How independent is your auditor and audit committee?

Findings from the IRBA’s research include the concentration of audits amongst the global networks, and the challenges faced by next – tier and indigenous firms to break into certain markets based on perceptions around these firms, and close and long-standing associations between audit committees and audit firms, which have been questioned by the audit regulator.

“The IRBA Code of Ethics requires auditors to be independent of their clients, but this assumes that auditors are also independent of those charged with governance (TCWG), or audit committees. We can only protect the interest of the investing public if there is a healthy environment of challenge between the auditor and TCWG, otherwise one has to wonder whether any long-standing and ‘cosy’ relationship could result in the auditors protecting the management or TCWG protecting their auditors, both at the potential expense of the investor and shareholder. It is of the utmost importance that the auditor is free from any influence if any confidence and reliance is to be derived from their opinions on a company’s financial statements”, says IRBA CEO Bernard Agulhas.

The IRBA Board recently introduced a Rule which requires auditors to disclose in the audit report the number of years which the audit firm has been associated with an audit client.

“It was important that we start to raise awareness amongst shareholders and investors of the tenure of some firms with their clients”, says Agulhas. “At least then shareholders can start asking questions around the independence of the auditor when they see tenure periods exceeding 100 years, although they should always be sceptical and alert to any circumstances and relationships which could impair independence.

“Of course, it is not simply the numbers which should invoke an enquiring mind, but whether there truly exists real independence when there is such long association between an audit firm and their audit client, and in some instances between the audit firm and the audit committee. It is the IRBA’s statutory responsibility to address any independence issues, and as custodian of the profession, also facilitate equal opportunities for all auditors in the market. But an equal responsibility should be placed on audit committees, which will hopefully themselves be transformed” says Agulhas.

In a South African context, the IRBA Board has also recognised the challenges with lack of economic transformation, and domination by the ‘Big 4 firms’ (PWC, Deloitte, KPMG and EY) within the profession.

Out of the 353 audit partners who sign off on the financial statements of all JSE listed companies, only nine are Black African and over 90% are audited by the Big 4 firms. This finding came from a survey undertaken by the IRBA to look at what can be done to facilitate transformation in the auditing profession, increase market competition and strengthen auditor independence.

“The numbers that we found come as a big surprise, especially since the profession claims to invest heavily in driving transformation amongst auditors. While we appreciate that transformation is not only a ‘numbers game’, we will only see true empowerment when opportunities are provided equally amongst everyone” says Agulhas.

Transformation of the auditing profession in South Africa was also one of the main recommendations of the World Bank Report on the Observance of Standards and Codes released in 2014, and commissioned by the Minister of Finance. Although the IRBA and other stakeholders have been involved in various initiatives to drive transformation of the auditing profession and to open up the market and opportunities for all auditors, much still remains to be done.

The IRBA is considering Mandatory Audit Firm Rotation (as opposed to individual partner rotation within a firm), Mandatory Audit Tendering and joint audits as some of the measures that could help address the challenges of transformation, market concentration and auditor independence.

“Our board will take a decision at their next board meeting on which measures will work for the South African environment. We needed to go through a consultation period to let various stakeholders, including other regulators, investors, auditors, TCWG and company directors, voice their opinions on the proposed measures,” concludes Agulhas. ENDS.

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