Black audit firms need a big step up - body

Cape Town – South Africa will need more than just the rotation of auditing firms to address the low level of participation of black auditing firms in the economy, the Independent Regulatory Board for Auditors (IRBA) said in a statement.

IRBA – the body that oversees the auditing profession in South Africa – made a representation at a meeting of Parliament’s standing committee on finance on Wednesday about progress with mandatory audit rotation and transformation of the auditing sector in South Africa.

The body proposed the Mandatory Audit Firm Rotation (MAFR) framework in November last year, in terms of which an audit firm won’t be allowed to serve as the registered auditor of a listed company for more than 10 consecutive financial years. The same audit firm can only be reappointed after the expiry of at least five financial years. 

MAFR will be effective for the financial years on or after 1 April 2023. 

READ: Call for overhaul of auditing in South Africa 

IRBA said in its statement that audit rotation was prescribed in terms of the Auditing Profession Act to safeguard auditor independence in response to concerns of declining audit quality, excessive tenures and increasing concerns around a lack of independence, both real and perceived, that could negatively impact the quality of the audit opinions.

“However, audit rotation alone won’t facilitate the growth and participation of black audit firms in a market that has been historically dominated by the big four audit firms,” the statement read. “Additional measures to drive transformation will be required to address government’s concerns regarding de-concentration of the audit market and transformation.”

IRBA recommended a number of interventions to bring about meaningful black participation so that black-owned firms can be grown and be able to take on the work of large listed entities, such as:

- increase the number of qualification routes to registered auditing by increasing the number of accredited professional bodies

- enhance long term career prospects for black accountants in auditing

- improve the attraction, retention and progression approach for black auditors and ensure equitable opportunity and access on par with white counterparts

- advance the number of black partners in senior and executive roles

- increase the number of black partners with equity ownership in the audit firms

- crack down on and expose discriminatory recruitment practices that limit opportunities and career path possibilities for black accountants

- create access to markets for black-owned firms and include these in mainstream auditing and

- and hold broader governance structures accountable for transformation targets and goals through comprehensive regulation of the broader accounting environment.

READ: Transformation at the heart of mandatory audit firm rotation 

IRBA said the implementation of mandatory audit firm rotation is a first step towards breaking down closed and restricted markets which will allow opportunities for black auditors to participate. Greater transparency in the profession is needed though – specifically with regard to audit firm ownership, transformation policies and performance. 

In the UK, audit firms are required to disclose network relationships and the governance structure of a particular auditing firm, as well as disclosures on independence, remuneration of partners and financial statements.

Although transparency reporting is not yet mandatory in South Africa, IRBA believes it could become a useful tool for auditing committees and shareholders and in South Africa it could be extended to include disclosures of BEE ownership and employment equity reports.

Governance structures that select and appoint audit firms must also undergo transformation, IRBA said, to ensure diversity and that the selection and appointment of auditors are not restrictive, selective or influenced by the management of companies.

During public hearings on the MAFR framework held in February this year, a number of financial sector stakeholders – including representatives from the big auditing firms - objected to the proposals, saying that such a framework has significant cost implications.

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

They also questioned why IRBA wants to change the framework, given that South Africa has the world’s best auditing standards.

IRBA was also criticised for failure to provide research to substantiate its notion that auditor independence in South Africa is a matter of concern.

The stakeholders further argued that the MAFR framework will in fact reduce the accountability of audit committees.