been some form of consolidation. It identified growing black-owned accounting firms such as Sizwe Ntsaluba Gobodo and Sekela Xabiso as examples. There certainly was room for pooling resources and consolidations.

Mr Nombembe said SAICA would work on facilitating dialogue and achieving transformation. Transformation was one of the objectives SAICA was formed to accomplish.

The Chairperson said the Committee would seek to meet stakeholders on MAFR twice a year, beginning from January 2018. Also, the Committee was to decide in due course whether to send Members or a researcher during MAFR stakeholder meeting. 

The meeting was adjourned. 

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