The Impact of mandatory audit firm rotation on the statutory duties of Directors

• Main Author: McGregor, Dale
• Other Authors: Yeats, Jacqueline
• Format: Dissertation
• Language: English
• Published: Faculty of Law 2020
• Subjects: Commercial Law
• Online Access: http://hdl.handle.net/11427/30833

On 5 June 2017, the Independent Regulatory Board for Auditors, the audit regulator in South Africa, implemented mandatory audit firm rotation (MAFR) with effect from 1 April 2023 in response to concerns regarding auditor independence in South Africa. The introduction of MAFR has been met with criticism from many stakeholders due to the adverse effects many believe the implementation of MAFR will have on audit quality and auditor independence. To date, there have been limited studies which focus on the impact of audit quality and auditor independence on audit practitioners in South Africa as a result of the implementation of MAFR but, to the best of my knowledge, no studies have assessed how the effects on audit quality and auditor independence will impact the ability of directors to discharge their statutory duties under section 76 of the Companies Act 71 of 2008 (‘the Act’ or ‘Companies Act’). This thesis first provides readers with a brief background of MAFR, followed by an overview of the statutory duties of directors as contained in the Act. I then subsequently assess how MAFR will affect audit quality and auditor independence before considering the impact this will have on the ability of directors to discharge their duties effectively. One of the duties of the directors is to produce the financial statements which are not false or misleading. Audit quality and auditor independence help directors produce financial statements which are not false or misleading, as determined under section 29 of the Act. As shown in this thesis, the enforced rotation of auditors results in situations which affect audit quality through the loss of client-specific knowledge which the outgoing auditor has developed over time. Furthermore, the enforced rotation of South African audit firms does create difficulties for multi-national entities which have their various entities audited by the same network of audit firms. These concerns, together with the concerns related to the cost of switching auditors and the threats posed to audit quality and auditor independence related to the initial discounts on audit fees offered by audit firms to new audit clients, poses serious concerns that directors will not be able to comply with section 29 of the Act. However, the introduction of a new audit team does provide instances which offer improvements to audit quality and auditor independence which may assist directors to produce financial statements which are not false or misleading. Lastly, I provide recommendations in terms of alternatives to MAFR, examining the existing measures which are already in place in South Africa to promote audit quality and auditor independence.