Mandatory audit firm rotation : a South African perspective

Abstract

Abstract: Study purpose and context: Auditor independence is a critical component of audit quality, which in turn is necessary for the proper functioning of capital markets, public protection and economic decision-making. Mandatory audit firm rotation (MAFR) has received a great deal of attention internationally in recent years, as concerns mount regarding the quality of external audits performed and the independence of auditors. These concerns have been exacerbated by corporate financial collapses that result from unchecked management misconduct and fraud. In these circumstances, the auditors are accused of failing to prevent and detect the financial misconduct, or to act as whistle-blowers. Many have claimed that problem goes beyond negligence and that the familiarity and relationships developed between client and auditor over many years of the audit firm appointment has impaired independence and professional scepticism. In 2017 the South African audit regulator, the Independent Regulatory Board for Auditors (IRBA), issued a ruling to implement MAFR on a ten-year rotation basis, effective April 2023. This ruling follows similar regulation enacted in the European Union (EU) in 2014. The debate concerning MAFR has shown divergent views among key audit-industry participants. These views include debate surrounding the additional intentions of the IRBA to use MAFR to stimulate socio-economic transformation in the audit profession by building the capacity of black-owned audit firms and facilitating opportunities for small- and medium-tier audit firms to compete for the audits of large and exchange-listed companies. There is disagreement concerning whether audit quality and auditor independence is impaired in South Africa, as well as whether the existing safeguards are appropriate. The study aims to investigate the perceptions and arguments of key stakeholders in the South African MAFR debate, with specific consideration of audit quality, socioeconomic transformation and market concentration factors, in order to understand and explore possible unintended consequences of MAFR, as well as provide recommendations to audit industry stakeholders and regulators...

Ph.D. (Auditing)