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The King IV code does not stipulate the auditors tenure requirement to assess its independence

The recent ruling by the Supreme Court of Appeal (SCA) that overturned the Independent Regulatory Board for Auditors’ (IRBA) requirement for the rotation of audit firms has left many perplexed. This judgment eliminates the need for entities to appoint new audit firms every 10 years and removes the restrictions imposed by the IRBA’s mandatory audit firm rotation rule (MAFR), which came into effect in April this year.

Nevertheless, despite this ruling, we will continue to advocate for the rotation of audit firms as we believe it to be a sound practice. We find encouragement in the fact that prior to this judgment, numerous South African companies listed on the Johannesburg Stock Exchange (JSE) took the matter seriously and took steps to change auditors.

One might question why we continue to apply this principle as part of our ESG policy. Auditor independence, particularly when referring to external auditors, entails objectivity, impartiality, and a commitment to being free from conflicts of interest and bias. Auditor independence holds great importance as it serves as a check and balance to ensure the accuracy of the financial performance data provided by a company.

An evident example of the consequences that arise when there is a breakdown in auditors’ duty to report accurate information is the case of Steinhoff International Holdings. The auditors of the company, Deloitte, had been auditing Steinhoff since 1998 and failed to detect that the company had overstated its profit by R100 billion. Consequently, many investors suffered losses, with the Government Employees Pension Fund alone losing more than R21 billion.

The MAFR was designed to safeguard shareholders against such catastrophic incidents. While it may be argued that there are only four major auditing firms capable of overseeing companies, this could have prompted a discussion on extending the tenure instead of completely discarding the idea. Additionally, it should be noted that the firms opposing the MAFR were primarily large firms that were well accommodated under its provisions. Their main argument against mandatory audit partner changes lacks sufficient merit since an auditing firm that has audited a company for over 20 years can simply change its audit partner and reintroduce the same partner after a 5-year hiatus.

Steinhoff is not the sole example of the harm that can be caused by maintaining a familiar auditing firm for an extended period. It would be prudent to avoid adding to the list of such cases by upholding the principle of audit firm rotation.

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