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Could mandatory joint audit be next in South Africa’s anti-corruption drive?

In President Cyril Ramaphosa’s latest address to the nation, the clampdown on COVID-19 corruption emerged as a strong theme, with 36 investigations already said to be underway. Sanjay Ranchhoojee, Head of Audit at Mazars South Africa explores the ramifications

Unfortunately, the news of unlawful or improper conduct in the procurement of goods, works and services has come as little surprise to many South Africans, who have become accustomed to the unabated corruption that continues to plague the country.

Set to contribute to this revived interest in corruption prevention is the proposed audit reform currently being debated within the auditing profession. To restore the industry’s damaged credibility and shore it up against interference and complacency, regulators in numerous countries are evaluating the merits of instituting mandatory joint audits for public interest entities. Most notable among these is the United Kingdom which, due to the size of its market, could potentially act as a catalyst for the adoption of this principle across the globe.

This development is extremely important for South African regulators to note, given the country’s own efforts to improve the standards and performance of its audit industry.

“A joint audit is where two separate audit firms are appointed by a company to express a joint opinion on its financial statements. The firms divide the necessary fieldwork between them, according to their expertise and skills, and both firms conduct the audits of areas that involve a high level of judgment. We believe that this would be a particularly apt solution in the South African context, and that the global learnings around joint audit can prove it.”

Yolandie Ferreira, Partner and Audit Leader at Mazars, points out that this is a logical addition to the groundwork that South Africa has already laid for audit reform. “Mandatory audit firm rotation will come into effect from 1 April 2023. While this has the potential to make a positive change to the industry by helping to promote the independence of audit firms, it carries one significant risk.”

She explains that under mandatory firm rotation, listed companies are expected to appoint a new audit firm every ten years, in this period they will also have two audit partners signing off the accounts, as an audit partner needs to rotate every five years. However, the risk of major audit failures are always at their highest in the first two to three years of a new audit firm taking over.

“Appointing joint auditors under overlapping contract terms will help to accomplish the intention of audit firm rotation, while still ensuring that the handover process between firms takes place with as little disruption as possible and the loss of knowledge between firms are limited,” she says.

With mandatory joint audits having been in place in France for over 50 years already, Ranchhoojee notes some of the key successes that the country’s audit industry has had because of it. “For one, France has seen no major audit failures in many years.”

Ferreira adds that the French market also illustrates the notion that mandatory joint audit can contribute to skills development and improve competitiveness in the audit industry. “It is important to mention that the number of challengers to the big four audit firms is much bigger in France, when compared to a country like the UK. Building skills outside of the big four auditing firms (Deloitte, PwC, EY and KPMG) is an especially important focus for a country like South Africa. Growing skills development and enabling challenger firms can also help the audit industry reach its transformation targets faster by extending opportunities to a much more diverse range of candidates.”

The Competition and Markets Authority in the UK estimates that 100% of the top 120 companies on the London Stock Exchange are audited by the big four firms. By comparison, 44% of the 120 top listed companies in France are audited by two of the big four firms, and challengers often have around 40% of the joint audit engagements. At the same time, comparisons of audit fees in both countries have shown that the fees for listed companies in France are significantly lower than their counterparts in the UK.

In addition, if one of the big four firms collapses or is banned from practising in a country (as we have seen in India, which was seeking a five-year auditing ban for Deloitte and KPMG in 2019), a mature joint audit market can help to prevent the industry from collapsing as a result of the void left by the exiting firm,” Ranchhoojee says.

With that said, it is also worth taking a look at countries such as Denmark, where mandatory joint audit was initially implemented, but later abandoned. According to Ranchhoojee, Mazars has analysed the case of Denmark quite extensively.

“Unlike in France, where each firm has to audit a minimum of 40% of a company’s books, it was common in Denmark to see one firm taking on 90% of the audit work, while the smaller firm only took on the remaining 10%. This disparity was a major reason for the failure of joint audit in Denmark, since a lot of firms did not want to participate in joint audits for listed firms because of this unfair division of work.”

In light of this, Ferreira says that if mandatory joint audit is to be introduced in South Africa, there would need to be regulation in place to ensure an equitable split of work between the two cooperating firms. “When introducing joint audit, it won’t necessarily be possible to enforce a 60/40 split between firms in the beginning.

“With strict and well-thought-out regulations, however, the big four firms can take on a much larger piece of the workload, which can be decreased over time as the challenger market matures,” she adds.

Ferreira notes that South Africa already has some experience in joint audit, since it is standard practice in the banking industry. “The big four banks have been subject to joint audits for a number of years, and it has certainly helped them avoid major audit failures.  The Prudential Authority of South Africa are also in the process of assessing implementation of Joint Audit for major Insurers.”

Ranchhoojee adds that introducing mandatory joint audit in South Africa will enable better alignment with the global market. “But even more important than that – we desperately need to find a way of restoring confidence in our country’s audit industry, and joint audit is the best way to do this,” Ranchhoojee concludes.

 

 

 

 

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