The head of the Independent Regulatory Board for Auditors (Irba) has called a recent Supreme Court of Appeal (SCA) ruling that set aside a requirement for corporates to rotate audit firms “disappointing”.
In 2017, Irba, in its bid to improve independence in the auditing profession, promulgated the rule, which made it mandatory for listed and public entities to appoint a new audit firm after each 10-year period.
But a legal challenge brought against Irba by a group of accountants resulted in the SCA’s judgment in May that said the regulatory board acted outside of its powers by introducing the rule. The effective date for the rule was set for 1 April 2023.
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While the canning of the ruling was disappointing, Irba maintains that rotational audit firm practices further strengthen the independence of both auditors and firms, its CEO Imre Nagy said on Wednesday.
He said Irba will continue to collaborate with National Treasury “to reinforce the independence aspects related to firm rotation in our legislation”.
Independence
Auditor independence has been a particular area of concern in South Africa in recent years.
The profession has been riddled with colossal corporate failures, such as the Steinhoff and Tongaat Hulett scandals that were marked by accounting irregularities and have compromised public and investor trust in the profession.
Nagy said despite the ruling, statistics have shown that close to 95% of listed companies on the JSE had already rotated in the five-year lead-up since the rule was announced in 2017. He added that some investors and companies have said they will voluntarily keep the rotation rule as part of their strategies.
“Yes, we’re disappointed with the ruling; we still firmly believe in the merits and the value of firm rotation to further enhance auditor independence of firms and auditors; certainly not the silver bullet, but it’s one of those mechanisms that could, collectively, with others [be used to] enhance compliance and independence.”
He said perhaps the rule may better fit in regulatory spheres other than the auditing body, such as the Companies Act.
“We will see where it is put out in consultation and where it fits. Maybe it doesn’t fit in our act, maybe it fits in the Companies Act,” he said.
“We just don’t know, but we are busy gathering the legal counsel’s views on where it could be sitting,” Nagy said.
Nagy was speaking in a public lecture hosted by the University of Johannesburg’s accountancy department, where he also highlighted some of the key challenges faced by the industry.
Among them are gaps in financial reporting and governance, which he said increase the risk of more corporate failures.
“These include a lack of accountability and visible lack of accountability and consequence management of all role-players in the ecosystem, fragmented regulation, [and] a lack of collaboration among regulators and law enforcement agencies,” he said.
He said the waning attractiveness of the profession is an emerging challenge.
Audit firms are generally struggling to attract and retain talent due to the increasing availability of more modern and easier career choices, high requirements and tuition fees to study accounting, low remuneration, high work stress, and negative reports about the industry, Nagy said.
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