Western Cape Business News

Send  Share  RSS  Twitter  14 Sep 2009

FINANCE: Relationships With Auditors Shaken Up


Recent Western Cape Business News

The new completely rewritten companies legislation promises to shake up the world of the auditor, according to Mike Bourne, professional practice director of Ernst & Young in Cape Town.

The act requires an auditor to vacate the role of auditor after having had responsibility as auditor for five financial years. This requirement applies to the individual and not the firm of auditors.

Auditor rotation is required where countries require its auditors to comply with the rules dealing with auditor independence issued by the International Federation of Accountants. However these internationally accepted rules only apply to the audit of listed companies whereas local legislators have made the requirement apply to all audits irrespective of the nature or size of the company concerned, says Bourne.

What this means for South Africa is that the private company auditor will need to vacate the role of auditor if, on the effective date of the act, the auditor has already completed five years in the role.

There are no transitional arrangements in the act so it is conceivable and likely that, on 1 July next year, many small, often one-partner firms will immediately vacate the role of auditor on that date.

At the same time many small companies which have had a particular auditor for many years will need to seek a new auditor. This could be very disruptive for smaller companies where they have had a long-standing relationship with their auditor who, at the same time, has also become a trusted business advisor.

Add to this the exemption of smaller owner-managed private companies from the need for an audit and the small company auditor is in for an adjustment.

South African legislators chose to make all auditors rotate after five years rather than only those of a public interest nature, which is presently the case. Whilst one can understand why this might have been done – namely to bring a new set of eyes and ears to every audit in the land, this will come at a cost.

Auditor rotation in a small, developing country such as South Africa for smaller, often previously disadvantaged firms, will introduce significant uncertainty for them personally as well as their staff and clients. This, at time when we need more chartered accountants and in particular need to build the numbers of previously disadvantaged.

Auditor rotation on the scale envisaged perhaps next year will lead to a churn in the auditing profession which in all likelihood will add to costs which auditors will seek to recover from companies.

With the benefit of a new set of eyes and ears will come the need for a learning curve on the part of the incoming auditor which inevitably will need to be recovered from clients.

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