ATC170913: Report of the Standing Committee on Finance on the Public Hearings for the Independent Regulatory Board’s Mandatory Audit Firm Rotation rules, Dated 13 September 2017

Finance Standing Committee

Report of the Standing Committee on Finance on the Public Hearings for the Independent Regulatory Board’s Mandatory Audit Firm Rotation rules, Dated 13 September 2017


  1. Aims of the hearings
  1. The Independent Regulatory Board of Auditors (IRBA), the regulator of the auditing profession, requested to brief the Standing Committee on Finance (SCOF) on its proposals on Mandatory Audit Firm Rotation (MAFR).
  2. Several of the auditing firms and other stakeholders requested meetings with the SCOF Chairperson to discuss their objections to MAFR and the lack of adequate consultation on it. The Chairperson did not meet any of them suggesting instead that they appear before SCOF in a public hearing. The Committee agreed that there should be hearings on MAFR.
  3. The Committee is acutely aware that IRBA is independent and has powers to make rules in terms of section 10 of the Auditing Profession Act, Act 26 of 2005. These rules do not require the approval of the Minister. Unlike normal parliamentary hearings, these hearings could not make binding recommendations on changing the content of the Rules. The Committee could at best suggest to the IRBA that it considers changes to the Rules, but the IRBA is not obliged to make these changes. This was made clear to stakeholders at the outset of the hearings. The aim of the hearings was to encourage more dialogue between the stakeholders in the hope that this would contribute towards a measure of consensus on the MAFR, and at the very least, better understanding among the stakeholders of their differences.
  4. In its National Treasury (NT) Budget Vote Report of 7 May 2017 the Committee noted: “the Committee has also had major hearings on the Independent Regulatory Board of Auditors’ (IRBA) proposals on the “Mandatory Rotation of Auditors” and will finalise its report by mid-June. While the majority in the Committee is committed to transformation of the auditing profession, including through its deracialisation and addressing the extent of monopolisation, the Committee has found the issues complex and challenging. It urges the Minister to meet with IRBA and consider engaging with it to postpone the implementation of the proposals until it consults more effectively with all the stakeholders.”
  5. The IRBA wrote to the SCOF Chairperson on 1 June 2017 to say that there would a joint media briefing by the Minister and IRBA on the MAFR Rules on 2 June.
  6. On 2 June, following a meeting between the Minister and IRBA it was announced that the MAFR Rules would be implemented. Neither the Minister nor IRBA heeded the Committee’s call for the postponement of the adoption of the Rules pending further consultation and negotiations. 
  7. This reduced the urgency to finalise this Report. There are also other reasons for the delay in finalizing this Report, including the huge legislative and oversight role of the Committee; the processing of ‘back-to-back’ hearings on the Financial Intelligence Centre (FIC) Amendment Bill, the Transformation of the Financial Sector, Health Promotion Levy (Sugar Beverages Tax), the Insurance Bill, the Rates and Monetary Amounts Bill, the huge workload of the parliamentary support staff, and the July constituency period.
  8. Flowing from the hearings, the Committee had a briefing on 22 June 2017 to discuss transformation in the auditing profession with SAICA, BCAP and ABASA.


  1. On 15 February and 17 March 2017, the Standing Committee on Finance (SCOF) held public hearings on the proposed introduction of the MAFR rules. The rules are primarily intended to strengthen auditor independence. The rationale is that auditors and audit firms sometimes develop a ‘cosy relationship’ and ‘familiarity’ with the companies they audit. This at times leads to them being easily influenced by their client companies when their audit tenure is too long or unlimited. In turn, this may lead them to fail to report reportable financial management violations by their clients to the authorities, as required by law. In addition, it compromises their independence, integrity, quality of the financial statements and ultimately the audit opinion on which investors rely to make important economic decisions. The MAFR rules will be introduced with the aim of protecting and enhancing auditor independence, audit quality and integrity. The rotation of firms is also expected to have some diffusion of benefits in opening access for medium-tier and large black firms to the JSE market, where they are largely excluded at the moment. It is envisaged that this would lead to market de-concentration as 96% of the JSE market is controlled by the big 4 auditing firms -  KPMG, PwC, Ernst & Young and Deloitte.
  2. The Committee received a briefing on the MAFR rules from the Independent Regulatory Board of Auditors (IRBA). Oral submissions were received from: the Chief Financial Officers’ (CFO) Forum, The South African Institute of Chartered Accountant (SAICA), The Institute of Directors in Southern Africa, the King Committee, the International Federation of Accountants (IFAC), Mr Jeffery Mothuloe Chartered Accountants, KPMG, Deloitte, Nkonki, Price WaterhouseCoopers (PwC), RSM South Africa, Black Chartered Accountants Practitioners (BCAP), Mr. S Mantell, East Rand Members of Chartered Accountants, Mr. Ignatius Sehoole, South African Reserve Bank, ABASA, Mr Michael Harber, Ernst and Young (EY) and, Association for Savings and Investment South Africa (ASISA).




