Audit quality and independence concerns in the South African audit industry: Contrasting views^†

† Authors’ contributions: The article was planned, executed and co-written by both authors.

Abstract

Audit quality in South Africa is perceived by the audit regulator to be deteriorating, with the primary cause being a compromise of auditor independence, mostly as a result of excessively long audit firm tenures. The regulator has responded with mandatory audit firm rotation (MAFR). The purpose of this research is to employ field surveys to collect the views of experienced audit committee (AC) chairs, chief financial officers (CFOs) and auditors of JSE-listed companies on the necessity for, and potential efficacy of, this regulation. An additional focus of the paper is to explore potential unintended outcomes, as well as identify preferred alternatives and provide recommendations and practical solutions to negative effects. Findings show that auditors, CFOs and AC chairs are strongly opposed to MAFR in South Africa on a cost-benefit analysis. Respondents do not believe that audit quality and independence has deteriorated and feel that existing measures to safeguard auditor independence are sufficient. In addition, the loss of knowledge and experience of the clients that will result from firm rotation, together with other unintended consequences such as unmanageable cost increases, provide further reasons not to implement MAFR. Findings also indicate that MAFR will not contribute towards decreasing the dominance of the market by the ‘Big 4’ firms. Practical recommendations are suggested based on the findings.

Keywords:

• Auditing
• auditor rotation
• audit quality
• mandatory audit firm rotation
• auditor independence

Disclosure statement

This article is derived from the following Doctoral thesis:

Harber, M. (2018). Mandatory audit firm rotation: A South African perspective (Doctoral thesis, University of Johannesburg. South Africa). Link: https://ujcontent.uj.ac.za/vital/access/manager/Repository/uj:31718?site_name=GlobalView

ORCID

Michael Harber http://orcid.org/0000-0002-3726-0696

Notes

† Authors’ contributions: The article was planned, executed and co-written by both authors.

1 MAFR refers to the mandatory periodic rotation of the audit firm from the client, as opposed to audit partner rotation whereby the audit partner alone is required to rotate off the engagement. With audit partner rotation the audit firm retains the client; with audit firm rotation the firm, upon rotation, is not eligible to tender for reappointment.

2 This is a useful definition that has been adopted by numerous recent studies such as those of Ball, Tyler, & Wells (2015), Fontaine et al. (2016), Hakwoon, Hyoik, & Jong Eun (2015), Jackson, Moldrich, & Roebuck (2008), Kwon, Lim, & Simnett (2014), Lennox et al. (2014), Lu & Sivaramakrishnan (2009) and Tepalagul & Lin (2015). The definition is important because it identifies the purpose of auditing.

3 Refer to studies such as Daniels and Booker (2011), Dopuch, King, and Schwartz (2001), Hakwoon et al. (2015), Kwon et al. (2014), Ruiz-Barbadillo, Gómez-Aguilar, and Carrera (2009) and Wang and Tuttle (2009).

4 The IRBA definition of a public interest entity can be found in the IRBA Code of Professional Conduct (IRBA, 2016a, 2016b).