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South African shareholders are increasingly voting against the reappointment of auditors

Twenty seven percent of annual general meetings (AGMs) resolutions surveyed by the South African regulator, the Independent Regulatory Board for Auditors (IRBA), recorded significant increase in vote opposing auditors reappointment. This is particularly the case for companies where the auditor’s tenure is excessively long, IRBA noted.

Since announcing in June of this year that mandatory audit firm rotation would be a requirement from 2023, IRBA has been tracking the results of shareholders' vote at AGMs with respect to the reappointment of auditors.

IRBA CEO Bernard Agulhas said: “What is clear is that the shareholders are beginning to make their voice heard at AGMs regarding the necessity for firm rotation to end excessively long relationships. Where audit committees may feel a 20-year, 50-year or longer relationship might not impair auditor independence, shareholders are saying otherwise.”

Of the 102 auditor appointment resolutions tabled at AGMs since November 2016, 51 recorded an increase in opposition; of these, 24 resulted in significant shareholder opposition to the auditor’s reappointment, according to Agulhas.

The most significant opposition recorded an increase of up to 40% year on year in the votes against the reappointment of auditors, he continued. “The most recent annual general meetings to be subject to this increased shareholder opposition were Telkom and PPC Ltd, which reflected 23% and 14% increases in the no vote. While such an increase may seem insignificant in some instances, it indicates to us that even minority shareholders are finding their voice.”

IRBA’s collected data showed that of the 24 resolutions that recorded an increase in the vote against the reappointment of auditors, only three had previously recorded an opposing vote above 1% (but less than 10%), the remainder had seen shareholders almost unanimously adopt the recommendation of the audit committee at the preceding AGM (see table below).

Since December 2015, audit firm in South Africa have to disclose the length of tenure of an audit in the independent auditor’s report to shareholders to be compliant with a regulation passed by IRBA. And the regulator sees the recent highlighted trends in shareholders' vote as a direct consequence of this regulation.

“As a first step, we are satisfied that the rule to disclose tenure of audit has served the purpose of highlighting excessively long relationships between companies and their auditors,” Agulhas concluded. “However, there is still more shareholder education to be done, as it is the shareholder – and not the management of the company - who is the auditor’s real client.”

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