KPMG opposes Mandatory Audit Firm rotation (MAFR)

KPMG opposes Mandatory Audit Firm rotation (MAFR)

After review of the IRBA’s Consultation Paper Issued on 25 October 2016, with regards to the Mandatory Audit Firm Rotation (MAFR) included in Annexure 2, KPMG would like to confirm that we do not support the adoption of MAFR in South Africa.



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KPMG is pleased to have the opportunity to comment on the above consultation paper issued by the Independent Regulatory Board for Auditors on 25 October 2016, with regards to the Mandatory Audit Firm Rotation (MAFR) included in Annexure 2. After review, KPMG would like to confirm that our view has not changed and we therefore do not support the adoption of MAFR in the South African context.

General comments

We fully support the strengthening of auditor independence which is fundamental to audit quality resulting in confidence in the profession by stakeholders. 

Independence, however contains two elements, “independence of fact” and “independence of appearance”. There are a number of measures currently in place to manage “independence of fact”. “Independence of appearance” is however more difficult to measure or manage. 

The IRBA Code of Professional Conduct defines independence of appearance as “The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s or a member of the audit team’s, integrity, objectivity or professional scepticism has been compromised.” Therefore this informed audience needs to be carefully considered in terms of the current proposals around auditor independence. 

The first question is whether there is clear evidence that there are fundamental concerns regarding auditor independence in South Africa. The findings from the IRBA inspections do not provide a conclusive link to fundamental auditor independence concerns in South Africa. 

No empirical evidence has been produced to support the suggestion of a perceived lack of independence. In addition no “so called” audit failures in South Africa have been factually attributed to arising from a lack of auditor independence. As evidenced by our internal research of informed stakeholders, we do not believe that the “informed audience” referred to in this definition does in fact believe that auditors in South Africa are not independent of their clients. 

Recently, auditor independence has been strengthened through the Companies Act of South Africa which provides for individual designated audit partner rotation. Shareholders are responsible for the appointment of the independent auditor and the audit committee is responsible for ensuring auditor independence and the nomination of the independent auditor.

Will MAFR strengthen auditor independence?

The second question is whether MAFR will strengthen auditor independence. Based on international experience there is very little evidence to support the view that MAFR strengthens auditor independence. Here are just a few examples of countries that have either implemented and subsequently withdrawn MAFR and countries which have considered but not adopted MAFR:

  • Countries such a Singapore, South Korea, Argentina, Brazil, Spain and Canada have implemented MAFR and subsequently either partially or fully withdrawn MAFR.  
  • Countries such as Australia, Hong Kong, Japan, Malaysia, Mexico, New Zealand, Russia, Sri Lanka, Switzerland, Thailand and the USA have considered MAFR and decided against the adoption of MAFR. 

It would be useful to understand the reasons behind the decisions by these countries that have either, implemented and subsequently withdrawn MAFR and countries which have considered but not adopted MAFR. 

From an EU perspective the objective of implementation of MAFR was around market concentration and not auditor independence. A point to note is that the implementation took place through a legislative parliamentary process, different to what IRBA is proposing. Preliminary evidence indicates that market concentration in the EU has increased rather than decreased as a consequence of MAFR. Further impact studies need to be conducted and evaluated to identify the impact of MAFR in the EU on auditor independence. Further to empirical studies being conducted, there is likely to be some amendment to the EU MAFR rules to take into account the impracticalities and unintended consequences of implementation. 

Considering international experience and our specific comments below, particularly around more comprehensive research being conducted in South Africa, we do not support the adoption of MAFR in South Africa, as we do not believe MAFR will achieve the primary objective of strengthening auditor independence to enhance audit quality and manage the alleged perception around auditor independence.

