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- Since April this year, the Independent Regulatory Board for Auditors required companies to appoint new audit firms every 10 years.
- IRBA hoped this would strengthen auditor independence.
- But the Supreme Court of Appeal has just set aside this requirement.
- For more financial news, go to the News24 Business front page.
The Supreme Court of Appeal (SCA) has set aside the requirement for the rotation of audit firms as promulgated by the Independent Regulatory Board for Auditors (IRBA).
The judgment means entities are no longer required to appoint new audit firms every 10 years and removes the limitations introduced by IRBA's mandatory audit firm rotation rule (MAFR), which requirement became effective April 2023.
The East Rand Member District of Chartered Accountants, comprising members who are registered auditors who practise in small to medium-sized firms, had objected to the introduction of the mandatory audit rotation. IRBA introduced it in an attempt to enhance the independence and objectivity of audit firms in their dealings with client firms they audited.
The MAFR required that an audit firm (including a network firm) not serve as the appointed auditor of a public interest entity or listed company for more than 10 consecutive financial years. Following the 10-year audit tenure, the audit firm would only be legible for reappointment as the auditor after the expiry of at least five years.
IRBA had argued that the measure was necessary to "strengthen auditor independence" given the limited pool of audit firms and the dominance of small teams of finance directors holding sway over the appointment of auditors posed risk to audit outcomes.
South Africa has suffered a string of corporate scandals in recent years, with auditors at Steinhoff and Tongaat Hulett blamed for failing to protect investors from alleged manipulation of financial reports and fraud by the executive management teams.
In its judgment on Wednesday, however, the SCA ruled that the IRBA had acted beyond its powers in terms of the Auditing Professions Act of 2005 in the promulgation of the MAFR.
This leaves shareholders and boards of companies, or trustees in public interest companies, without any limitations to appoint any auditors as they deem fit.
In the five years since the rotation rule has been in the making (before it became effective in April), many companies had implemented the auditor rotation voluntarily, with more than 90% of JSE-listed firm having changed auditors in the period.
