1. STRENGTHENING AUDITOR INDEPENDENCE Mandatory Audit Firm Rotation BERNARD PETER AGULHAS, CEO

2. The IRBA 4 Pillar Strategy

3. The role of audit and assurance
By promoting integrity in Financial Reporting and building a basis for providing confidence, auditors reduce financing costs and contribute to the efficiency of capital markets, thereby promoting economic growth.

4. World leader in Audit Standards
The world’s number one for auditing and reporting standards
As measured by the World Economic Forum’s Global Competitiveness Report (published 28 September 2016)
Seventh consecutive year that the country holds this position
Signals robust standards setting process, sound inspections methods and ‘right – touch’ regulation
Recommendations from the World Bank (2013)

5. Creating a Competitive Market Place
Audit Failures
Recent fines payable by audit firms
Market Concentration and dominance of large firms
Comprehensive Regulation to address systemic failure
Measures introduced (e.g. MAFR, Prohibition of Non-audit Services)

6. Background
Corporate failures that continue to shape regulatory reforms
Corporate failures and global financial crises drive focus on the independence of Auditors and the responsibility of Regulators.
High profile cases include: Enron, WorldCom, Parmalat, Tyco International, Royal Dutch Shell and Siemens.
Local cases include: Leisurenet, Randgold and Regal Bank
Global developments
The European Union (EU) introduced measures such as mandatory audit firm rotation, mandatory audit tendering and joint audits in order to strengthen auditor independence effective from 17 June 2016
32 countries across Europe
Risk of failure of one of the major audit firms
In 2016 alone all the “Big 4” firms globally have been fined, sued or settled court cases with amounts running up to billions of dollars

7. When it goes wrong….

8. Penalties / Settlements - major audit firms 12 months to date
Penalty
Publish Date
Reason EY
$17.4m
22-Dec-15
Audit Quality
Deloitte
$233,000
19-Feb-16
€1.8m
24-Mar-16
€2.2m
KPMG
€1.2m
PwC
€845,000
€1.24m
$5.5bn
11-Aug-16
Collapse; Fraud; Audit Quality
Civil claim suit
23-Aug-16
Fraud; Audit Quality; Auditor Independence
£2.3m (cut from £3.5m)
31-Aug-16
Near collapse; Audit Quality
Referred by whistleblower
01-Sep-16
Audit Quality; Auditor Independence
HK$30,000
12-Sep-16
$9.3m
19-Sep-16
Auditor Independence
$11.8m
19-Oct-16
Fraud; Audit Quality
£4m
10-Nov-16
Collapse; Audit Quality; Misconduct

9. High profile global cases since 2013

10. Current measures in place
Mandatory audit partner rotation
In terms of Section 92 of the Companies Act, the same individual (engagement partner) may not serve as the auditor or designated auditor of a company for more than five consecutive financial years.
Prohibition of non-audit services
Section 90(2) prohibits an auditor to provide audit and certain specified services to the same client
Disclosure of audit tenure
The IRBA published a rule that makes it mandatory that all auditors’ reports on Annual Financial Statement of all public companies shall disclose the number of years that the audit has been the auditor of the entity (audit tenure).
Reporting, including <IR> and KAM

11. Scope and objectives of research
The objectives of the initiative are as follows:
Strengthening auditor independence
Addressing market concentration / Provide access to markets
Promote transformation in the profession
The scope of the project considered the following three measures:
Mandatory Audit Firm Rotation (MAFR);
Mandatory Audit Tendering (MAT); and
Joint Audits (JA).

12. Mandatory Audit Tendering

13. Mandatory Audit Firm Rotation

14. Joint Audits

15. What the EU initiatives aim for
Clarifying and better defining the role of statutory audit regarding public-interest entities
Improving the information that the audit firm provides to the audited entity, investors and other stakeholders
Improving the communication between auditors and audited entities
Preventing any conflict of interest arising from the provision of non-audit services
Mitigating the risk of any potential conflict of interest around selection, fees, and appointments
Broadening the choice and improving independence
The European Parliament and the Council of the European Union issued in April 2014 Directive 2014/56/EU amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts as well as Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities. Member states were required to implement the new requirements by 17 June 2016, when the Directive and the Regulation became applicable. (European Union, 2014)
Some of the key reasons given as objectives of the Regulation, are outlines in paragraph 34 :
clarifying and better defining the role of statutory audit regarding public-interest entities,
improving the information that the statutory auditor or the audit firm provides to the audited entity, investors and other stakeholders,
improving the communication channels between auditors and supervisors of public-interest entities,
preventing any conflict of interest arising from the provision of non-audit services to public-interest entities,
mitigating the risk of any potential conflict of interest due to the existing system whereby the auditee selects and pays the auditor or of the familiarity threat, by facilitating the switching of, and the choice of a statutory auditor or an audit firm to public-interest entities,
broadening the choice of statutory auditors and audit firms for public-interest entities and
improving the effectiveness, independence and consistency of the regulation and
Improving oversight of statutory auditors and audit firms providing statutory audits to public-interest entities including as regards cooperation at Union level”.(European Union, 2014)

16. Research Findings
Independence

17. Threats to independence
Familiarity threat between CFOs and the incumbent auditors
Familiarity threat between audit committee chairs and incumbent auditors
PIC concerns regarding the independence of auditors and company directors
Inspection findings relating to ethical requirements
Long audit tenure
Global developments on strengthening auditor independence
Independence is defined in the IRBA Code of Professional Conduct (the Code) as comprising two elements:
independence of mind and
independence in appearance.
Independence of mind is the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity as well as exercise objectivity and professional scepticism.
Independence in appearance is the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit or assurance team’s integrity, objectivity or professional scepticism has been compromised (IRBA).
One of the significant findings was the Familiarity threat between the CFO/Financial Director and incumbent auditors. Our analysis revealed that 18% of the CFOs/FDs of the JSE Top 40 listed companies were previously employed by the audit firm that was listed as the appointed external auditor to that company in the annual report.
Another significant finding was that 25% Audit Committees of the JSE Top 40 listed companies are chaired by a member who were previously employed by the audit firm that is the appointed as external auditor to that company. This raises a Familiarity threat between the Audit Committee and the Audit Firm. In this regard, the PIC, which holds 12.5% of the market capitalisation of the JSE Top 40 listed companies, highlighted that it had voted against the reappointment of auditors where the audit firm had been auditing an entity for more than nine years as it believes that after nine years there is a familiarity threat, which may impair auditor independence.

