After years in the making, the mandatory audit firm rotation rule has been reviewed and set aside. A Moneyweb report says the rule, promulgated in 2017, obliged listed and public interest companies to appoint a new audit firm after a tenure of 10 years.

The effective date for implementation was set for 1 April 2023 and the main aim of the rule was to ensure auditor independence. 

The SCA published its judgment yesterday, following an appeal by the East Rand Member District of Chartered Accountants.

The voluntary association petitioned the SCA after the Gauteng High Court (Pretoria) dismissed its application for a review with the aim of setting aside the rule. Its initial application and subsequent appeal were opposed by the Independent Regulatory Board for Auditors (Irba).

Irba opposed the High Court application, stating that the association delayed the review. 

It also submitted that it had statutory powers to introduce the rule. The High Court found that the review was brought outside the prescribed period set out in the Promotion of Administrative Justice Act.

It could not find sufficient grounds to condone the delay, dismissed the application, and thus found it unnecessary to consider the merits of the review.

The SCA considered the importance of the matter to the parties and the public and the obvious constitutional implications, and granted the association leave to appeal.

The Moneyweb report notes the SCA criticised Irba for its unexplained delay in giving reasons and the fact that the reasons amounted to no more than a ‘regurgitation’ of what was conveyed in the public notices for the publication of the final rule.

Irba relied on provisions in the Auditing Profession Act as the source of the powers it has to promulgate the rotation rule.

The rule-making power is confined to ‘the prescription of standards’ in respect of defined functional areas. The association argued that the rule was not a standard.

‘The net effect of the mandatory audit firm rotation … is that it imposes a broad restriction on companies, audit committees and their current and future shareholders from appointing an audit firm of their choice,’ the SCA found. 

Irba then tried to rely on its measures to protect the public from a series of accounting scandals.

 Reference to the specific section on which it relied (section 10(1)(b) of the Act) was never mentioned when the rule was published. The SCA found the promulgation was beyond the legal power or authority of the Act (ultra vires).

Full Moneyweb report

Judgment