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  • IRBA seeks to split audit and advisory firms

IRBA seeks to split audit and advisory firms

20 April 2018

Statement from Mark Stewart, CEO, BDO South Africa

Recent reports that the Independent Regulatory Board for Auditors (IRBA) would seek to split the structure and functioning of audit and advisory firms lacks the clarity that would be expected from an announcement of this magnitude.

While we can understand why IRBA would seek such a change, it does require a better appreciation of why audits have failed, including downward pressure on fees, an increasingly complex environment which has ever shortening reporting deadlines and the legal accountability of company boards themselves for decisions.

The very intention to improve quality and enhance independence would likely result in an opposite reality, as businesses would need to be disposed of within the context of potential conflicts and existing client commitments. It is in fact highly likely that it is a change that clients themselves do not want.

There is an expectation for a greater indication of criteria IRBA will use to determine what categories of audit are likely to be included. Without this, it is all but impossible for provide considered input if at all. If all audits (irrespective of category of client) are included, then IRBA’s recommendations are not practical in the least.

Further to this, there is no clarity in terms of what is meant by splitting firms into audit and advisory services and there are more questions than answers, including:

  1. Is it that the shareholding in the two firms must be different?
  2. Is it that the shareholding can be common, but services must not be rendered to the same client?
  3. Do the names of the firm have to be different?
  4. What are the realistic timelines?
  5. How does this impact existing client relationships and contracts? For example, if the regulator simply means that a firm is prohibited from offering both audit and advisory services to the same client then there is already regulation in place to prevent this.

IRBA’s recommendations imply a significant change in the way business is done in this sector. This will trigger further market concentration in those firms offering only audit services and those offering advisory services.

Should the result of this suggestion indicate that greater market concentration or barriers to entry to the profession would result - which is a possibility - then the regulator would need to re-think its view.

An appreciation that advisory services contribute greater profit with less risk than an audit has contributed to the growth in advisory services. But with this, begs the question as to whether audit committees are giving auditors the appropriate fee for the risk that auditors are exposed to - and more importantly that the public is demanding?

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