25% of JSE-listed entities have rotated audit firms ahead of 2023 MAFR deadline
JOHANNESBURG – At least 25 percent of companies listed on the Johannesburg Stock Exchange (JSE) had rotated audit firms by the end of April 2020, according to the latest statistics released by the Independent Regulatory Board for Auditors (IRBA).
IRBA said in a statement that of those who have rotated in that time, 47 percent cited the early adoption of Mandatory Audit Firm Rotation (MAFR), which was promulgated in 2017, as the reason for the rotation.
IRBA mandated audit firm rotation in 2017 following audit failures resulting from a lack of independence and lengthy tenures of audit firms with the same clients, in some instances exceeding 100 years.
“The risk with long tenure, whether real or perceived, is that the relationship between the client and the firm becomes ‘cosy’, which could compromise auditor independence and the appropriateness of the auditor’s opinion on clients’ financial statements,” stated IRBA.
IRBA chief executive Bernard Agulhas said on the matter of open access to next tier firms and black-owned firms, audits had rotated to a number of firms outside the big four, and there has been some partnering between big four and black-owned firms.
“We are very pleased to see that rotations are not limited to changing between the big four and are confident that we will see this trend continuing. Increased access to work on listed entities will enhance the depth of experience at next-tier and black-owned firms.
“We have noted some audits rotating to firms such as BDO, PKF Octagon, Mazars, RSM, SNG GT and Ubucule. Also, we are pleased to see that both EY and PwC have joined with SNG GT and won joint audit business. Another new joint audit pairing being Thawt Incorporated and Crowe JHB also recently won two audits in the listed market.
“As there is very little past experience of joint audit arrangements outside of the banking sector, the IRBA has been developing a Guide to Joint Audits which is at an advanced stage. Such guidance will go a long way to assisting audit firms to agree and formulate sound working arrangements around a joint audit,” said Agulhas.
The effective date for MAFR is April 1, 2023, and applies to all companies whose audit firm tenure is 10 years or more at that date, which gives some advantages for those companies which have opted to rotate early.
Agulhas said the benefit for those companies that have already rotated was that they would not be impacted by the effective date of April 1, 2023, since their audit firm’s tenure would be far less than the maximum 10 years. For these entities, they will only be required to rotate again between 2027 and 2030.
“Given the steady uptake over the last three years, we can already foresee that in the years 2027 to 2030 these companies will again be able to rotate with minimal disruption to the audit profession, and without any hindrance to the companies, as Audit Committees can already be sure to limit the procurement of prohibited services from any firm they may wish to rotate to in future. The forward planning for these companies will be made easier by the fact that not many companies will be rotating in those years,” he said.
The latest statistics show that 18 companies rotated in 2017 right after the promulgation, and 2018 and 2019 saw 34 and 32 rotations respectively.
“The important thing to bear in mind is that there are only three years left for voluntarily early rotation and 75 percent of companies have yet to rotate and a large percentage of these with audit firm tenure exceeding ten years at 1 April 2023 will be required to rotate in that year or the year prior, depending on the company year-end.
“This naturally suggests that audit firm rotation should pick up in the number of rotations per year over the next 18 months as audit committees attempt to avoid a mass rotation in the period 2022-2023. We would fully expect that by next year there will be between 60 and 100 rotations in the one-year cycle,” said Agulhas.
He said tor those audit committees that had not yet formulated their planned rotation, IRBA suggested that this should become a priority to finalise in the next few months or at least to establish a target date for the actual rotation of the audit, at a time which is least inconvenient for the company.