Is MAFR supporting diversity and eliminating bias, or could it be doing better?
Many companies have already carried out their mandatory audit firm rotation (MAFR), and with the 2023 deadline looming, others will soon follow. The idea behind MAFR was to shorten audit firm tenure and to open up auditing opportunities in the public sector to firms outside of the Big Four.
With this in mind, this year’s virtual Finance Indaba held an Impact Session with leading experts to examine how this regulation has affected the auditing industry and business environment.
In 2017 the Independent Regulatory Board for Auditors (IRBA) issued a rule that public interest businesses must change audit companies every 10 years. This rule will come into full effect in April 2023.
Acting CEO at the IRBA Imre Nagy said that while it is still to early to measure the impact on audit quality, newly appointed firms are coming into an environment with the benefit of fresh eyes and a clean slate.
“If an auditing firm has been auditing a particular business for several uninterrupted decades, can you objectively conclude that there is no underlying bias or relationship that developed over that period that could impact on the independence and indirectly the audit quality?” he asked.
He said international auditing regulation standards favour shorter audit tenures. Locally, businesses have voluntarily implemented MAFR ahead of the 2023 deadline. “About 43 percent of JSE-listed companies have rotated since 2017,” said Imre.
The proposal for MAFR wasn’t well-received by everyone at the time, PwC being among the detractors. The firm’s CEO, Dion Shango, explained why the auditing giant wasn’t completely sold on the idea, partly because he doesn’t believe it supports the diversity it is purported to.
“It costs money and investment to participate in all of these tender and proposal processes,” he said. “What we are seeing is that some of the smaller firms don’t have the financial resources to be on this continuous treadmill of participating in the market.”
Another reservation PwC had about MAFR is that new audit firms take an average of three years to get to know the entity and understand how that business works. But Dion conceded that longer tenures of 20 years and more could affect the auditing firm’s independence.
SNG Grant Thornton CEO Victor Sekese told the panel that he’d recently completed his dissertation on audit regulation. He said that MAFR allows mid-tier enterprises a seat at the table. However, an invitation did not necessarily result in appointments. “As of April 2020, the Big Four are still dominant,” said Victor.
His dissertation also explored the rising levels of corporate and audit failure. “Participants in my study believed that it wasn’t necessary to put in layers and layers of regulation. They understood where the regulators were coming from, but if things go wrong, people will find ways to crook the system,” said Victor.
He said there was support for practical interventions like strengthening the regulatory environment around key players in the governance ecosystem. “Firstly, implement stringent requirements that key executives must meet for them to be members of professional bodies,” he suggested. He said that these bodies must also have the power to sanction members to keep them accountable: “Right now, there is no requirement for one to be a director.” said Victor.
He said there was also overwhelming support for the UK’s model of joint audits. “This would be where one firm is from the Big Four, and the other is a mid-to-small tier firm.”
PwC is already on this journey. They’ve partnered with smaller black-owned audit firms. “On a number of our listed client audits, we bring in an emerging firm to execute the audit with us,” said Dion.
On a similar journey from the client side is Aspen Pharmacare. CFO Sean Capazorio explained that the pharmaceutical multinational began using the joint audit model about seven years ago. They’ve recently rotated their Big Four and emerging audit firm through a tender process. “It helps to build local expertise; in some areas, you get a healthy debate on interpretation between the two firms,” said Sean.
The international standards governing the auditing industry mean that even if firms are using different methods, they will ultimately have to reconcile following international standards. He said if the industry is serious about deconcentrating the market, then rigorous reform is required.
“We have tried and tested successful case studies in the public sector. In the mid-90s, when the government implemented the triple BEE framework, none of the emerging firms had experience,” explained Victor. Emerging firms were gradually introduced into the fold and made to work with the Big Four to gain experience. Over time they graduated and moved on to play a more meaningful role in the public sector.”