  1. The Independent Regulatory Board of Auditors
  1. The Chief Executive Officer of IRBA, Bernard Agulhas, explained to the Committee that the role of IRBA is to promote the integrity of financial reporting. He said that this built confidence in the markets and was integral to promoting economic growth. He explained that investors were more likely to be attracted to an environment with trustworthy financial reporting. Where the role of auditors is overseen by effective and efficient regulation, confidence is created to stimulate investments, employment and growth.
  2. Mr Agulhas explained that the primary objective of IRBA is to strengthen auditor independence, thus enhancing the quality of audits. Other secondary objectives were to address the high levels of market concentration and promote transformation within the auditing profession.
  3. In the global context, there were concerns around corruption, transparency, governance and accountability of the auditing firms, he said. There was a belief that “a fresh pair of eyes” was now and again needed to improve transparency, governance and accountability. It could also assist to unearth or prevent corruption, especially in cases where auditors might turn a blind eye to such issues as illicit financial flows, tax evasion and avoidance by big companies and multinational conglomerates.
  4. He explained that in 2015 IRBA issued a rule requiring Mandatory Audit Tenure Disclosures by corporates in terms of section 10(3) of the Auditing Profession Act (APA), 2005. The top 10 companies which had over 50 years with the same auditor were Murray and Roberts who had been audited by Deloitte for 114 years, Naspers by PwC for 101 years, Barloworld Limited by Deloitte for 98 years, AECI Limited by KPMG for 91 years, Santam Limited by PwC for 87 years, Woolworths Holdings Limited by EY for 87 years, Sappi Limited by Deloitte for 80 years, Tongaat Hulett by Deloitte for 78 years, Anglo Gold Ashanti by EY for 72 years, and Distell Group Limited by PwC for 71 years.
  1. In terms of market concentration, the big four auditing firms in South Africa audited 96 percent of the JSE listed companies. He said PwC controlled 48 percent of the JSE market, Deloitte 22 percent, EY - 14 percent, and KPMG - 12 percent. This signified unacceptable levels of market concentration. When it came to racial demographics of audit partners signing off on all JSE listed companies, the percentage was as follows: white partners constituted 73 percent, foreign audit partners, 15 percent, Indian - 8 percent, African 3 percent and coloured, 1 percent.
  2. Mr Agulhas emphasised that in the wake of a number of audit failures and the global financial crises, there was an increased focus on strengthening the independence of auditors and enhancing the role of regulators to effectively monitor and enforce auditing standards and the Code of Ethics. In line with this, investors are demanding more transparency and high quality audits. Government and regional trade structures such as the EU were taking steps to ensure accountability. There was also a drive to harmonise regulatory practices across various jurisdictions.
  3. He said IRBA had conducted research on strengthening independence since 2015. Between July 2015 and May 2016, it consulted stakeholders. This was accompanied by public participation and consultation focused on building awareness of the proposed MAFR measures. The Ministry of Finance and the National Treasury (NT) were kept abreast of developments.  
  4. In August 2016, IRBA made an announcement of its proposed requirements for audit firms to implement MAFR. It sought comments on the following proposals:
    1. An audit firm shall not serve as the registered auditor of a listed company for more than 10 consecutive financial years.
    2. Thereafter, the audit firm will only be eligible for reappointment as registered auditor after the expiry of at least five financial years.
    3. The requirement would be effective for financial years commencing on or after 1 April 2023.
  5. Mr. Agulhas informed the Committee that the following countries have already adopted MAFR or were implementing them. These include the 22 EU member states, Abu Dhabi, Albania, Chinese Taipei, Dubai, Indonesia, Korea, Lichtenstein, Norway, Singapore, Thailand, Italy, Netherlands, United Kingdom, Turkey, Argentina, Brazil, China, Russia, Kenya, Mauritius, Morocco, Mozambique, Nigeria and Tunisia. South Africa was joining this list of countries.
  6. He explained that international trends showed very minor changes in the audit fees that companies spent when they rotated audit firms. Any increase in audit fees was mainly due to the time and effort spent with the new auditors.  A sample of rotations in South Africa showed that Vodacom Limited’s audit fees increased from R22 million to R26 million per annum when it changed from Deloitte to PwC in 2015. Sasol Limited spent R87 million in 2015 with PwC, from R86 million with PwC and KPMG the previous year. Pick ‘n Pay Limited experienced a reduction in audit fees from R7,4 million with KPMG in 2015 to R6,1 million with EY in 2016. Famous Brands Limited’s audit fees increased by R1,2 million from R3,4 million with RSM South Africa in 2015 to R4,6 million with Deloitte in 2016.
  7. There are many multinational companies which operated in South Africa which are already affected by MAFR rules. These included Barclays Bank, Old Mutual, Mondi, Redefine Properties and Hammerson. Mr. Agulhas reported that IRBA planned to monitor the costs of implementing the MAFR rules. It will also work with the Competition Commission to monitor potential cartels within the auditing industry. He emphasised the need for capacity building of mid-tier auditing firms so that they could ‘step up’ to the challenge. He further reported that there will be more opportunities for audit firms as two new stock exchanges will open in the near future.
  8. He further mentioned that South Africa was ranked as number one in the world for the strength of its auditing and financial reporting standards and has held this position for the past seven years, as measured by the World Economic Forum’s Global Competitiveness Survey. This signalled a robust standard setting process (due process), sound inspections method (monitoring) and consequences for non-compliance (accountability) in South Africa.  




  1. The CFO FORUM
    1. Ms. Christine Ramon, Chairperson of the CFO Forum (Forum), which is a high-level discussion group of Chief Financial Officers of major JSE listed and larger state-owned companies said that the Forum supports measures to strengthen auditor independence, audit quality, transformation and increased competition. She said that although there had been some consultation and discussions, the Forum did not believe there had been sufficient, transparent and appropriate consultation with all the relevant stakeholders and affected parties prior to making a decision to introduce the MAFR rules as announced by IRBA on 29 August 2016. She said the Forum believes that stakeholders have not been provided with comprehensive evidence to support assertions that auditor independence in the country was an issue/problem and that MAFR was an appropriate instrument to address it.
    2. Ms. Ramon said the Forum believes that in-depth, comprehensive research still needed to be conducted on the costs and benefits of introducing MAFR. The Forum was also of the view that IRBA does not seem to have taken into consideration concerns raised through submissions by stakeholders. She said that the Department of Trade and Industry (DTI), as the custodian of the Companies Act, was not consulted by IRBA. Yet that MAFR will have far reaching consequences on companies, shareholder rights, investors and business management.
    3. MAFR, in the Forum’s view, should be implemented through the Companies Act and its regulations. Ms. Ramon further submitted that investor protection, inherent in IRBA’s responsibility, could be achieved more efficiently in ways other than introducing the MAFR rules. She explained that many of the tools to protect investors were already in place and included effective audit committees, mandatory audit partner rotation, audit reporting, independent reviews of financial statements and independent practice reviews.
    4. She said that the Forum does not believe that IRBA has provided compelling research and evidence to show that MAFR is the best solution to address transformation and market de-concentration. The Forum also doubts “smaller firms’ capabilities to audit entities with extremely complex operations such as the banks and other entities in the financial services environment”. Citing the experience in the Netherlands where, she said, the introduction of MAFR has not yielded positive results: “the Netherlands found itself struggling with a skills shortage and although they had expected MAFR to provide more work to the mid-tier audit firms, that work did not transpire. The majority of the work stayed with “the Big 4” as the mid-tier firms struggled more with the skills shortage than bigger firms.” She further argued that IRBA’s consultation process failed to highlight the experience of MAFR in the US and Singapore where “MAFR was withdrawn”.
    5. Ms. Ramon explained that the MAFR rules have been implemented in a number of jurisdictions[1] and in others they have been considered and not implemented[2]. Other jurisdictions have implemented and later withdrawn/repealed[3] them.  She said that the Forum was of the view that there must be lessons drawn from all these jurisdictions to assess the possible regulatory impact assessment of MAFR in South Africa.


