Mandatory audit firm rotation in South Africa : suggested solutions to prospective problems

Abstract

In response to the increasing number of financial scandals, many jurisdictions introduced more prescriptive rules with the aim to enhance the independence of auditors. Similarly, the Independent Regulatory Board for Auditors (IRBA) issued a rule on mandatory audit firm rotation (MAFR) for South African public interest entities (PIEs) effective from 1 April 2023. This regulation forbids auditors of PIEs to be appointed as auditors for more than ten consecutive years. Contrasting views exist on the effectiveness of MAFR in South Africa. Proponents believe that this rule will increase audit quality due to improved auditor independence, however, opponents argue that MAFR will reduce audit quality due to the loss of client and industry-specific knowledge by the auditor. This research study aims to contribute to auditing literature by examining the consequences MAFR had in other jurisdictions which implemented similar rules. Differences between South Africa and the identified countries are used to anticipate how specific problems could manifest in a South African context. The difficulties experienced by other countries are then combined with the expectations of affected parties in South Africa. Suggested solutions to prospective problems are explored with the aim to help audit firms and the IRBA set pro-active measures in place to ensure that MAFR has the desired effect on audit quality in South Africa. The primary research objective of this study is to determine what pro-active measures could reduce the potential negative effects of MAFR to such a degree to support the implementation of MAFR in South Africa. This study consists of both a literature study and a qualitative empirical study. The literature study provided background for the implementation of MAFR in South Africa and includes a detailed comparison with eight other jurisdictions around the world that already implemented MAFR. The empirical study supplemented the findings of the literature study by exploring the views on auditor independence as well as on potential problems and possible solutions through semi-structured interviews with six registered auditors and six academics teaching auditing. The study found that MAFR will likely improve auditors’ independence in appearance which would help restore the public’s opinion of the audit profession. Possible solutions proposed to mitigate the effect of client specific knowledge loss include the up-skilling of audit trainees and the management of audit clients with problem solving abilities and encouraging knowledge sharing between the predecessor and the successor audit firms. Furthermore, it is suggested that the IRBA should introduce an audit fee framework to assist auditors in determining and explaining audit fees to clients to prevent low-balling. Besides the possible contribution towards improved independence in

appearance, it is believed that MAFR will have a limited effect on the audit market concentration and the transformation in the audit profession. This dissertation contributes to the gap in literature on MAFR in South Africa by anticipating possible problems based on experiences in other jurisdictions. Furthermore, the suggested solutions which were gathered provides the IRBA as well as audit firms with measures that can be put in place to help limit likely negative consequences that will be caused by MAFR. The empirical evidence of this study could also assist countries which are still deliberating on introducing MAFR by providing an understanding of how knowledgeable parties would react to the implementation of such a regulation; and which problems should be addressed from the start.