An analysis of the possible impact of mandatory audit firm rotation on the transformation and market concentration of the South African audit industry

Abstract

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.

Will mandatory audit firm rotation reduce audit market concentration in South Africa?

“…In response to the promulgation of the MAFR regime in June 2017, a survey study on stakeholder perceptions (with responses from auditors, chief executive officers and audit committee chairs of the top 100 JSE-listed companies collected between August 2017 and November 2017) was conducted to assess the possible effect of MAFR in South Africa with respect to the three focus areas of MAFR, namely audit quality , black economic empowerment (i.e. transformation) and audit market concentration (Harber & Marx, 2019), as well as the financial effect of MAFR . With respect to audit quality, respondents concurred that business failures in South Africa are not attributed to audit quality being compromised (but rather to auditor error) and that MAFR will impair audit quality .…”

“…With respect to audit quality, respondents concurred that business failures in South Africa are not attributed to audit quality being compromised (but rather to auditor error) and that MAFR will impair audit quality . With respect to transformation and http://www.sajbm.org Open Access audit market concentration, respondents anticipated that MAFR will reduce audit firms' capacity to pursue transformation initiatives (owing to the additional costs that MAFR will impose on audit firms) and that MAFR will increase audit market concentration (Harber & Marx, 2019). Findings on audit market concentration include the reluctance of audit committees and shareholders of large listed companies to appoint non-Big 4 audit firms as auditors, based on the lack of resources, skills, experience and international presence of non-Big 4 audit firms compared to Big 4 audit firms.…”

“…Findings on audit market concentration include the reluctance of audit committees and shareholders of large listed companies to appoint non-Big 4 audit firms as auditors, based on the lack of resources, skills, experience and international presence of non-Big 4 audit firms compared to Big 4 audit firms. Furthermore, specialisation in some sectors, where not even all Big 4 audit firms are equally experienced, would cause such sectors to have only one or two appointable audit firms (Harber & Marx, 2019, 2020. Although reported an anticipated increase in audit costs (for audit firms) under an MAFR regime, the reluctance of audit committee chairs to allow the increase led to mixed results on the anticipated effect of MAFR on audit fees.…”

“…The review of South African literature on audit firm rotations, audit firm tenure and audit market concentration, therefore, showed that studies mainly focused on earlier periods in which MAFR was not an envisaged regulation (Grant et al, 2018) or were based on surveys conducted in the year when the MAFR regime was promulgated Harber & Marx 2019, 2020 and mainly focused on the top 100 JSE-listed companies Harber & Marx 2019, 2020Welch et al, 2017). The present study aimed to add to literature by assessing the actual audit firm landscape (based on disclosures on audit firm identity and audit firm tenure) over a period that incorporates the pre-promulgation and post-promulgation of MAFR and covering all size categories (i.e.…”

Auditor independence and professional scepticism in South Africa: Is regulatory reform needed?

“…The primary reason for implementing MAFR in South Africa is the concern by the IRBA that the quality of audits performed by audit firms on exchange-listed companies is deteriorating (Harber & Marx 2019). According to the IRBA (2016), this lack of independence and professional scepticism is evidenced by recent high-profile financial reporting scandals and the poor results of regulatory inspections of audit work.…”