  1. South African Institute of Chartered Accountants (SAICA)
    1. SAICA, represented by its Chief Executive Officer, Mr. Terence Nombembe CA (SA), explained its collaborative role with IRBA’s consultation process on the issue of introducing the MAFR rules. Mr. Nombembe explained that SAICA had developed a discussion paper and conducted a survey with its members, facilitated a meeting between the Senior Partners’ Forum and IRBA, held a broad stakeholder Indaba, shareholder and investor Indaba, international investor roadshow and transformation Indaba.
    2. The view of SAICA was that the MAFR rules, in isolation, cannot address transformation, market concentration and auditor independence. He explained that there needed to be clarity on what the MAFR rules intended to achieve. He said that different objectives should “not be mixed” or confused. He expressed doubt that MAFR would contribute meaningfully to these three objectives. He said that instead of achieving the three objectives, the rules could lead to unintended consequences by increasing market concentration and slowing transformation.
    3. He said SAICA believes that there needs to be comprehensive research and a regulatory impact assessment (RIA). He said that this should clarify domestic  questions and threats that this regulatory intervention intends to provide solutions for. This research and impact assessment should draw lessons from abroad, analyse the costs and benefits of regulation and provide for clear responses.
    4. He further submitted that sufficient time was needed for proper research and consultation to take place. He said that there needed to be support and buy-in of the profession and the business community. SAICA submitted that the legitimate custodian of the process of introducing the MAFR rules were IRBA, Specialist Committee on Company Law (SCCL), NT, and the DTI. All these stakeholders needed to provide joint leadership responsibility for this process.


  1. Institute of Directors in Southern Africa/ King Committee
    1. The King Committee was represented by Ms Lindie Engelbrecht of SAICA. She submitted that the MAFR rules would result in loss of cumulative client-specific and industry-specific audit knowledge gained over the years. The impact of this, she argued, was to the detriment of companies, particularly when rotation takes place during times of mergers or acquisitions, or when they were dealing with operational changes.
    2. She said that while the King Committee supports the overall objectives and desired outcomes, it does not believe that the MAFR rules were the appropriate instrument to achieve auditor independence. The basis of this belief was that globally, there were “no convincing studies confirming that MAFR will result in improved audit quality and ensure auditor independence”. Instead there could be adverse consequences as “research suggests that audit quality could be most vulnerable with MAFR as audit failure is at its greatest in the first number of years after the audit firm has changed”[4]. Instead, she said the King Committee was of the view that auditor independence could be best achieved by other mechanisms already in place such as the appointment of auditors by shareholders of the company at an annual general meeting, statutorily appointed independent audit committees exercising oversight over auditor independence, audit partner rotation after every five years and, an observance of internationally recognised codes of ethics.
    3. She submitted further that the MAFR rules would increase the amount of time that management spends during a transition as they would need to educate the incoming auditors on the company’s operations, systems, business practices, environment and financial reporting processes. This would result in increased costs for these companies, including the general costs of audit tendering and professional indemnity insurance cover. She said these costs would ultimately be passed down to consumers.
    4. She further submitted that the MAFR rules may lead to an increase in costs of audit compliance for multinational companies especially where standards differ from one jurisdiction to another. She raised capacity concerns regarding the ability of all audit firms to conduct highly complex audits on multinational companies.
    5. Ms. Engelbrecht submitted that there could be some conflicts between the MAFR rules and the Companies Act which would have to be navigated very carefully, particularly sections 90 (2) and 94. She further submitted that MAFR may result in stifling the growth of “smaller audit firms as they may be unwilling or unable to invest in staff and other resources to reach critical size, capacity and capability to perform audits of large and complex entities.”


  1. International Federation of Accountants (IFAC)[5]
    1. The IFAC representative explained to the Committee that IFAC recognised the role that audits plays in the ‘financial reporting ecology’. There were, however, other elements such as financial report preparers, organisational management, boards of directors, audit committees, regulators, standard setters, investors and financial statement users. He said auditors and all these role-players played a crucial role in enhancing the credibility of financial reports. Appropriate attention should be given to all of these in order to achieve high quality audits. He said that auditors should not be singled out for the short-comings of other stakeholders in the financial reporting ecology.
    2. He explained that the most effective approach to regulation will vary between jurisdictions. He advised that governments and regulators should not try to replicate arrangements from other jurisdictions without carefully analysing and considering whether they are the most effective and appropriate for their circumstances. In that exercise, the following factors need to be considered; the historical experience in the jurisdiction such as financial reporting failures; membership of international bodies and the use of standards and practices developed and endorsed by these bodies; the general political orientation to regulation as an instrument of economic management; the national economic development path, and the nature and characteristics of the market failures to be addressed by regulation.
    3. He advised that regulatory reforms needed to be very clear on the objective (s) of the proposed reform. While IRBA’s consultation paper identified audit quality as the primary objective for the introduction of MAFR, other objectives such as transformation were identified. IFAC advised that IRBA should be careful that competing objectives do not impede the outcomes of the proposed reform. He argued that IRBA’s consultation paper was not about market concentration and transformation but about auditor independence. He submitted that If IRBA’s objectives were to tackle market concentration and transformation, such regulatory objectives would need to be clearly articulated so that appropriate solutions are sought for them.
    4. The introduction of MAFR rules is not the solution to improving audit quality. He cited the example of the Monetary Authority of Singapore (MAS) which has proposed ceasing to implement the MAFR rules because “research studies conducted thus far internationally did not provide conclusive evidence linking mandatory firm rotation with an improvement in audit quality. From MAS’s observations and feedback received from stakeholders, MAS recognises that there are also negative consequences associated with frequent rotation of external auditors.” He said it was therefore unclear why IRBA wants to introduce MAFR, which might lead to negative consequences.
    5. IFAC bemoaned the lack of evidence supporting many of its conclusions in its consultation paper.  IFAC further bemoans IRBA consultation paper’s uneven international perspective on the MAFR reforms. In this regards, IFAC observes that “the discussion on “global developments” was restricted to events in Europe.” In this regard, IFAC warns that Europe’s audit reform process was divisive, confrontational and politically-driven. It resulted, he claimed, “in legislation that provides over 80 options” for EU Member States to consider and “has resulted in there being even more fragmented regulatory arrangements - with 28 different arrangements - one for each Member State - being implemented across Europe.”
    6. Further, IFAC observed that through the IRBA consultation process there was a failure to list audit expertise and capacity as an issue of concern given the restriction on auditors providing non-audit services. It is not clear in light of this whether South Africa will have a sufficient number of experienced auditors and audit firms to provide services to highly specialised industries and sectors.


