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South Africa: SCA overturns mandatory audit firm rotation rule for public interest entities

2 June 2023
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Overview

  • The South African Supreme Court of Appeal recently handed down judgment in the judicial review of the Mandatory Audit Firm Rotation Rule (MAFRR) promulgated by the Independent Regulatory Board for Auditors (IRBA) in June 2017.
  • The MAFRR took effect on 1 April 2023 and requires that an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years.
  • The impact of this judgment in the short term is expected to be relatively minimal, given that many public interest entities would have already taken steps to comply with the MAFRR.

The Supreme Court of Appeal (SCA) handed down judgment on 31 May 2023 in the judicial review of the Mandatory Audit Firm Rotation Rule (MAFRR) promulgated by the Independent Regulatory Board for Auditors (IRBA) in June 2017. The MAFRR took effect on 1 April 2023.

The SCA did not rule on the substance of the MAFRR and made no comments on its appropriateness in a South African context but rather decided the judgment on the basis that the IRBA was acting outside the scope of its powers in terms of section 4 of the Auditing Profession Act (APA) when promulgating the MAFRR. Therefore, the MAFRR was ultra vires and was set aside. A copy of the MAFRR is available here.

The MAFRR requires that, with effect from 1 April 2023, an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors (Code), shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years. Thereafter, the audit firm will only be eligible for reappointment as the auditor after the expiry of at least five financial years.

The definition of a ‘public interest entity’ includes listed entities and those entities that are required to have their annual financial statements audited by legislation (for example, the Companies Act requires that public companies, state-owned companies and certain private companies, personal liability companies and non-profit companies have their annual financial statements audited (Applicable Entities)). The Code also provides a further list of entities that are likely to be considered public interest entities, which includes banks, insurers, collective investment schemes, pension funds, medical schemes, and other issuers of debt and equity instruments to the public.

Ultimately it is now up to the legislature to legislate on this issue if the MAFRR is to become law. The MAFRR must be considered in conjunction with section 92 of the Companies Act, which provides that the same individual may not serve as the auditor of the applicable entities mentioned above for more than five consecutive financial years. The legislature may consider amending section 92 of the Companies Act to regulate firms that are registered auditors, as well as individual registered auditors.

The impact of this judgment in the short term is expected to be relatively minimal, given that many public interest entities would have already taken steps to comply with the MAFRR in advance of 1 April 2023.