MAFR not a silver bullet

Evan Pickworth BD Law & Tax Editor

The corporate sector and auditing profession have the small but feisty East Rand Member District of Chartered Accountants to thank for achieving clarity on the status of mandatory audit rotation

These guys certainly took the fight to the statutory body controlling that part of the accountancy profession involved with public accountancy in SA, the Independent Regulatory Board for Auditors (Irba) After all, this was a decision meant to kick in this year but which has been in the making for a full five years, causing much ruckus in an industry that has become used to multidecade audit-client relationships of trust

In a decision which received a lot of media attention in June, the Supreme Court of Appeal (SCA) reviewed and set aside Irba’ s proposed mandatory audit firm rotation (MAFR) rule as promulgated on June 5 2017 in the Government Gazette

The legal battle to get the their voluminous tome and, as the ruling above shows, they were not impressed

In fact, they said the record was awash with reports and unnecessary material not required for the adjudication of the matter

The court also expressed its displeasure in numerous matters at the disregard for the rules in the preparation of the record The necessary record to resolve the application “should not have exceeded seven volumes”

The court said both parties were responsible for the state of the record, hence the 50% ruling

This would no doubt have stung, but is in line with a number of recent rulings by judges fed up with litigants wasting time or getting embroiled in minutiae and general nastiness but then discontinued it for certain sectors There is no reason SA will be penalised in any way for not doing it either appeal heard was also highly acrimonious and led the SCA to rule that the attorneys for both the appellants and the respondents can recover only 50% of the costs associated with the preparation, perusal and copying of the record in the appeal

It is indeed hard to believe that a matter as fairly straightforward as this could put Leo Tolstoy s War and Peace in its shade for volume Intrepid bibliophiles who have read War and Peace will know that getting through the 1,225 pages is a trial albeit a rewarding one Yet the record in this audit case comprised an astonishing 15 volumes and 2,633 pages!

The attorneys should indeed be applauded for their alacrity and ardour but they forgot that five busy and time-pressed appeal judges would have to wade through

In context the decision does not mean there is no hope for mandatory audit rotation just that it must be done within the ambit of the law and rules for the profession The added cost, red tape and lack of authority to make rules were in the spotlight

This all mattered as the change was going to essentially dictate to companies and boards how to manage their affairs

Criminals

The issue is not about the principle of rotation it does make sense Countries such as Australia, China, Denmark, Finland, France, Germany, Greece, Malaysia, the US and UK do have it in place

But as the head of a leading audit firm told me recently, countries such as Spain, Italy and Poland do not have a mandatory audit rotation rule either and it has not hit their investments or economies

Other emerging-market countries such as South Korea, Argentina and Brazil initially adopted the policy

But to get there, if Irba and legislators change the law through amendments to the act the industry and corporate sector must buy in

It will never be appropriate to position mandatory audit rotation as a silver bullet to stop scandals and corruption Criminals are too sophisticated and a thousand steps ahead for something like this to stop them Blaming auditors every time they fail to spot something in good faith is not the answer to all SA s corruption ills Blaming them when they are party to the corruption is a completely different matter altogether

The auditing CEO I spoke to is quite right in saying that while the ruling is important in achieving clarity, the focus should actually be on making an even more robust annual assessment of independence The industry is also more than willing to work with Irba in ensuring the highest possible standards are maintained in line with the duties and responsibilities of Irba’ s legislated mandate

There is absolutely no reason for Irba to feel aggrieved when a company does not rotate after 10 years Many companies may, in fact, rotate as part of their striving for greater independence

But there are many reasons companies may stick with their most trusted firms one being cost Starting up a new audit firm is stressful and can take at least the first year just to onboard them There are also clear risks that things may be missed in those early years

Then there is the issue of trust Companies should be able to choose who they think is the best

In the judgment, Irba was seen as acting beyond its authority in pushing these changes through the way it did Quite simply, the Auditing Professions Act 26 of 2005 is pretty clear in setting out the objects and functions of the Irba They are set out in section 2 of the act and include the regulation of audits performed by auditors, setting and maintaining requisite standards of competence and ethics, and providing for disciplinary procedures

Section 4 confines Irba’ s rule-making power to the prescription of standards in respect of defined functional areas Simply put, Irba may not exercise a power not conferred on it by its founding legislation nor can it act in a manner that is inconsistent with the act

MAFR, however, is not a standard of competence or a professional standard The net effect of the MAFR is that it imposes a broad restriction on companies, audit committees and their current and future shareholders from appointing an audit firm of their choice

At the same time, it prohibits audit firms from accepting appointments even if selected by a company

It is also important to note that SA already has worldclass independence rules in place Section 92 of the Companies Act 71 of 2008 regulates individual audit tenure and provides that an individual auditor or designated auditor may not serve as an auditor of a company for more than five years It provides for a cooling-off period of two years between the appointment cycles

What should change going forward is compliance must become even more prominent and robust than before, no matter whether rotation is mandatory or not