Planning ahead for mandatory audit firm rotation

MANDATORY AUDIT FIRM ROTATION

PLAN FOR SUCCESS

Aspen Pharmacare’s Sean Capazorio says embracing mandatory audit firm rotation early was a strategic decision for Aspen.

In 2017, the Independent Regulatory Board for Auditors (IRBA) issued the rule that public interest businesses must change audit companies every 10 years, thus introducing mandatory audit firm rotation (MAFR). The regulation is aimed at improving audit quality by helping to ensure independence, as well as increasing market competition. It comes into full effect in April 2023. Aspen Pharmacare is a global speciality and branded multinational pharmaceutical company with approximately 10,000 employees at 70 established business operations in 55 countries. Headquartered in Durban, the company decided to embrace MAFR two years ahead of the implementation, which group CFO Sean Capazorio says was a strategic decision. “We took the view not to leave audit rotation to the last minute, but to go two years early to enable a comprehensive and detailed tender and auditor selection process. Going early increased our leverage position, enabled competitive bids and increased our ability to select a high-quality audit firm and lead partner from a larger pool, which would have diminished in size as more companies started to embark on audit rotation,” Sean says. The company had previously been audited by PwC for roughly 20 years across its global business and has rotated to EY. In South Africa, it employs a joint audit model and has rotated from SNG Grant Thornton to Motlanalo Inc. “We were not compelled to undertake a local rotation, but saw it as an opportunity to invest in and partner with another empowerment audit firm in their growth journey,” Sean says.

Auditing a multinational entity

Given the fact that Aspen operates across multiple countries on different continents, the audit process can be complex. “For our group audit process, we follow an IFRS-based audit (International Financial Reporting Standards),” says Sean. “Everyone is audited against the same standard. Then, within each jurisdiction we’re subject to the local statutory requirements (including tax regulations) in compliance with local GAAP (Generally Accepted Accounting Principles). So, for example, Netherlands would be audited according to Dutch GAAP (for local statutory purposes) compared to Ireland, which is IFRS based.” Sean explains that each jurisdiction has its own requirements, with some requiring directors’ reports, for example, or consolidation of all affiliate accounts (as is the case in Australia). “Obviously, tax is very specific to each territory and the tax audit would be very specific to each entity,” he says. MAFR is not in place in all the jurisdictions in which Aspen operates, but Sean says it wouldn’t make sense for the South African based holding company to rotate and to keep the rest of the group with different auditors. However, he admits that not all the auditors in local jurisdictions were thrilled by the change, given their long-standing relationship with Aspen.

Lessons to date

Sean was careful to emphasise that Aspen was still working towards finalising its first audit report with the new audit partners at the time of writing, but says that several lessons had already emerged from the process. These may prove valuable for other firms as they prepare for MAFR. “I think step one is to understand what your internal stakeholders are looking for,” he says. “We made sure we sought out input from all of our regions before the rotation, and we put a detailed scorecard together so that we could sort of get a sense of who, on balance, would be the preferred audit firm. You don't want to go with a global partner and then realise down the line that they've got quality problems in a specific region. It is critical to get buy-in from the local regional teams.” Sean says it’s also vital that the new audit firm must have the ability to comply with and implement a comprehensive and pragmatic transition plan. “We’ve found that EY had that – they had a very focused transition plan with detailed milestones and would keep us continuously updated on the various elements.” If possible, Sean believes it’s also valuable to involve the new audit firm in the previous financial year review. “Unfortunately, we couldn't really do that in our case because of Covid-19. But if the new auditor can shadow the outgoing one, it certainly would help a lot towards a more seamless transition,” he says. “Managing any early substantive work is also very important with the new audit firm because if you try and leave everything to the year-end, you’ll run into problems. We've identified quite a lot of areas together with the firm where we could do early audit work on specific higher risk or more complex areas, so we don't have to worry about those at the end of the process.”

MAFR pros and cons

Sean believes that no matter how well a rotation is planned or managed, it will always be a difficult

“I think step one is to understand what your internal stakeholders are looking for.”

process. “It is disruptive, it is very time consuming, and it’s also stressful,” he says. “The new auditors coming in have to learn your business from scratch and everybody is under time constraints.” In Aspen’s case, the rotation also happened during Covid-19 lockdowns, which meant that there was limited scope for in-person introductions or engagements, which added an extra challenge. “I think the key thing for us was to select an audit firm that had proper leverage across the globe so that if we had a problem, we could just go through one contact point and then they could rectify that in whichever jurisdiction,” Sean says. “But it’s not an easy process. You've got to get to know each other and they've got to understand our business. However, on the positive side, it does give you an opportunity to relook things in a different way and also just to make sure that what you've been doing has been checked by a second set of eyes. That gives you extra comfort.” Sean agrees that MAFR has a role to play in the future of audit in terms of upholding audit quality. He remains unsure, however, whether the 10-year rotation period is optimal and suggests this may need to be reviewed in future. He does believe that having different (and possibly both correct) views from two different firms does make for a more well-rounded audit approach, but says that in an ideal world, there should be a “crossover” period where outgoing and incoming auditors could work together to give an audit opinion before a full handover. While he admits that this might not be practical, it would certainly enable a smoother transition and is something worth considering as firms prepare for MAFR coming into effect and plan their own rotations. l