18. Audit tenure for listed companies
Name of company
Auditor
Audit tenure
Audit tenure exceeding 40 years
Murray & Roberts Holdings Limited
Deloitte
114 years
Naspers Limited
PwC
101 years
AECI Limited
KPMG
91 years
Santam Limited
PWC
87 years
Woolworths Holdings Limited EY
84 years
Tongaat Hulett Limited
78 years
AngloGold Ashanti Limited
72 years
Hulamin Limited
66 years
Standard Bank Group Limited
KPMG & PWC
53 years
Mondi Limited
48 years
Tsogo Sun Holdings Limited
47 years
Group Five Limited
46 years
The Foschini Group Limited
45 years
Combined Motor Holdings Limited
40 years
A review of our Audit Firm Inspections in 2015 revealed significant deficiencies in 68% of firms inspected thereby significantly raising concerns regarding the independence of auditors. These inspections are performed in terms of Section 47 of the Auditing Profession Act. While a variety of deficiencies were identified, the root cause of these findings was the failure to maintain independence as an underlying principle for high audit quality.
In 2015, to address the threat associated with long audit firm tenure, the IRBA made the decision to require the mandatory disclosure of audit tenure, which is consistent with measures implemented in other jurisdictions. in terms of sections 9 and 10 read with sections 1, 2 and 3 of the Auditing Profession Act, Act 26 of 2005, published a Rule in the Government Gazette Nr of 04 December 2015 which makes it mandatory that all auditor's reports on Annual Financial Statements shall disclose the number of years which the audit firm/sole practitioner has been the auditor of the entity (audit tenure).
A review of this information revealed that in the most extreme case the audit firm tenure was 91 years, with others at 66, 72, 48, 40 and 35 years.

19. Impact of audit fees on previous audit firm rotation in South Africa
Vodacom Limited
31 March 2015
31 March 2014
Audit fees
R26 million
R22 million
Audit firm
PwC
Deloitte
Sasol Limited
30 June 2015
30 June 2014
R87 million
R86 million
KPMG
Bidvest Limited
30 June 2008
30 June 2007
R44 million
R39 million
Famous Brands Limited**
28 February 2016
28 February 2015
R4.6 million
R3.4 million
RSM Betty

20. Research Findings
Market concentration

21. Audit market share for listed companies
In terms of concentration of the market, our study found that more than 90% of the market capitalisation companies listed on the JSE whose audit reports are signed off by South African Engagement Partners are audited by a member of the Big Four.
* Concentration measured by share of market capitalisation on the Johannesburg Stock Exchange.

22. Global presence of major audit firms in SA
Name of Firm
Deloitte
220,000 professionals in more than 150 countries and territories. EY
212,000 employees in 28 regions across Americas, EMEIA, Asia Pacific and Japan.
KPMG
174,000 in 152 countries and in over 700 cities worldwide.
PwC
people in 157 countries
BDO
or more employees in 150 countries
Grant Thornton
42,000 people in over 130 countries
RSM Betty
or more staff in 120 countries
Howarth Leventon Boner
More than 200 independent accounting firms in over 130 countries
SizweNtsalubaGobodo
While rooted in Africa, its international links with leading global consulting and professional services firms enable it to meet the cross-border needs of its clients,
Nkonki
Member of Kreston International Limited with more than staff in over 100 countries
PKF
Member firms operate under the PKF brand in 440 cities and operate in 150 countries across five continents.
Nexia SAB&T
More than 250 member firms operating 565 offices in over 120 countries

23. Research Findings
transformation

24. Racial demographics of audit partners signing off on listed companies
Racial demographics of audit signing off JSE listed companies
Number of individual auditors
African 9
Chinese 1
Coloured 5
Indian 33
White
255
Non South Africans – This relates to auditors from other jurisdiction 50

25. Further solutions suggested from consultation
Strengthening of audit committees
Public disclosure of firms’ inspections report
Enhance audit committee report and auditor reporting
Increase the IRBA penalties
Provide audit quality indicators to relevant stakeholders
Strengthen the audit regulator

26. Challenges Resistance to change in age old practices and patterns
Acceptance of the IRBA’s authority as the audit regulator appointed to deliver on the State’s mission
Motives which could be marred by possible self-interest
Conflating independence, concentration and transformation
Threats of legal challenge

27. Timeline of consultation process
Initial research phase and Consultation Process
July 2015 – July 2016
Public Consultation Process
25 October 2016 – 20 January 2017
The IRBA consulted with, and reported progress to the Ministry and Treasury throughout the process.

28. Proposed requirements
An audit firm shall not serve as the registered auditor of a listed company for more than 10 consecutive financial years.
Effective date
The requirement is effective for financial years commencing on or after 1 April 2023.
Transitional provisions
If at the effective date, the listed company has appointed joint auditors and both has had audit tenure of 10 years or more, then only one audit firm is required to rotate at the effective date and the remaining audit firm will be granted an additional two years before rotation is required.

29. THANK YOU