  1. Jeffery Mothuloe Chartered Accountants
    1. Mr Jeffrey Mothuloe CA (SA) expressed support for the introduction of MAFR arguing that it was a step in the right direction to deal with transformation. He then enumerated a number of ways in which barriers to entry existed and excluded small and medium firms, particularly black firms. Mr Mothuloe submitted that the big four audit firms’ opposition to MAFR demonstrated the abuse of their dominance in the auditing profession to advance their own interests and their lack of commitment to transformation. He accused the big four audit firms of controlling the SAICA. He said, since they were the main financiers, they were allocated four of the five seats on the Executive Committee of SAICA. He said ABASA (Association of Black Accountants of South Africa) only had one seat. Mothuloe informed the Committee that SAICA continues to exclude black chartered accountants from marking board exams by indicating that markers are appointed at SAICA’s discretion. He submitted that SAICA should be reconstituted so that it can benefit all the audit firms. In this regards all audit firms should contribute a percentage of their revenue to SAICA.  All audit firms should have a say in how the EXCO of SAICA is elected and not only the big four. This will facilitate transformation of the sector.
    2. He claimed that the attrition (moving from one audit firm to another during training) rate among trainee accountants during their training contracts was highest among black trainees due to the hostile racial environment they found themselves in. He said there was a clause in their training contracts which discouraged trainees form transferring to another firm during their training by penalising them. He also said that the standards of training were discriminatory against black trainee accountants as compared to their white counterparts.
    3. Mothuloe submitted further that the Supply Chain Management Policy of the Auditor General of South Africa (AGSA) excludes emerging black audit firms from tendering for AGSA work.  This was because audit firms were only able to bid for AGSA audit work if they had a registered training office with SAICA. He submitted that due to these requirements emerging black audit firms were excluded from getting work from AGSA.
    4. Mothuloe said that the increased intake of black trainees in the big four audit firms should be tested against the number of black trainees who stay on in these audit firms and acquire post qualification experience.
    5. Mr Mothuloe expressed support for the introduction of the MAFR rules, adding that it will help to advance change and transformation in the sector.


  1. KPMG
    1. KPMG, represented by Mr Zola Beseti CA (SA), expressed support for the strengthening of auditor independence. Mr Beseti stressed that auditing firms should not appear to be independent, but should be independent as a matter of fact. He expressed support for the restrictions on auditing firms performing non-audit services for the same firms they were responsible for auditing. He said this will ensure that auditors do not end up auditing their own work and will therefore enhance the integrity of audits.
    2. Mr Beseti stated that external inspections by IRBA on audit firms has resulted in fundamental and positive changes to oversight and led to improvements in audit quality. He said internal engagements on quality control reviews strengthened audit quality through identifying areas where adjustments, processes and procedures must be made to enhance audit quality. He said the JSE had also instituted strict accreditation requirements for auditors and this would help to enhance auditor independence.
    3. KPMG did not support MAFR as a mechanism to address auditor independence, market concentration and transformation. He said that auditor independence had nothing to do with race or gender. It was about the relationship between an auditor, the client and the integrity of an audit. There was no convincing evidence presented by IRBA that there was an issue about auditor independence in South Africa. The findings of IRBA from audit inspections also did not suggest that there was a problem of auditor independence in the country.
    4. Mr Beseti maintained, like the other presenters, that IRBA had not consulted adequately on the proposed MAFR and research was still needed. He said IRBA released a consultation paper with pre-determined decisions and without any intention to accommodate alternative views. IRBA has also failed to present a balanced perspective on why other jurisdictions adopted and then repealed MAFR, he said.
    5. On market concentration, Mr. Beseti said there was evidence that MAFR may instead increase market concentration. He said that the issue of transformation needed to be understood ‘qualitatively’. To illustrate this point, Mr. Beseti explained that it took over 12 years for one to become a partner in an audit firm. He expressed doubt that young and upcoming black accountants were prepared to persevere for over 12 years to become partners and accept the risks associated with being a partner in an audit firm . He suggested that other mechanisms that were already in place to regulate transformation be explored rather than MAFR. MAFR will not assist to achieve transformation and may instead reverse the gains that have been made to transform the profession, though he did not explain how.
  2. Deloitte
    1. The Business Unit Leader of the Deloitte’s Gauteng Unit, Mr. Bongisipho Nyembe CA (SA), expressed support for efforts to enhance audit quality by strengthening auditor independence. He told the Committee that Deloitte, although a global company and brand, was owned by partners of the jurisdiction in which the offices were located. In that regard, black partners owned 32% in equity shares of Deloitte in South Africa. He further explained that 17% of all black chartered accountants in the country were trained by Deloitte as part of the firm’s contribution to transformation.
    2. Mr. Nyembe urged IRBA to consult widely and consider the views of all stakeholders in an open and transparent manner. He pointed out that the potential ramifications of MAFR were significant and local research was required. He said Deloitte is concerned that there seemed to be “no independent and objective evaluation of the arguments for or against the introduction of MAFR.” There was also a lack of drawing lessons from jurisdictions that had implemented and later repealed the MAFR rules such as Canada, Czech Republic, Korea, Latvia, Singapore and Slovak Republic. There were also other jurisdictions that had out-rightly rejected MAFR. Mr. Nyembe said that in developing country jurisdictions such as India and Brazil, MAFR impacted negatively on small and medium firms.
    3. He submitted that IRBA should explore other alternative mechanisms for enhancing auditor independence as there was a lack of evidence that MAFR will enhance auditor independence. The alternative mechanisms included partner rotation, independent audit committees to ensure auditor independence, appointment of external auditors by shareholders, pre-approval of non-audit services, the prohibition of certain non-audit services, independent regulatory oversight by IRBA and independent engagement quality control reviews of International Standard of Quality Control (ISQC) 1, which assist in strengthening audit quality.
    4. He said that the MAFR will not achieve transformation objectives. The big four firms were already transforming without the MAFR. He said that since Deloitte had 98 black partners, the firm had the largest number of black partners, more than any of the three largest black firms (such as Nkonki and others) combined. He added that Deloitte has had black CEOs for the past 18 years.


