Shareholders speaking out on auditor appointments
“What is clear is that the shareholders are beginning to make their voice heard at AGMs regarding the necessity for firm rotation to end excessively long relationships,” says Bernard Agulhas (pictured), CEO of the Independent Regulatory Board for Auditors (IRBA). “Where audit committees may feel a 20-year, 50-year or longer relationship might not impair auditor independence, shareholders are saying otherwise.”
Since announcing that Mandatory Audit Firm Rotation (MAFR) would be a requirement from 2023, the IRBA has been tracking the results of shareholder voting at AGMs with respect to the reappointment of auditors. A visible trend towards voting against the reappointment of auditors is developing, with 27 percent of the surveyed ordinary resolutions increasing the opposing votes by up to 40 percent. This appears to be the case, particularly for those companies where the tenure is excessively long.
The IRBA issued a regulation in December 2015 requiring audit firms to disclose the length of tenure of an audit in the independent auditor's report to shareholders. This was to ensure that shareholders were aware of the length of the relationship between the auditor and their client, which should have also been considered by the audit committee when the auditors were considered for reappointment.
"Of the 102 auditor appointment resolutions tabled at annual general meetings since November 2016, 51 recorded an increase in opposition; of these 24 resulted in significant shareholder opposition to the auditor's reappointment. The most significant opposition recorded an increase of up to 40 percent year-on-year in the votes against the reappointment of auditors."
The most recent AGMs to be subject to this increased shareholder opposition were Telkom and PPC Ltd, Agulhas continued, which reflected 23 percent and 14 percent increases in the no vote. "While such an increase may seem insignificant in some instances, it indicates to us that even minority shareholders are finding their voice," he said.
Of those 24 resolutions (see table below) that recorded an increase in the vote against the reappointment of auditors, only three had previously recorded an opposing vote above 1 percent (but less than 10 percent); the remainder had seen shareholders almost unanimously adopt the recommendation of the audit committee at the preceding AGM. The reality is that even with some shareholders opposing the reappointment of auditors, the vote is not binding without a majority. This is not in the best interest of minority shareholders.
"As a first step, we are satisfied that the rule to disclose tenure of audit has served the purpose of highlighting excessively long relationships between companies and their auditors. However, there is still more shareholder education to be done, as it is the shareholder - and not the management of the company - who is the auditor's real client," Agulhas concluded.