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Mandatory audit firm rotation and SMPs

Last Updated Sep 2019

Johannesburg, 27 September 2019 - It has been two years since the Independent Regulatory Board of Auditors (IRBA) on 5 June 2017 gazetted their rule on mandatory audit firm rotation (MAFR).

The rule requires that audit firms (including network firms) shall not serve as the appointed auditor of a public interest entity for more than ten consecutive financial years for financial years commencing on or after 1 April 2023.

There is a retrospective application to this rule. This means that if the firm has served as the appointed auditor of a public interest entity for ten or more consecutive financial years before the financial year commencing on or after 1 April 2023, then the audit firm shall not accept re-appointment and will be required to rotate. 

With less than four years to go to this due date, the question is if the entities being audited have been proactive in applying this rule?

As reported on 1 April 2019 in Business Day, IRBA confirmed that in the last two years 64 JSE-listed entities rotated auditors after the rule of MAFR was gazetted.  This rotation is almost double the normal rotations that happened before MAFR.  If this trend and the pace of MAFR continue, we will see an estimated 120 companies on the JSE that would have rotated their auditors by the end of 2019.  This represents about a third of the main board of the JSE.

Based on the above rotation numbers, IRBA forecast that by 2021 all companies on the JSE would have rotated their auditors.  It is important to note that MAFR prevents the reappointment of the same audit firm after rotation for a period of at least five years after the rotation.

It is important to note that MAFR doesn’t only apply to listed companies, as the rule also refers to public interest entities (PIEs). The IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018) defines PIEs as: (a) all listed entities; (b)(i) any entity defined by regulation or legislation as a public interest entity; or (b)(ii) any entity for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities; or (c) any other entities as set out in sections R400.8a SA and R400.8b SA.

A company with a high Public Interest Score (PI Score) may be a PIE – not simply because its PI score exceeds a certain threshold, but rather because it falls within the factors included in sections R400.8a SA and R400.8b SA of the Code.

Section R400.8a SA of the Code requires the audit firm to determine whether to treat entities (or certain categories of entities, in addition to entities defined) as PIEs because they have a large number and wide range of stakeholders. The factors to consider in this regard include: the nature of the business; the number of equity or debt holders in the entity; the size of the entity; the number of employees in the entity. Section R400.8b SA lists entities that will generally satisfy the conditions in paragraph R400.8a SA as having a large number and wide range of stakeholders, and thus are likely to be considered as PIEs.

Implication for Small and Medium Practices (SMP)

It is important that SMPs will review and assess their client basis based on the Code if there are any entities that meet the definition of a PIE.  If clients of an SMP do meet the definition, it is important that the SMP proactively plans for the rotation and maintains clear communication lines with the PIE in terms of when audit firm rotation will happen.  The planning will involve the rightsizing of the firm in terms of audit trainees and profitability to ensure that MAFR does not leave the firm with a shortage of work.

MAFR also creates the opportunity for SMPs to market services other than audit to PIEs, and even to listed entities where the SMP is not the auditor.  These services can include, among others, drafting of annual financial statements, tax compliance services and corporate secretarial services.  Even other assurance engagement such as internal audit, agreed upon procedures and other assurance reports may now be a new line of business to market actively, as the skills will probably be available in the SMP.

The next step

The next step for SMPs will be to ensure that their ISQC1 manuals clearly define what a PIE is, to evaluate and identify PIEs in their client base according to this definition, and then to have frank discussions with clients to plan for MAFR.

In conclusion, SMPs may think that MAFR is not applicable to them and would not affect their business.  This would be incorrect, as there are real risks relating to MAFR, also for SMPs – and there are also opportunities available to SMPs. The SMP will need to evaluate the skill set currently available in the firm for non-assurance services to entities subject to MAFR.  There may also be new services that the SMP would like to offer and appropriate training and skills development will have to be sourced.


The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46 000 members and associates who are chartered accountants [CAs(SA)], as well as associate general accountants (AGAs(SA)) and accounting technicians (ATs(SA)), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

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