    1. Ms. Thuto Masasa CA (SA), a partner at Nkonki, expressed her organisation’s support for the implementation of MAFR rules. She said the development of MAFR rules was in the public interest as it aimed to improve the protection of the investing public from potential audit failures that might result in substantial financial losses. MAFR, Ms. Masasa submitted, will have a large and positive impact for small to medium audit firms, which includes black audit firms.
    2. MAFR will assist with managing the threats to independence of auditors and enhance audit quality. She submitted that the planned MAFR implementation date of 2023 was too far off and provided large firms with an unfair competitive advantage. She said that this disadvantaged the small and medium audit firms who currently do not have access to consulting work from the JSE listed companies.
    3. She stated that although there were several thousand-audit firms existing in South Africa today, only a few audit firms are appointed to audit JSE-listed companies. On top of this, these companies rarely switched from one audit firm to another, blocking access for small and medium firms. She explained that only 9 of the 353 audit partners who signed off on financial statements of JSE-listed companies were black-African. She then submitted that without MAFR, the auditing profession in South Africa will not transform.
    4. She submitted that the benefits of the MAFR rules would far outweigh its costs. She explained that the change of audit firms every 5 years was standard practice in the public sector and there appeared to be no concerns of costs with this practice there. She further cited the International Federation of Accountants’ Financial Reporting Supply Chain Report which stated, in relation to MAFR, that “Although there are concerns about loss of valuable knowledge and experience, long lead times to get-up-to speed and more expensive audits, many respond that getting fresh eyes on the audit outweighs the cost.”
    5. MAFR will, among other advantages, increase the number of black auditors who sign off JSE-listed companies and therefore spread intellectual capital. It will also boost small and medium auditing firm’s share of the listed company market. It will also help to speed up transformation, which will go a long way in achieving the objectives of the NDP of an inclusive economy.


4.9.        Ernst & Young (EY)

4.9.1.    Ernst & Young was represented by its CEO, Mr Ajen Sita CA (SA). Mr. Sita said that EY believed that there were already many safeguards in South Africa to deal with issues of auditor independence, as expressed by other presenters above.  He said that there had been no audit failures in South Africa, in the last 20 years, which could be attributed to auditor independence. 

4.9.2.    Mr. Sita said further that ‘ethics and independence’ findings by IRBA’s inspections comprised less than 2% of all the findings reported in the most recent IRBA’s inspection report of December 2015.

4.9.3.    Mr. Sita submitted that market concentration in the auditing profession was inescapable throughout the world as it enabled the largest firms to perform the more complex audits of the largest companies, while the smaller firms served the rest of the market. Larger multinational firms needed companies that could match their global footprint in terms of presence in all countries where they operate. He said the largest four firms in South Africa audited 66% of the JSE listed firms.

4.9.4.    Mr. Sita outlined educational initiatives to educate and train black auditors and said all these initiatives will lead to transformation as the country faced a challenge that there was a limited number of black auditors who are available to serve JSE listed companies. He said the country must not rush to implement the MAFR rules.



4.10.    Price Waterhouse Coopers (PwC)

4.10.1.   Mr. Dion Shango CA (SA), CEO of PwC, like others from the big four firms, said PwC was against the implementation of the MAFR rules. He cited similar reasons as others that there was no evidence that it leads to auditor independence and that South Africa had no problem of auditor independence. He pointed out that the MAFR rules had been adopted and repealed in other countries due to costly and unintended consequences. He said that the MAFR rules could stifle competition as it limits companies to choose their auditors. 

4.10.2. Mr. Shango emphasised that PwC supported transformation and would like to see the demographics of society represented in the profession. Introducing the MAFR rules would make the profession less attractive. To transform the profession there was a need to involve other stakeholders from education, commerce and industry to seek a multi-pronged solution to producing black accountants. He said that transformation was not to be realised through a one-dimensional solution such as the MAFR rules. Mr. Shango repeated many of the arguments made by some of the big four firms urging for more consultation.



4.11.    Association for the Advancement of Black Accountants in Southern Africa (ABASA)

4.11.1.    The President of ABASA, Ms. Gugu Ncube CA (SA) explained that ABASA advocated for the transformation of the audit profession. She said that MAFR alone could not lead to the transformation of the industry; what was needed was the introduction of new players in the market, de-racialising the ‘big four’ audit firms, allowing smaller and medium-sized practices (SMPs) an opportunity to service larger clients and allowing smaller medium-sized practices.

4.11.2.   Ms. Ncube said that IRBA can do much more to assist with transformation by ensuring that there are more black partners who are accredited to service JSE listed entities. This assistance includes conducting more frequent partner audit file assessments and, setting transformation targets of firms with penalties incurred for non-compliance, among others.


4.12.    RSM South Africa

4.12.1.    Mr. Henk Heymans CA (SA), Head of Audit for RSM South Africa, submitted that RSM does not support the introduction of MAFR rules in South Africa, and his firm had no vested interest in the matter as it was a middle-sized firm. He submitted that any regulation that deals with the appointment of auditors belonged to the Companies Act, 2008, sections 90 to 94, not in the Auditing Profession Act.

4.12.2.   He said his firm’s objection to the rules were on the basis that there was not enough evidence that the MAFR rules were needed. He said that more research was needed. He also submitted that the MAFR rules would likely lead to more market concentration where companies rotate among the big four firms. 


4.13.    Mr Simon Mantell CA (SA)

4.13.1.   Mr. Simon Mantell is the owner of a Biscuit Factory. He submitted that the MAFR rules were a necessary intervention and their implementation was of vital and urgent relevance in the auditing profession in South Africa. He said that this would likely lead to greater auditor independence and audit quality. They could also lead to better pricing and improved competitiveness and allow for transformation.

4.13.2.    Mr. Mantell argued that failures of Wall Street banks in the US and African Bank in South Africa, among others, were at odds with the clean audit reports they got from their auditors. According to him, this confirmed serious shortcomings of audit independence. He submitted that auditors were more likely not to fall under pressure from the companies they audit if they know that their fee income is not guaranteed and they will be rotated anyway.

