No more mandatory rotation of audit firms in SA

After years in the making the mandatory audit firm rotation rule has been reviewed and set aside.

The rule, promulgated in 2017, obliged listed and public interest companies to appoint a new audit firm after a tenure of 10 years.

The audit profession has been marred by public scandals involving accounting irregularities and misrepresentations that have severely eroded public trust. Steinhoff is one of the biggest scandals to hit the profession, where investors, including pension funds lost millions of rands.

The main aim of the rule was to ensure auditor independence.

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The Supreme Court of Appeal (SCA) published its judgment on Wednesday (31 May), following an appeal by the East Rand Member District of Chartered Accountants and its chair Jaroslav Cerny.

The voluntary association petitioned the SCA after the Pretoria High Court dismissed its application for a review with the aim of setting aside the rule.

Its initial application and subsequent appeal were opposed by the Independent Regulatory Board for Auditors (Irba), the statutory body established to regulate the audits of auditors as well as the setting and maintaining of standards of competence and ethics.

Effective date

Irba decided in July 2016 to introduce the mandatory audit firm rotation rule and published it on 5 June 2017. The effective date for implementation was set for 1 April 2023.

Imre Nagy, CEO of Irba, last year reported on progress made with the implementation of the rule having identified several public interest entities that would also have been affected by the rule.

Irba on Wednesday declined to comment, saying it will study the judgment and then discuss the matter with the Irba board before deciding on future steps. The association could not be reached for comment.

The South African Institute of Chartered Accountants (Saica) says it respects the judicial system and would therefore leave the issue with the regulator, which Saica believes is best suited to express an opinion on the judgment.

The association objected to the rule from the beginning. Many of its (association) members represent small and medium-sized firms. When Irba decided to go ahead with it anyway, it requested reasons.

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This happened in September 2017 and Irba only supplied its reasons on 1 December that year. The association approached the high court in May 2018, 179 days after receiving the reasons for the rule.

Constitutional implications

Irba opposed the high court application, stating that the association delayed the review. It also submitted that it had statutory powers to introduce the rule. The high court found that the review was brought outside the prescribed period set out in the Promotion of Administrative Justice Act (Paja). It could not find sufficient grounds to condone the delay, dismissed the application, and found it therefore unnecessary to consider the merits of the review.

The SCA considered the importance of the matter to the parties and the public and the obvious constitutional implications, and granted the association leave to appeal.

In terms of Paja the association had 180 days to institute a judicial review. The high court criticised the association for only bringing the review application on the 179^th day after receiving the reasons, despite it having had 180 days. The SCA found the criticism to be unjustified.

The SCA criticised Irba for its unexplained delay in giving reasons and the fact that the reasons amounted to no more than a “regurgitation” of what was conveyed in the public notices for the publication of the final rule.

The power to make rules

Irba relied on provisions in the Auditing Profession Act as the source of the powers it has to promulgate the rotation rule.

The rule-making power is confined to “the prescription of standards” in respect of defined functional areas. The association argued that the rule was not a standard.

“The net effect of the MAFR [mandatory audit firm rotation] … is that it imposes a broad restriction on companies, audit committees and their current and future shareholders from appointing an audit firm of their choice,” the SCA found.

Irba then tried to rely on its measures to protect the public from a series of accounting scandals.

Reference to the specific section on which it relied (Section 10(1)(b) of the act) was never mentioned when the rule was published.

The SCA found the promulgation was beyond the legal power or authority of the act (ultra vires) and “falls to be set aside”.

The court was also not happy about the size of the record – 15 volumes comprising 2 633 pages.

It was “awash with reports and unnecessary material”.

“This court has expressed its displeasure in numerous matters at the disregard for the rules in the preparation of the record and the cost to the parties when that happens.”

The court ordered that the attorneys for both the applicants and the respondents may only recover half of the costs associated with the preparation, perusal and copying of the record in the appeal procedure.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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