Purpose This study aims to address an acknowledged gap in the literature for the analysis of experienced practitioner views on the effects and implications of mandatory audit firm rotation (MAFR). Design/methodology/approach Using an exploratory and sequential design, data was collected from South African regulatory policy documents, organisational comment letters and semi-structured interviews of practitioners. These findings informed a field survey, administered to auditors, investors, chief financial officers (CFOs) and audit committee members of Johannesburg Stock Exchange (JSE) listed companies. Findings Practitioners expressed considerable pushback against the potential efficacy of MAFR to improve audit quality due to various “switching costs”, notably the loss of client-specific knowledge and expertise upon rotation. In addition, the cost and disruption to both the client and audit firm are considered significant and unnecessary, compared to audit partner rotation. The audit industry may suffer reduced profitability and increased strain on partners, leading to a decline in the appeal of the profession as a career of choice. This is likely to have negative implications for audit industry diversity objectives. Furthermore, the industry may become more supplier-concentrated amongst the Big 4 firms. Practical implications The findings have policy implications for regulators deciding whether to adopt the regulation, as well as guiding the design of policies and procedures to mitigate the negative effects of adoption. Originality/value The participants are experienced with diverse roles concerning the use, preparation and audit of financial statements of large exchange-listed multinational companies, as well as engagement in the auditor appointment process. The extant literature presents mixed results on the link between MAFR and audit quality, with most studies relying on archival and experimental designs. These have a limited ability to identify and critique the potential’s witching costs and unintended consequences of the regulation. Experienced participants responsible for decision-making within the audit, audit oversight and auditor appointment process, are best suited to provide perspective on these effects, contrasted against the audit regulator’s position.
Research purpose: This study explores the perceptions of auditors and audit committee chairs of Johannesburg Stock Exchange-listed companies with regard to the direct and indirect financial effects of the implementation of MAFR in South Africa with respect to black economic empowerment and market concentration.Motivation for the study: No studies have explored this controversial additional objective of MAFR in South Africa.Research approach, design and method: An exploratory mixed-methods design is employed, using questionnaires derived from a review of the academic research and professional debate concerning MAFR. Main findings:Contrary to the intentions of the regulator, MAFR may not result in improved transformation of the audit profession and could in fact reduce the capacity of audit firms to pursue transformation initiatives. In addition, MAFR may not decrease the current degree of audit domination of the Big 4 firms of the JSE, possibly even further concentrating the industry, as audit committees and shareholders may be reluctant to appoint mid-tier firms as auditors of the large listed companies.Practical/managerial implications: Industry stakeholders and the regulator should consider targeted interventions to mitigate the potential for impaired transformation and further concentration of the industry which may result from implementation of MAFR in 2023. Contribution/value-add:The findings and conclusions will contribute to addressing concerns regarding the rate of black participation in the industry, as well as mitigating the potential unintended consequences of MAFR.
This paper explores the perceptions of key audit industry stakeholders concerning the direct and indirect financial effects of the implementation of mandatory audit firm rotation (MAFR) in South Africa. Globally, concerns over audit quality, in response to corporate failures, have resulted in renewed debate over MAFR as a solution. The European Union and South Africa have recently ruled in its favor, while other countries have rejected it on grounds that the benefits do not exceed the costs. Using structured surveys, the informed perspectives of experienced auditors, chief financial officers, audit committee chairs, and equity fund managers are explored and contrasted. We find that considerable costs will be imposed on audit firms in the form of “setup and transition costs,” as well as costs incurred to submit and present competitive tenders to secure appointment. Although auditors will try to recoup these costs with fee increases, this will likely not be allowed by the clients, resulting in a squeeze of audit firm profits. The Big 4 firm fee premium, relative to non‐Big 4 firms, will decrease due to increased competition. From the clients' perspective, the costs will be in the form of audit inefficiency translating into staff time and disruption, caused by the incoming auditors being less familiar with the complexities of the business. We contribute to the literature detailed descriptions and estimations of the nature and extent of potential cost implications, as expressed by experienced practitioners. The findings inform audit industry regulators, standard‐setters, and practitioners to more effectively mitigate potential unintended consequences of the regulation.
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