4.13.3.     Mr. Mantell cited a study conducted in the US (2008) where between 2003 and 2006, more than 50% of the 12 600 public companies listed with the US’s Securities and Exchange Commission (SEC) decided to voluntarily change their auditors. He argued that based on this, the costs of rotation do not seem to be much of an issue as most of these firms would not have decided to rotate firms if it was going to be too costly. On loss of memory and knowledge due to rotation, Mr. Mantell argued that audit firms have a high turnover of staff anyway. He argued that this institutional memory and knowledge that would be lost is probably overrated as big firms such as Enron and many Wall Street banks collapsed without any warnings from long-time incumbent auditors.

4.13.4.    Mr. Mantell submitted that audit firm rotation and tendering would ensure more competition and better prices. He argued that bidding for work in many businesses and professions was ordinary business practice and there was no plausible reason for exempting the auditing profession from such a practice.

4.13.5.   On transformation, Mr. Mantell explained that in 2006 in the US, more than 50% of companies registered with the US’s SEC were audited by firms outside the big four. In South Africa, this figure is less than 10%. The introduction of MAFR, he said, would open the door to black owned middle tier firms to ‘take their seat at the table’ and facilitate transformation. 


4.14.    The East Rand Member District of Chartered Accountants (ERD)

4.14.1.   The ERD stated that it opposed the introduction of MAFR rules. It said evidence in many studies conducted in Europe, in countries such as Italy and Spain, suggested that it does not help to improve auditor independence and quality; instead it increased costs for companies. The ERD suggested many alternatives to MAFR such as the introduction of joint-audits and mandatory audit partner rotation, among others.


4.15.    Mr. Michael Harber: School of Accounting- University of Cape Town

4.15.1.   Mr. Michael Harber, a lecturer in the School of Accounting at UCT, submitted that government legislation and regulations should be evidence-based. He cited research from many countries which found no evidence that MAFR was the correct instrument in enhancing auditor independence and quality. Mr. Harber also conducted research in South Africa where he interviewed 14 senior and managing partners from the big four firms and other middle-tier firms, including from 3 black owned firms. He found that these senior managers did not support the introduction of MAFR rules.

4.15.2.  He found that most of the concerns were that MAFR will lead to loss of valuable client-specific and industry-specific knowledge and to an unmanageable and unnecessary costs for companies.  He also found that the senior managers were of the view that MAFR will not address market de-concentration and that the rotation will circulate among the big four firms. Another opinion was that MAFR would reduce competition as smaller firms do not currently have skills, experience or resources to service the large complex companies.

4.15.3.  On transformation, Mr. Harber found that the managers from the non-black firms “expressed serious concern regarding whether the black firms that have been awarded large public tenders have the resources, skills and experience to audit large public interest entities. He said that: “Government, in their opinion, has been far too quick to award such large tenders to the black-owned audit firms” [6]. The general feeling from this survey therefore was that the introduction of MAFR rules or giving work to smaller, medium and black owned firms could jeopardise audit quality instead of enhancing it. 


4.16.    Mr. Ignatius Sehoole CA (SA)

4.16.1.  Mr. Ignatius Sehoole, CA (SA) citing an example from Brazil, said that the MAFR rules may lead to more market concentration, as had happened there. He said when MAFR was introduced in Brazil, the big four auditing firms had about 56% of listed companies in 2003 and about 72% of the market in 2011.

4.16.2.   Mr. Sehoole expressed doubts that auditor independence was an issue in South Africa. He said there were safeguards in place on auditor independence. He further critiqued IRBA’s discussion paper on MAFR as having failed to conduct enough research to support its decision to introduce the MAFR rules. He also submitted that there was not enough consultation.

4.16.3. He said the major problem in South Africa was with transformation in the auditing profession. He said to ensure that there were enough black accountants and auditors to reflect the country’s demographics, the country’s education system will have to be fixed to ensure a pipeline of black CAs. He showed that in January 2017, in the top 15 firms in the country, there were 67% white partners, followed by 17% Indian, 12% African and 3% Coloured.


4.17.    South African Reserve Bank’s Banking Supervision Division

4.17.1.  The Acting Deputy Head of Banking Supervision, Mr. Neil Maree, represented SARB. He said that further research was required to assess the costs and benefits of introducing the MAFR rules. He argued that a blanket approach to all listed firms on MAFR was not advisable and submitted that MAFR rules not be imposed on complex sectors such as banks, which required scarce skills. He said that in this context the MAFR could compromise audit quality within the sector.

4.17.2.  He said banks already endured stringent prudential requirements and international practice standards from the Basel Committee on Banking Supervision that enhanced audit independence, including requirements for joint-audit firms for the large banking firms. He suggested that instead of introducing MAFR in the banking sector, large banking companies should be encouraged to appoint small and medium auditing firms, over and above their joint auditors, to audit segments or entities in the group.

4.17.3.  He submitted that the MAFR rules should be introduced through the Companies Act (2008), which already prescribes partner rotation and the appointment of audit committees.


4.18.    Black Chartered Accountants Practitioners (BCAP)

4.18.1. The Interim Chairman of BCAP, Mr. Victor Sekese CA (SA), said that BCAP strongly supported the introduction of MAFR rules. He said that the auditing playing field was not level and MAFR would assist in transformation and the development of black firms. The main challenge for black firms is market access and barriers to entry. He said that examples from other countries should be used, but should be not be the deciding factor of what happens in this country. European countries used MAFR to address their challenges and South Africa should adapt these to solve its unique challenges.

3.18.2. Mr. Bhekabantu Ngubane CA (SA) said that MAFR was consistent with government objectives of promoting competition and ensuring transformation. He said that the MAFR rules would see the certification of black accountants and auditors and help in building indigenous auditing firms. He said MAFR would create new opportunities for black firms, which had been lacking for the past 23 years of democracy, arguing that South Africa should not be unfairly compared to the countries where the MAFR rules failed as such countries may not have had the same national imperatives.


4.19.    ASISA, CFO Forum, Institute of Directors, King Committee, Audit Committee Forums

4.19.1.    Representatives of the above organisations sent a joint letter to the Committee on 15 March 2017. The letter raised two concerns about MAFR as proposed by IRBA:  it ‘would have a profound impact on the rights and interests of companies, investors and many stakeholders, and cuts across existing legislation such as the Companies Act and will conflict with the King IV governance framework.’

