Media Briefing by Minister of Finance Malusi Gigaba
Joint statement with the Independent Regulatory Board for Auditors
Good afternoon ladies and gentlemen, members of the press
Economic transformation involves changes in the structure of the economy, as well as the institutions which govern it. We need to move beyond justifying the need for economic transformation and find ways to create the opportunity for changes by changing the institutions themselves.
The National Development Plan (NDP) says that we need inclusive growth and economic transformation. Transformation without growth becomes a struggle for current resources, and when current resources are tied up in oligopolistic practices it becomes an issue government must address.
Accepted ways of doing business that benefit the few and limit access to opportunity for black entrepreneurial business to grow are not aligned to our desire for inclusive growth.
The auditing sector is one such sector. The Independent Regulatory Board for Auditors is mandated by the South African government under the Auditing Profession Act (26 of 2005) to regulate the audit profession in the protection of the investing public.
Part of its role is to ensure that registered auditors deliver services of the highest quality and adhere to the highest ethics standards, including independence. In line with the legislation, its objective is to create a robust and relevant framework that guides the services of registered auditors (RAs), and which must respond to our dynamic environment.
While mindful that Transformation of the auditing profession may perhaps not be the Board’s principal mandate, it is nevertheless an issue that assumes critical importance in the broader constitutional framework outside of the Auditing Profession Act.
In our view, the broadening of audit capacity means it is necessary to attract more players to the market thereby creating more employment opportunities than is the case in a concentrated market dominated by 4 or a few players.
Transformation is a constitutional imperative that binds all organs of state, of which the IRBA is one, and it therefore does not require it to have an express legislative mandate to consider issues of transformation of the profession. After all, the Constitution is the supreme law of this country and binds all organs of State.
The IRBA also plays an important role in protecting the interest of the local and international investor community, and to do this, the IRBA sets down an agreed set of principles and values supported by well-developed and internationally recognised standards, clear laws and regulations for the profession which must be revised as necessary.
Indeed, the World Economic Forum Global Competitiveness Report has ranked South Africa first in the strength of its auditing standards for the last seven consecutive years.
We therefore all recognise the need to maintain a strong auditing environment as the value of the external audit is to provide the assurance to the capital markets that the opinions expressed on the financial reporting of public interest entities are an accurate and fair reflection of the state of the company. This enables sound investment decisions.
Critical to reliable reporting is that the auditor is independent of those whom they audit. Inspections findings from audit regulators worldwide, including our own regulator, indicate that auditors do not always maintain such independence. This increases the risk that they may not report the true state of affairs of a company.
In 2013, the World Bank conducted and concluded its second Report on the Observance of Standards and Codes (ROSC Report) – Accounting and Auditing (A&A) for South Africa. The ROSC report made recommendations to strengthen accounting and auditing practices in South Africa towards enhanced competitiveness, governance and accountability in the private and public sectors.
There are over 4200 registered auditors (RAs) in South Africa and over 300 JSE-listed entities which have a combined spend in audit fees amounting to around R4bn, making it an important part of the financial sector.
In July 2015, the IRBA began a process to investigate how to strengthen auditor independence, looking carefully at issues and threats to independence, but also in the South African context examining the effects of market concentration and the progress of the profession with regards to transformation, as part of its mandate and in fulfilling its role as an entity of State.
It examined closely the distribution of audits of the JSE-listed companies to establish the level of concentration of the market, and its study found that despite there being many audit firms, more than 90% of the market capitalisation of the JSE, in companies whose audit reports are signed off by South African Engagement Partners, was audited by a member of the Big Four global audit firms. With much of the JSE-listed audit market still retained by the big four global audit firms, South African black-owned and other audit firms have consequently struggled to gain access to the market and broaden their capacity.
On the matter of the progress of transformation of the auditing sector, the IRBA study revealed that of the 353 companies whose audit reports were scrutinised, it was found that the audit reports of 72% of the companies listed on the JSE that were actively trading as at 31 December 2015 were signed off by white RAs.
It was also found that 16% of the companies listed on the JSE that were actively trading at that time were signed off by non-South African partners.
Therefore, only the audit reports of the remaining 12% of actively trading listed companies were signed off by South African non-white RAs of which only 3% were Black South African.
It is of equal importance that we also look to those structures which have the responsibility of appointing the auditors. If they themselves are not transformed, it cannot be expected that we will ever transform the auditing profession.
The IRBA’s first responsibility is to protect the ordinary public from material adverse events affecting the capital markets that could be avoided through an incorrect audit opinion, and this mandate takes preference over the desires of the CFOs and their auditors that do not wish the local audit landscape to change. So when it came to independence the extensive long tenure relationships the IRBA uncovered, with some in excess of 100 years and many in excess of 50 years, it raised concern that there may be a lack of the requisite independence, whether real or perceived, that would safeguard the quality of audit for the protection of the markets and investors.
It then engaged with stakeholders on three possible measures to introduce being Mandatory Audit Firm Rotation (MAFR), Mandatory Audit Tendering (MAT) and Joint Audits (JA) in order to better safeguard independence and protect investors.
To put the need for protection into perspective, the biggest proportion of investments of both black and white South Africans is held through mandated investments (indirect investment), not individuals. The largest of these is the largest retirement fund being the Government Employees Pension Fund (GEPF), with assets of R1.6 trillion, providing for 1.2 million active members and more than 400 000 beneficiaries.
In 2013 mandated investments accounted for about 37% of total investment into the JSE’s Top 100 companies, with the Public Investment Corporate (PIC) being the largest single investor holding 12% of market capitalisation.
In the financial sector, retirement is big business. According to a report on the retirement sector by a large audit firm, around 100 retirement funds invest a total of R375 billion into the stock exchange. So, who is this indirect and often unaware investor? It is ordinary pensioners and working South Africans who have contributed throughout their working lives to retirement savings which easily can be lost if invested in businesses which ultimately fail, such as Masterbond and Sharemax which cost many their life savings and all future secure retirement prospects.
Our inability to transform the economy has left the poor and unemployed particularly vulnerable to shocks to economic growth, so the cost to the broader economy of a business collapse or audit failure that costs working South Africans their retirement savings would be devastating. So in the matter of independence and maintaining audit quality we support the IRBA in its efforts to protect the public.
The board of the IRBA has informed me of its decision to implement Mandatory Audit Firm Rotation. I have indicated that we support the measure but remain concerned about transformation and increasing access to markets because we have stressed that we really need to internalise the mind-set that growing black business is good for South Africa.
While Mandatory Audit Firm Rotation will address the independence concern, it might not immediately address the need to broaden capacity and increase access to opportunity although the board believes that these outcomes could be advanced in the long term.
The Board has assured us that it shares our concerns, around broadening access and transformation, and will work to develop complementary initiatives to address the broader transformation of the profession.
I now hand you over to the CEO of the IRBA, Mr Bernard Agulhas to expand on the board’s decision.
I thank you.
