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The CFO Forum Chairman's statement on concerns over mandatory audit firm rotation consultation process

SEPTEMBER 30, 2016
The CFO Forum Chairman's statement on concerns over mandatory audit firm rotation consultation process

The CFO Forum, a group of chief financial officers from some of South Africa’s largest companies, has expressed concern over the process followed by the Independent Regulatory Board for Auditors (IRBA)  in arriving at its decision to impose mandatory audit firm rotation (MAFR) on the country’s audit firms. The CFO Forum also disputes the IRBA’s findings that MAFR will enhance auditor independence.

Forum members have a strong view that the IRBA has not adequately engaged with affected stakeholders on these proposals. The IRBA has not shared a detailed proposal during either the initial information sharing sessions or the subsequent discussions around transitional arrangements. The Forum believes its members’ concerns were not adequately considered, despite a number of written submissions and efforts at constructive engagement with the IRBA.

The consultation process followed by the IRBA lacks robustness and transparency.  There are a number of matters requiring consultation and it may not be possible to address these adequately through a single process.  The Forum believes that any form of discussion, in the absence of a specific written proposal, does not constitute proper consultation, particularly for a matter of such importance.

“It appears that the outcome of this regulatory change proposed was predetermined”, says Chairman of the CFO Forum and AngloGold Ashanti Chief Financial Officer Christine Ramon.

Given auditors' fundamental role in establishing confidence in capital markets, the IRBA should follow a fair and robust public consultation process which enables all affected parties to have their opinions recorded and appropriately considered, as is required in terms of South Africa’s Constitution. Furthermore, MAFR dilutes the oversight role of audit committees insofar as it pertains to auditor appointments. It also undermines the rights of shareholders, who currently have the right to approve the appointment of auditors.

“If shareholders’ rights are changed, then the process must be effected through the Companies Act, rather than through regulations applicable only to auditors that have indirect, significant consequences on publicly traded entities” says Ramon. A process to amend the Companies Act would be subject to significant public input and evaluation.

The South African Institute of Chartered Accountants (SAICA) initiated a debate among its diverse member constituents and stakeholders through a survey aimed at establishing their views on the measures proposed by the IRBA.  The results of this survey were released on Tuesday.

Ramon says that the Forum believes that MAFR is not the appropriate mechanism to achieve the IRBA’s objectives. Her view echoes the results of the SAICA survey, in that she believes that whilst the three IRBA objectives are valid, they should be addressed separately. By addressing each objective separately, she says, the measures implemented would be fit-for-purpose and unintended consequences mitigated as far as possible. The Forum members are sceptical of the advantages, and concerned about the impact of the disadvantages and the unintended consequences of MAFR.

“Audit partners rotate every five years and there are effective regulatory oversight bodies in all jurisdictions who police a very strict set of rules and regulations, including the new rules on audit committee oversight which address audit quality and auditor independence” says Ramon. “The Forum’s view is that the disadvantages far outweigh the advantages. The cost, complexity and management effort to rotate auditors whilst still trying to operate efficiently in a complex and volatile macroeconomic environment, cannot be justified to shareholders who will ultimately be expected to bear the cost of MAFR.”

Effective engagement will require the IRBA, in a structured process, to table a detailed proposal for the implementation of MAFR, as well as for the other measures, upon which comments and consultations can be based.

We also suggest that the JSE and the IRBA undertake a broad-based survey and impact assessment, followed up with a thorough and transparent consultation process among accountants, registered auditors, investors and all other affected parties to determine whether or not they support MAFR. Then, if appropriate, the proper transitional measures should be identified and agreed upon. We believe that this research should be supplemented with international research data including a full analysis on MAFR on a country by country basis together with SAICA’s survey results.

Implementation of MAFR is simply premature, as there are a host of issues that have not been considered, such as which entities’ will be subject to MAFR, on what basis it will be rolled out, exemptions, the abrogation of shareholder rights, cooling off periods for auditors, and the appropriate place for these regulatory changes to be made”, says Ramon. Transformation in South Africa is an important objective which the CFO Forum supports however MAFR is not the means to achieve this.”