4.19.2.    The letter also warned that MAFR implementation has the potential to cause serious harm to the economy, particularly given the costs involved in its implementation, which would amount to about R10 billion in 10 years. The letter did not expand on what these estimated costs would entail. It was stated that there are more effective ways of enhancing transformation of the audit profession including through the transformation charter.

4.19.3.   it was also said that the implementation of MAFR would ‘undermine business confidence in government, concern foreign investors, cause them to withdraw capital, and possibly prompt corporates to move listings, which would have a significant impact on the JSE and foreign direct investments. The proposals made can be found in other presentations above, such as those made by the CFO forum.




  1. Observations and Recommendations


  1. These observations and recommendations have to be situated in the context of the aims of the hearings and the powers of the Committee in regard to the IRBA’s independence and its right to determine the MAFR Rules as explained in section 1 of this Report.
  2. The Committee initially intended to decide on a Provisional or Interim Report which would be referred to all stakeholders to comment on within a deadline before adopting a final Report. But because the IRBA went ahead to implement the MAFR Rules and the Minister endorsed this, as already covered in this Report, including in sections 1.4 to 1.7, this became unnecessary.    
  3. The majority in the Committee firmly support the transformation of the financial sector. The Committee expresses its serious concern about the monopolization and market concentration in the sector. The big four auditing firms control over 90 percent of the JSE-listed companies market. Out of all the audit partners who sign off the audits of about 353 companies listed on the JSE, only 9 of them are black.  The Committee understands that companies listed on the JSE rarely switch auditing firms. However, the medium tier and smaller firms, especially black owned, believe that they are deliberately denied access. The Committee expresses its serious concern about this and urges that NT, IRBA and the JSE act on this.
  4. The Committee acknowledges that the percentage of black partners in the big four auditing firms has increased over the years, but believes that this is far from adequate. For instance, the representative of Deloitte said that it was the biggest black owned firm in South Africa as it had the largest number of black partners, more than any of the 3 largest black firms. Asked to explain this claim, he said that Deloitte had 98 (36%) black partners out of a total of 269 partners. Black partners constituted 16% African, 17% Indian and 4% Coloured. The Committee requested that the other three of the big four firms submit their transformation Scorecards, and they did not do so.
  5. The Committee notes the many complaints about the inequitable treatment of black candidates and accountants by SAICA. The Committee further notes complaints that black trainees hardly get post-qualification experience at the big four auditing firms which inhibits them from being appointed as CEOs and CFOs in JSE listed companies. The Committee recommends that the Minister of Finance consider investigating these complaints.
  6. The Committee notes the persistent complaints from key stakeholders that IRBA did not consult adequately on the MAFR Rules and had basically decided on adopting MAFR before it began to engage stakeholders. The IRBA strongly disputed this and produced evidence of its many meetings with stakeholders. The Committee appreciates that the MAFR challenges the dominance of powerful stakeholders in the auditing sector and, as usual, they are fiercely resisting this. Often there is a tendency of stakeholders to claim that they were not adequately consulted when they are opposed to a Bill or policy that challenges their vested interests. The Committee cannot, in the circumstances, be absolutely certain about this, but believes that, on the balance, it is probably the case that IRBA did not consult adequately with all the stakeholders. The Committee does not question the accuracy of IRBA’s account of the meetings it had with stakeholders, but the quality of the negotiations with the stakeholders is debatable. Were they meaningful and conducted in the spirit of arriving at least at a measure of consensus, even if many of the opposing interests at issue may be irreconcilable? The Committee cannot, in the circumstances, be absolutely certain about this, but based on the hearings, believes that the stakeholders who claimed that IRBA had made up its mind about MAFR being implemented before it began the consultation process have a credible case.
  7. The Committee, obviously, does not believe in endless negotiations that do not lead to any outcomes. Moreover, where there are fundamentally opposed interests at stake it is often difficult to arrive at significant consensus on key issues. But as far as possible, there have to be concerted, meaningful  negotiations that seek to arrive at least to a minimum degree of consensus, and it is only if there is no prospect of arriving at such consensus through the negotiations that those who have the power and authority should make the final decisions. Even if negotiations do not lead to a measure of consensus usually they are still valuable. It was important that the IRBA try to get even a reluctant ‘buy-in’ for its MAFR proposals given the interests at stake, and the Rules would probably have been easier to implement if this had happened.     
  8. The Committee notes the views expressed by the Industry that auditor independence is not an issue in South Africa. But even if the international examples of Enron, Worldcom, Barings Bank and Parmalat are ignored, South Africa has had its fair share corporate failures such as the Masterbond scandal, FBC Fidelity, Saambou Bank, Tigon, Leisurenet and African Bank which happened under the watch of auditors. The Committee believes that regulatory interventions, in general, are a means of correcting market failure, actual or potential. The Committee also notes that the Minister in his 2 June 2017 media statement supporting MAFR said: ‘In 2013, the World Bank conducted and concluded its second Report on the Observance of Standards and Codes (ROSC Report) – Accounting and Auditing (A&A) for South Africa.  The ROSC report made recommendations to strengthen accounting and auditing practices in South Africa towards enhanced competitiveness, governance and accountability in the private and public sectors.’
  9. The Committee also notes that in his statement the Minister said: ‘Critical to reliable reporting is that the auditor is independent of those whom they audit. Inspections findings from audit regulators worldwide, including our own regulator, indicate that auditors do not always maintain such independence. This increases the risk that they may not report the true state of affairs of a company.’  
  10. The Committee has been processing Bills to give effect to the “Twin Peaks” model of financial regulation. The Financial Sector Regulation Act (FSRA) has just been promulgated. Among other issues the Act (as with other ‘Twin Peaks’ Bills) seeks to mitigate against potential threats of financial collapse such as the global financial crisis of 2008. South African banks were not immediately involved in this crisis, but Parliament went ahead with the FSRA to mitigate against the risks of such failures. It could be argued that the MAFR should be perceived in the same way - as “fixing the roof while the sun is shining”.
  11. The Committee notes that there are other measures in the system to deal with auditor independence. The Committee’s understanding is that the introduction of MAFR is not being touted as the only measure to deal with auditor independence, but is aimed at complementing other existing initiatives.
  12. Since MAFR is being introduced, the Committee is interested to know how IRBA can ensure that firm rotation does not circulate among the big four firms only.
  13. The Committee recommends that the JSE and IRBA relook at the JSE accreditation rules to ensure that these do not create barriers to entry in the market for black auditors and firms.   
  14. The Committee notes arguments by some stakeholders that IRBA’s mandate does not include transformation. However, the Committee believes that transformation should be the responsibility of all organisations, state and non-state to advance inclusive growth and the developmental goals of the country. The Committee agrees with Minister Gigaba in his 2 June media statement: “While mindful that Transformation of the auditing profession may perhaps not be the Board’s principal mandate, it is nevertheless an issue that assumes critical importance in the broader constitutional framework outside of the Auditing Profession Act.”
  15. The Committee rejects the view of a participant in the hearings that because it takes too long to become a partner in an auditing firm, up-and-coming black students, clerks and accountants are not ready for it. The Committee urges those in the profession to communicate more constructive messages that encourage the growth and take-up of the profession by aspiring black candidates in order to improve the auditing professions’ demographic representation.
  16. The Committee recognizes that smaller firms do not have the capacity that the ‘Big Four’ do, but believe that, given the opportunities, they will develop the required capacity. The Committee rejects suggestions that the implementation of MAFR will lead to poor quality audits as a result of the entry of smaller and medium black firms into the JSE market. The Committee is disturbed by the views which seek to equate transformation with the lowering of standards or incompetence and with lack of capacity .The Committee believes that capacity will respond to demand.
  17. The Committee notes the submission of the SARB regarding the exemption of large banks from mandatory rotation requirements. The Committee does not have a firm view on this at this stage and will engage further with the IRBA and SARB on this before coming to a conclusion. However, the Committee strongly condemns bank collusion on currency trading and is interested to know where the auditors’ role fitted into this. The Committee will also take this into account in deciding its final position on whether the banks should be exempt from the MAFR Rules.   
  18. The Committee notes the arguments that audit rotation issues should be dealt with through the Companies’ Act rather than through the Auditing Profession’s Act. The Committee believes that IRBA should engage further with those who hold this view.
  19. The Committee notes that none of the big companies that are listed on the stock exchange, who will directly be affected by the MAFR rules, made a submission at the Committee’s hearings. We however note that many of these companies participated in IRBAs consultation process.
  20. The Committee notes the 15 March 2017 letter submitted by leaders of ASISA, CFO Forum, Institute of Directors, King Committee and, Audit Committee Forum. At this stage, the Committee believes that we have not been presented with a strong enough case that a significant number of companies will shift their listings and disinvest from the country. Of course, the country is desperate for investment and we need to avoid taking reckless decisions that will provoke investors to shun us, but we also need to find an appropriate balance between securing investment and deracializing and transforming the economy. Both increasing investment and reducing monopolies are parts of the overall transformation of South Africa.
  21. The Committee understands that the big audit firms may lose their guaranteed income from their lucrative long-time clients of years, decades and even close to a century, in some instances. The Committee believes, however, that such private interests cannot be elevated beyond the needs of the country to transform in the interests of our developmental and social stability goals. The Committee believes that to implement measures to encourage competition, transformation and auditor independence is in the interest of the country.
  22. The Committee  recognises that there has been transformation in the “Big Four” audit companies but recommends that these companies consider further transformation. There has be further transformation of the auditing sector, including through reducing the level of monopoly, creating more space for smaller and medium sized companies and ensuring the growth of companies that are owned by Black, particularly African, people and women.
  23. The Committee supports the transformation of the auditing profession programmes discussed at the 22 June briefing with SAICA, BCAP and ABASA, but believes far more needs to be done sooner.
  24. So what then is the Committee’s position on the MAFR Rules? Based on the hearings, and our observations in sections 5.1 to 5.23 above, at this stage, we believe:
  1. We cannot be certain, but it is probably correct that IRBA had decided it was going ahead with the MAFR Rules before it began the consultation process and while IRBA certainly had several meetings with the stakeholders the quality of its negotiations process is questionable.
  2. Based on what emerged at the hearings, the Committee believes that the IRBA should have postponed the implementation of the MAFR Rules and appropriately engaged further with the stakeholders. Our views on this are spelt out in greater detail in sections 5.6 and 5.7.  We regret that IRBA and the Minister did not heed our request.
  3. We are opposed to the monopolization and market concentration in the auditing sector and fully support its transformation, including through creating more space for smaller and medium sized companies and ensuring the growth of companies that are owned by Black, particularly African, people and women.  
  4. We support the MAFR  Rules. It is not clear to us that the MAFR Rules will definitely advance the goals in c), but on balance, we think the case for the MAFR Rules is stronger than the case against these Rules.
  5. We recommend that the IRBA, stakeholders and NT continue to engage on the MAFR Rules.  
  1. Appreciation
  1. The Committee thanks all those who took part in the hearings.
  2. The Committee expresses its appreciation to its Content Advisor Dr Zakhele Hlope and Researcher Ms Antonia Manamela for the initial draft of this Report.











