The rule is effective for financial years commencing on or after 1 April 2023.
An audit firm cannot serve as the appointed auditor of a public interest entity (PIE), including all listed companies (whether equity or debt listed), for more than ten consecutive financial years, measured in respect of financial years commencing on or after 1 April 2023.
Thereafter, the audit firm will only be eligible for re-appointment as the auditor after the expiry of at least five financial years.
If, at the effective date, the public interest entity (PIE) has appointed joint auditors and both have had audit tenure of ten years or more, then only one audit firm is required to rotate at the effective date and the remaining audit firm will be granted an additional two years before rotation is required.
The Independent Regulatory Board for Auditors (IRBA) Code and the IESBA Code of Ethics on which it is based, set out incremental independence restrictions (including certain prohibitions) that apply to the audit of a PIE. The base definition of a PIE, set out in paragraph 290.25 of the IRBA Code, comprises all listed entities, and also applies to any entity for which the audit thereof is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Currently in South Africa, all audits are conducted in compliance with the same independence requirements which are those the IRBA has promulgated.
Therefore the IRBA has also included paragraph 290.26(a) in an amendment to the Code to provide further guidance on which entities, other than listed, may be considered to be PIEs. See below for more information about entities that are included in the current PIE definition.
Q: For the purpose of determining duration of tenure for mandatory firm rotation, does the period before the entity became a PIE count toward total audit tenure?
In calculating audit tenure for the purpose of MAFR rules, the date an entity first became a PIE is likely to be key.
In the case of a listing — where a company has had its auditor for a number of years before the listing date, the duration of the audit engagement should only be calculated as from the beginning of the financial year in which the listing became effective.
For example, Audit firm X have been auditors for ten years but the entity only listed in financial year 2017. In this scenario the auditor tenure will be counted from financial year 2017 and not from 2007.
Tenure is counted from the start of the first accounting period audited. For the avoidance of doubt, it does not commence from the actual date of the appointment or the date of the engagement letter or the date of the AGM at which the appointment is ratified.
For example, if a new statutory auditor is appointed to perform the audit of a PIE for the year ended 31 December 2017, then this will count as year one of the auditor relationship regardless of the date of appointment.
The ruling provides that if an audit firm of a PIE has served as the appointed auditor of that entity for ten or more consecutive financial years before the financial year commencing on or after 1 April 2023, the audit firm will be required to decline re-appointment. It may not again assume appointment as auditor for a five year period thereafter.
If, at 1 April 2023, the PIE has appointed joint auditors and both have had audit tenure of ten years or more as at the effective date, then only one audit firm is required to rotate at the effective date and the remaining audit firm will be granted an additional two years before rotation is required.
Section 90(2)(b) lists specific services which an auditor cannot perform for an audit client. It provides that a firm cannot perform any work which is seen to be:
- Work of bookkeeper / maintenance of financial records
- Work of accountant / preparation of financial statements
- Secretarial services / acting as director / acting as company secretary
The above is considered a high level overview and we recommend a reading of the section to view the requirements in context. For the first two bullets, the Act contains clauses which require the auditor to assess the time period over which the work was performed. The work cannot be for more than one year nor can it be considered to be habitual or regular. Therefore “once off” short assignments may be permissible.
However these “exceptions” on short assignments would apply to the whole basket of services delivered by the firm and are not evaluated per service. The most common services provided by audit firms and their related advisory practices relate to the first two bullets.
Section 90(2)(b) states that prohibited services may not have been performed for the five years prior to appointment as auditor. As an example, if a firm performed a prohibited service for a client during the 2016 and 2017 financial years of a December year end client, the audit firm would only be able to accept appointment to audit the 31 December 2023 year end.
The restrictions also apply to related parties of the auditor. Therefore, firms closely linked to the audit firm could also disqualify the audit firm if they provide prohibited services. For example, all EY offices worldwide are related parties to the audit firm in South Africa. This includes all advisory departments. This may also include entities which contract the audit firm to perform services on its behalf or through a co-operation agreement.
Section 90(2)(b) only applies to the statutory entity being considered. Therefore services delivered to a subsidiary company would not affect the section 90(2) evaluation for the holding company. However the auditor would still need to consider the independence threat in terms of the IRBA Code of Ethics. This consideration always applies.
The table below provides some (non-exhaustive) examples of services which may affect section 90 and those which may not. The specific facts in each situation are important to determining a more definitive view:
Section 90 – Likely prohibited services
- Financial Statements Assistance: Preparing any disclosures, providing “fill in” templates or assisting with preparation using electronic software
- Preparing any source documentation: Assisting with payroll administration, compiling purchase orders or capturing of data related to financial transactions
- Calculating amounts: Assisting with or performing any calculations of amounts recorded in financial records. Examples: Valuations of balance sheet amounts by corporate finance or actuarial experts; Computing taxation amounts
- Templates and Models: Providing or assisting with templates or models that compute any amounts or taxes
- Accounting Work: Where advice extends past principles to calculating impact and/or providing a “model”
- Processes: Designing or implementing financial back office processes which “feed into” financial processes. This includes any financial software implementations
S90 – Likely permitted services
- Accounting Advice: Providing advice on accounting principles for existing or new standards. Reviewing accounting principles and commenting thereon
- Financial Statement Advice: Providing a mock set of illustrative (complete) financial statements for a fictional company. Reviewing financial statements and commenting thereon
- Review of amounts calculated / models of client: Services to assess computations of amounts or models already performed / created by client and to provide comments
- Internal Audit: Provided no design influence on corrective action
Firms may propose “adjustments” to amounts based on review work of client prepared schedules. Must be adjustments and not re-work or constitute primary “source document”.
PIEs primarily include:
- Listed (debt or equity) companies
- Entities that are otherwise publicly traded or have publically traded debt (refer to IRBA PIE definition)
- Other issuers of debt and equity instruments to the public
In addition, PIEs include:
- Financial Services Providers
- Mutual Banks
- Issuers of debt and equity instruments
- Deposit-taking companies
- Providers of financial or other borrowing facilities
- Entities holding funds on behalf of third parties
- Authorized users of an exchange otherwise responsible for safeguarding client assets. This will include brokers handling public monies
- Long and short term insurance entities
- Collective investment schemes
- Medical Schemes
- Major Public Entities, including Parastatals
- Market Infrastructure (per Financial Markets Act)
- Pension Fund administrators
- Retirement funds, including provident funds
No. There is still a requirement for lead engagement (signing) partners to rotate after a maximum of five years, followed by a two-year cooling-off period.
No. A PIE is free to invite any audit firms to submit proposals, other than the incumbent firm where the ten year or longer tenure applies.
Q: What is the impact of mergers, acquisitions or changes in structure of PIEs on the calculation of the audit tenure?
- In such cases legal advice may be required to assess the detailed terms of the merger, which could impact the way in which audit tenure is calculated.
- However, as a general principle, if two entities merge to create a new legal entity then tenure for MAFR transition purposes would be calculated from the date of the creation of the new legal entity to the extent that it is a PIE.
- In cases of major acquisitions, management buy-outs or other significant corporate events, a reasonable interpretation would be that if they do not result in the formation of a new legal entity and the existing auditor does not change as a result of the transaction, then this is not treated as a “new” start to the audit relationship — although, again, legal advice should be sought. Clearly, a PIE in such a situation will also consider the corporate governance and market perspective and may wish to consult with the IRBA.