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Naspers joins financial sector in questioning new framework for appointing auditors

Naspers joins financial sector in questioning new framework for appointing auditors

Naspers has joined some of South Africa’s most influential financial sector stakeholders in questioning a proposed new framework for how companies appoint auditors – and has challenged the way the Independent Regulatory Board for Auditors (IRBA) is trying to introduce it.
 
Naspers, one of the world’s leading internet and entertainment groups with investments in 130 countries, this week made a formal submission to IRBA objecting to its proposal of Mandatory Audit Firm Rotation (MAFR) for South African corporates.
 
It pointed out that MAFR has been tried and failed in most major markets, and called on IRBA to conduct a thorough investigation into the potential impact of its proposed framework. It also called for a proper public consultation process – involving National Treasury – because of the negative impact MAFR could have on the South African economy.
 
Concerns about MAFR have already been raised by, among others, the Johannesburg Securities Exchange (JSE), the Standing Committee on Company Law (SCCL), the King Committee, the Institute of Directors (IoD), the South African Institute of Chartered Accountants (SAICA) and the CFO Forum – a public interest group involving CFOs from some of the largest South African corporates.
 
“South Africa’s auditing standards are consistently rated as the best in the world, which makes us – and many others – question why IRBA is looking to introduce this failed concept here,” says Naspers Group CFO Basil Sgourdos.
 
“Mandatory audit firm rotation has proved to be a disaster in virtually every market where it has been introduced. In Europe, for example, it cost an estimated €16 billion to implement, although the private sector believes the cost could be as much as €32 billion. As in other markets that went down this road and later reversed its decision, there is no evidence to date that it has done anything at all to increase audit independence.”
 
In its submission, Naspers says the regulator has failed to provide evidence to back up its rationale for MAFR. “IRBA says MAFR is the solution, without providing any evidence that there is a problem, or how it came to conclude that there is a problem. It flatly refuses to provide us with this evidence.
 
“On top of that, IRBA hasn’t conducted any independent research or produced an economic impact assessment on the potential consequences of MAFR.
 
“IRBA has also not carried out a proper consultation process, and consistently ignores the views of those who do not agree with it. We believe the potential impact of MAFR requires a proper and meaningful consultation process.
 
“This would include the formulation of a White Paper and the undertaking of independent research. In addition, we would urge the active involvement of the CFO Forum, SCCL, JSE, the King Committee and the Institute of Directors.”
 
In addition to the points above, Naspers’ submission outlines its concerns as follows:

  • The proposed implementation of MAFR has implications far beyond the audit profession. MAFR is not simply a regulation for the auditing profession – it has a profound impact on companies, investors and many other stakeholders. Among other things, it cuts across existing legislation, such as the Companies Act, conflicts with the King 4 governance framework, and fundamentally dilutes the rights of shareholders. IRBA’s Consultation Paper simply ignores these wide-ranging consequences.
  • IRBA’s Consultation Paper simply assumes (but does not demonstrate) that audit independence is an issue. IRBA assumes there is a problem with audit independence and that difficulties with independence lead to audit failures. No real evidence is included to support this assumption and no evidence is provided to demonstrate how MAFR will address this.
  • The Consultation Paper does not include the research that IRBA has apparently conducted.  Accordingly, it does not demonstrate how IRBA has reached the conclusion that MAFR will fix a perceived problem relating to audit independence. It also does not engage with the fact that international research is less than unequivocal in its support for the alleged benefits of MAFR. 
  • The introduction of MAFR will result in a massive cost for South Africa, something which the Consultation Paper does not reflect in a meaningful or informed way. For Naspers, we estimate the cost of introducing MAFR in its proposed form to be between US$12 million and US$15 million in the first year alone. Given that we operate in 130 countries, we may in fact be unable to manage a transition uniformly, which would increase audit risk and costs even further.
  • IRBA is giving mixed messages concerning the objectives of MAFR. The Consultation Paper states the rationale for MAFR is an attempt to increase audit independence. In other forums and via the media, however, IRBA has argued that it wants to use MAFR to address transformation and market concentration – again without any evidence of how MAFR will assist in this regard. Experience in other markets suggests that MAFR increases rather than decreases concentration as smaller firms need to cycle out established clients to comply with rotation requirements; creating significant volatility to its revenue and income base making it harder to build the business.
Naspers says there are alternatives to MAFR that could more effectively address auditor independence, transformation and market concentration. These should be explored by IRBA in conjunction with all relevant stakeholders.
 
“In our view, IRBA is missing a real opportunity to engage with all stakeholders and consider a broader range of proposals to further improve governance in South Africa and to enhance transformation in the audit profession – if this is indeed an objective that IRBA is pursuing.”

For more information please contact:

Anika Ebrahim, Communications Director
Tel: +27 21 406 3446
Mobile: +27 82 551 4171
Email: [email protected]


About Naspers
 
Founded in 1915, Naspers is a global internet and entertainment group and one of the largest technology investors in the world. Operating in more than 130 countries and markets with long-term growth potential, Naspers builds leading companies that empower people and enrich communities. It runs some of the world’s leading platforms in internet, video entertainment, and media.
 
Naspers companies connect people to each other and the wider world, help people improve their daily lives, and entertain audiences with the best of local and global content. Every day, millions of people use the products and services of companies that Naspers has invested in, acquired or built, including Avito, Brainly, Codecademy, eMAG, Flipkart, ibibo, letgo, Media24, Movile, MultiChoice, OLX, PayU, ShowMax, SimilarWeb, Twiggle, and Udemy. Similarly, hundreds of millions of people have made the platforms of its associates Tencent (www.tencent.com; SEHK 00700) and Mail.ru (www.corp.mail.ru; LSE: MAIL) a part of their daily lives.
 
Naspers is listed on the Johannesburg Stock Exchange (NPN.SJ) and has an ADR listing on the London Stock Exchange (LSE: NPSN).
 
For more information, please visit www.naspers.com.

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