Over the past few years, the audit industry has been under significant scrutiny where the independence of auditors has been questioned.
In response to this, and to further drive auditor independence, the Independent Regulatory Board for Auditors (IRBA) issued a rule prescribing that auditors of public interest entities (PIEs) in South Africa must comply with mandatory audit firm rotation (MAFR) with effect from 1 April 2023.
So what is a PIE?
- all listed entities; and
- any entity defined by regulation or legislation as a public interest entity or for which an audit is required by regulation or legislation to be conducted – in compliance with the same independence requirements that apply to the audit of listed entities. Such regulation may be promulgated by any relevant regulatory body, including an audit regulator such as the Board.
In general, entities (as classified in point b) above) with large and diverse stakeholder groups are likely to be considered PIEs. These include banks, insurers, collective investment schemes, pension fund administrators etc.
What do the new rules entail?
In the past, it was mandatory for audit partners to rotate after a period of five years, without the need to change audit firms entirely. The new rules assert that in addition to the partner rotations, all PIEs must rotate their audit firms (including network firms) after a period of ten consecutive financial years. Any particular firm will only be eligible for reappointment to the same entity after at least five consecutive financial years.
The new rules come into effect on 1 April 2023. This means that, for example, if you have a February yearend and your auditors have performed your audits since the 2013 financial year, you would need to rotate your audit firm for the 2024 financial year.
What is the impact of MAFR?
Following the directives of this new rule, PIEs will have no option but to appoint a new audit firm every ten years. This means that the new audit teams will have the arduous task of learning the business and its internal workings. Right away, this could result in increased audit fees, not to mention the time that will need to be spent in consultation.
The process is widely contested in the market, with many firms stating that the impact of this new rule has not yet been fully assessed and will not increase independence or enhance audit quality. The JSE has responded positively by being one of the first entities to rotate their auditors to support the motion.
What you need to do
If your company is a PIE, it is time to start planning around when the best time would be to rotate your auditors. This should give you sufficient time to obtain quotes from other firms and make any necessary internal adjustments which can smooth the process along.
If you would like to know more about the Mandatory Rotation of Auditors, please contact our audit department to discuss any questions you may have in this regard.