[1] Countries with MAFR: Belarus, Bolivia, Brazil, Cambodia, China, Croatia, Ecuador, Georgia, Iceland, India, Indonesia, Israel, Italy, Kuwait, Laos, Macedonia, Morocco, Mozambique, Nigeria, Netherlands, Oman, Pakistan, Palestine- West Bank and Gaza, Paraguay, Peru, Poland, Portugal, Qatar, Russia, Saudi Arabia, Serbia, Slovenia, Tunisia, Turkey, Ukraine,  Uzbekistan, Venezuela and, Vietnam.

[2] Countries where MAFR was considered but not adopted: US, Australia, New-Zealand, Japan, Germany, UK, France.

[3] Countries where MAFR was repealed in whole or in part: Argentina, Austria, Brazil, Canada, Costa Rica, Czech Republic, Greece, Latvia, Pakistan, Philippines, Singapore, Slovak Republic, South Korea, Spain, Turkey and Uganda.

[4] This research was not referenced in the submission.

[5] IFAC describes itself as a “global organisation for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It works with its member organisations around the globe to achieve this goal. Through its current membership of more than 175 professional accountancy organisations in over 130 countries and jurisdictions, it represents nearly 3 million accountants in public practice, industry and commerce, government, and education.”

[6] Michael Harber, Mandatory audit firm rotation in South Africa and the push back from the audit profession? The Corporate Report, p. 28.


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