Audit Firm Rotation

By BVK Group | 30 Jan 2023

The Rule on Mandatory Audit Firm Rotation was published in 2017 and will come into effect for financial periods that start on or after 1 April 2023 and will be applied retrospectively.

It is important to understand the regulations surrounding audit firm rotation as non-compliance may result in penalties or sanctions. The mandatory audit firm rotation was added in response to major capital collapses in listed entities. It was believed that these collapses may have been caused by familiarity and independence threats.

There are three regulations that deal with the rotation of auditors:

• the Code of Ethics,
• the Companies Act,
• and the MAFR (Mandatory Firm Rotation)

All three of these regulations should be taken into consideration when determining the applicable rotation.

Section 4A and 4B of the Code of Ethical Conduct addresses the independence of the auditor. Both deal with long associations of personnel, including partner rotation, but only 4A will be discussed here as 4B deals with other assurance engagements such as trust audits and there is no prescribed restriction period. The auditor should include a safeguard to protect their independence when dealing with other assurances.

Section 4A – Section 540 “Long Association with Personnel (Including Partner Rotation) with an Audit Client” applies to:

1. Engagements with clients that are Public Interest Entities (PIE).
2. It only applies to the individual auditor or reviewer and not to the audit firm.
3. For both audits and reviews.

The first condition that needs to be met is that the company needs to be a PIE company. If so, section 540 will be applicable and states that the audit partner can be with the client for a maximum of seven years, after which a five year cool-off period should apply.

The Companies Act Section 92 applies only to companies and close corporations and only to statutory audits of financial statements and not to independent review engagements. The Companies Act rotation period is five years restriction with a two year cool-off period.

The third regulation is the MAFR (Mandatory Firm Rotation). This regulation was created as the Code of Ethics and the Companies Act is only apply to the audit partner and not to the audit firm. The MAFR applies to Public Interest Entities (PIE) and to the whole audit firm. The rotation period is ten consecutive years restriction with a five year cool-off period. It is unclear if this applies to independent reviews and other assurance engagements, and IRBA is doing research to determine if this is indeed the case.

It is important to remember that the goal of the regulations is to maintain independence. Therefore, we must ensure that we understand all applicable regulations and be informed so that we can avoid any potential non-compliance issues.

There is so much more to discuss such as what is a statutory audits and the definition of a PIE. This will be discussed in future articles.