The practical implementation and implications of MAFR on the listed company/audit firm

We believe that MAFR will have the following negative impacts on the listed company and audit firm:

Listed company impacts: 

  • MAFR would undermine the audit committee’s ability to choose the best auditor for the job, and determine whether a change in auditor and the timing thereof is in the best interest of the company and its stakeholders,
  • MAFR can conceal problems with a company and its auditor. The audit firm’s decision not to accept a re-appointment might indicate concerns regarding the integrity of management or the operations of the company. MAFR removes this as a mechanism of an indication of issues at a company. 
  • MAFR will result in regular audit tenders being required, each of which will absorb significant amounts of investment in time of boards, audit committees and executive management in the tender process as well as evaluation of the prospective auditor. This valuable time will be a distraction from running the business. 

Audit firm impacts:

  • MAFR promotes a sales culture rather than a focus on quality. This could result in auditors directing more experienced resources to winning new audits rather than focusing expertise on audit quality, efficiency and other imperatives. 
  • MAFR can negatively impact industry specialisation within an audit firm which will negatively impact the audit quality.
  • Empirical evidence has shown that changing audit firms has a negative impact on audit quality specifically for the first few years of appointment. 

Quantify the potential costs of implementing MAFR in the listed company/audit firm

Listed company impacts:

The cost implications for the company relate to the time spent during the tender preparation and evaluation process. The company also bears the cost of the review by the incoming auditor of the prior year audit working papers and shadowing costs in preparation for the takeover of the audit. This cost is amplified in a multinational/dual listed company environment. 

Audit firm impacts:

From our own experience relating to new audit appointments our estimated tender/proposal costs are in the region of 10% to 30% of the first year audit fees. This means that in instances where a number of firms tender for a new audit, the collective cost of tendering could amount to as much as the entire first year audit fee. These costs will have a negative impact on the ability of firms to invest in methodologies, transformation, and attract talent. This will ultimately lead to a deterioration in audit quality.

Transitioning costs in the first year typically amount to between 40% and 70% of the first year audit fees. 

These costs arise from:

  • Senior resource time investment in getting to know the client 
  • Time spent on meetings both locally and internationally with management 
  • Time spent on understanding the business and industry
  • Industry specialist involvement including technical input
  • Marketing and proposal presentation costs 
  • National and international travel costs 

Mention also needs to be made of the fact that all audit firms tendering for the audit incur these costs during the pursuit and proposal phase and therefore the cost to the economy is multiplied. These additional costs will be borne ultimately by the South African economy which is already under significant pressure. 

Should the scope of MAFR be extended beyond listed companies to other entities that operate in the public interest?

We believe that MAFR should not be adopted within the South African context at all.

Additional comments

The current economic challenges facing our country should not be ignored and by introducing another cost hurdle to listed companies there is a risk that companies will consider moving their listing to a jurisdiction which does not impose this onerous provision. 

Consideration needs to be given to industries which already require joint auditors such as banks, where MAFR combined with the auditor independence requirements in terms of the Companies Act, which preclude an audit firm from being appointed for a period of five years if certain non-audit services were provided, might be totally impractical.

Large multinationals will also face a challenge when trying to achieve consistency of auditor appointment across various jurisdictions. 


Based on the current information included in the consultation paper there is no evidence to support that MAFR enhances auditor independence given the extensive governance measures already in place in South Africa.

Based on the information provided in the consultation paper we firmly believe that:

  • The consultation process has been flawed and rushed;
  • Evidence of research  conducted on the viability of MAFR is lacking
  • An impact analysis around the unintended consequences of any possible implementation of MAFR needs to be performed;
  • Any proposed MAFR provisions need to be dealt with in the Companies Act, as the greatest impact is beyond the auditing profession, and a thorough stakeholder consultation process is thus required;
  • MAFR will negatively impact audit quality;
  • MAFR will not enhance auditor independence;
  • MAFR will add huge costs to an economy that is already under significant pressure; and
  • MAFR will greatly complicate the process of appointing consistent global auditors for multinational companies 

Therefore we do not believe that the implementation of MAFR is in the public interest and we do not support the implementation of MAFR in the South African context. 

© 2022 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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