The mandatory audit firm rotation (MAFR) rule was promulgated by the Independent Regulatory Board for Auditors (IRBA) on 5 June 2017, and was to come into effect on 1 April 2023.
The MAFR rule prescribed that an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, may not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years. After that, the audit firm would only be eligible for reappointment after the expiry of at least five financial years. A public interest entity is either a listed entity or one defined by law as a public interest entity, or any other entity which the law requires to be audited in compliance with the same independence requirements as listed entities.
On 31 May 2023, the Supreme Court of Appeal (SCA) handed down a judgment in East Rand Member District of Accountants v Independent Regulatory Board for Auditors, setting aside the MAFR rule. The SCA did not rule on the substance of the MAFR rule and made no comments on its appropriateness in a South African context, but rather decided the judgment on the basis that the IRBA was acting outside the scope of its powers, in terms of section 4 of the Auditing Profession Act (APA), when promulgating the MAFR rule. Therefore, the MAFR rule was ultra vires and was set aside.
The crisp question posed relates to what the legal status would be of the MAFR rule in the event that the SCA judgment is appealed to the Constitutional Court?
Common Law
It is useful to note the judgment of Municipal Manager OR Tambo District Municipality and Another v Ndabeni [2022] ZACC 3 (Ndabeni), wherein the Constitutional Court reaffirmed that a court order is binding until it is set aside by a competent court, and that this necessitates compliance, regardless of whether the party against whom the order is granted believes it to be a nullity or not.
In the unanimous Ndabeni judgment, penned by Pillay AJ, the Constitutional Court reaffirmed the binding nature of court orders granted by a competent court, irrespective of their validity. The court drew on previous judgments, such as Department of Transport v Tasima (Pty) Ltd [2016] ZACC 39; 2017 (2) SA and Secretary of the Judicial Commission of Inquiry into Allegations of State Capture Corruption and Fraud in the Public Sector including Organs of State v Zuma [2021] ZACC 18, to support its stance. The Constitutional Court emphasised that once a court with jurisdiction has issued an order, it remains in force and must be respected until it is set aside through review or appeal proceedings. The correctness of the decision on its merits does not impact the binding force of the order, which stands until a competent court with jurisdiction overturns it.
In light of the common law above, we note that the MAFR rule will no longer be mandatory unless (and if) the SCA ruling is set aside on appeal by the Constitutional Court.
Future Implications
It is imperative to give due consideration to the MAFR rule in conjunction with the provisions outlined in s92 of the Companies Act No. 71 of 2008, as amended (Companies Act). S92 stipulates that an individual is restricted from holding the position of auditor of a company for a duration exceeding five consecutive financial years. However, this provision only applies to companies that are required by s90 of the Companies Act to have their annual financial statements audited (such as public, state-owned companies, and private, personal liability and non-profit companies meeting specific public interest score thresholds as per the Companies Act), or those private, personal liability and non-profit companies that have voluntarily included the audit requirement in their memoranda of incorporation.
In light of this, the legislature may contemplate the prospect of amending s92 to establish comprehensive regulations encompassing both registered audit firms and individual auditors who operate within the framework of the Companies Act. However, as things stand, the MAFR rule is not mandatory.
Conclusion
The recent ruling by the SCA has raised uncertainties surrounding the legality and future of the MAFR rule in South Africa. As the MAFR rule is currently not mandatory unless the SCA ruling is overturned, stakeholders in the auditing profession and public interest entities should closely monitor further legal developments. In order to address concerns regarding audit quality and independence, potential amendments to the legislation, such as the Companies Act or the Auditing Professions Act, may be required. The legal landscape will continue to evolve, and stakeholders should remain attentive to potential changes that may affect the audit profession in South Africa.
Leonard Bilchitz is an Executive and Tevin Ramalu a Candidate Legal Practitioner | Corporate Commercial | ENSafrica.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.
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