New regulations to boost smaller audit firms

Johannesburg – A new regulation in the auditing sector will give smaller firms more access to the market, according to officials.

The Mandatory Audit Firm Rotation, announced on Friday seeks to ensure the independence of firms as well drive inclusiveness in the market. This is according to chief executive of the Independent Regulatory Board of Auditors (IRBA), Dr Bernard Agulhas who was speaking at a press briefing alongside Finance Minister Malusi Gigaba.

Agulhas emphasised that the main objective of the regulation is to address concerns of independence as well as quality of auditing. He said that in the long term, the regulation would broaden access to markets for other firms, besides the “big four”, as well as home-grown firms.

“For a hundred years, certain other audit firms were excluded automatically [from appointments]. Opportunities were not provided to these firms.” Agulhas explained that enforcing rotation would lead to markets opening to the rest of the audit firms.

The Big four

“South Africa has about 2000 audit firms, not just four,” said Agulhas, referring to PriceWaterhouseCoopers (PwC), Deloitte, EY and KPMG. “A lot of audit firms are connected to international global networks, it’s not just the four global firms that have international networks.”

This regulation will become mandatory on April 1, 2023. Agulhas explained that this is sufficient time to allow companies and audit firms to prepare for the rotations. Under the regulation, an audit firm cannot serve as a registered auditor for a listed company for more than 10 consecutive financial years.

The board had deliberated over the decision to enforce the rotation rule and Agulhas said stakeholders agreed it would be the best option to respond to independence concerns. The rule will be enforced on auditors and not companies. The same audit firm can only be reappointed after the expiry of at least five financial years, Fin24 reported previously.

READ: New audit regulation won't improve independence – auditors

However, not all stakeholders are on board with this rule and expressed their concerns in Parliament. Among the reasons is that the regulation will further constrict the market and concentrate the audit industry further.

Radical transformation

But at the briefing, the finance minister said he applauded the decision, saying that the rotation will help boost confidence in black audit firms and give them an opportunity.

“In the process to rotate companies, it will ensure more players are brought on board and will give opportunities to many South African firms and black firms to gain a foothold in the audit market,” he said.

Gigaba said that the rotation should also not simply result in the rotation of the four big firms.

He pointed out that an investigation launched in July 2015 showed that much of the JSE-listed companies made use of the big four audit firms. Of 353 companies whose audit reports were examined, 72% of JSE companies were signed off by white registered auditors. Only 12% of companies were signed off by non-white South African registered auditors, of these only three were black. 

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