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CFO Forum slams Treasury's backing of audit proposals

Cape Town - Mandatory audit firm rotation (MAFR) is, almost without exception, a complete failure in other parts of the world and – in many cases – has been reversed because of the problems it creates.

This was the reaction of the CFO Forum after Finance Minister Malusi Gigaba announced on Friday that National Treasury supports the proposals to introduce MAFR for local businesses.

The CFO Forum, which represents chief financial officers of the top 100 JSE-listed companies, with a market capitalisation of R12trn, said it was deeply concerned at Treasury’s backing for the proposals amid ongoing discussions on the need for and feasibility of MAFR.

Dr Bernard Agulhas, chief executive of the Independent Regulatory Board for Auditors (IRBA), who was speaking alongside Gigaba at a media briefing on Friday said the main objective of the regulation IRBA proposes 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.

“South Africa has about 2 000 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.”

CFO Forum chairperson Christine Ramon said in a statement late on Friday that the decision flies in the face of ongoing discussions that are taking place with the Parliamentary standing committee on finance and the committee’s commitment to fully understand any audit independence “problems” and explore possible solutions before any firm decisions are taken.

Ramon said five influential financial governance structures, including the CFO Forum, have already submitted strong objections to the standing committee on finance on the MAFR.

The others are the Association for Savings and Investment South Africa (Asisa), which represents the largest group of investors, the Institute of Directors, the King Committee and the Audit Committee Forum.

Agulhas said the MAFR regulation, which is set to become mandatory on April 1 2023, seeks to ensure the independence of firms as well drive inclusiveness in the market.

But Ramon hit back, saying that the process is still underway, and includes further scheduled discussions with the standing committee on finance later this month.

"We believe this process should be respected and, as the standing committee has directed, IRBA should not rush into a decision without understanding the consequences," said Ramon.

The forum has requested an urgent audience with Gigaba to express its concerns and propose a proper process.

The forum said even with the limited research that has been presented to the standing committee, it is already abundantly clear that the MAFR will cause more problems than it solves.

"In most, if not all cases, it has increased market concentration – and, in addition, there is absolutely no evidence to support IRBA’s argument that it will speed up transformation of South Africa’s audit profession."

Ramon also expressed cost concerns. "The cost of MAFR in Europe, for example, is estimated to be around €16bn, and estimates for South Africa are close to R10bn over a ten-year period. This is a cost which South African corporates cannot afford, and nor can the South African economy as a whole," she said.

Agulhas explained that the 2023 deadline 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.

Radical transformation

Gigaba applauded the decision at Friday's briefing, 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.

Ramon said South Africa’s auditing standards are among the highest in the world, and play a crucial role in attracting and maintaining foreign investment and in ensuring good governance among South Africa’s corporate community. "That should be acknowledged and respected."

Ramon said the CFO Forum still firmly believes that proper – transparent – research should be done into any possible problems caused by the current audit framework.

This should include a full understanding of what role – if any – audit independence has played in any of the financial failures referred to by IRBA.

She said the CFO Forum is disappointed that the Finance Ministry has ignored numerous letters and requests to undertake a more inclusive, transparent and thorough consultation process.

"This does not bode well for the relationship between government and business, and we urge the Minister to reconsider his decision and instruct IRBA to undertake broader, proper consultation before making any final decisions.

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