East Rand Member District of Chartered Accountants and another v Independent Regulatory Board for Auditors and others

• Jurisdiction: http://justis.com/jurisdiction/166,South Africa
• Judge: Ponnan JA, Nicholls JA, Mabindla-Boqwana JA, Weiner JA and Siwendu AJA
• Judgment Date: 31 May 2023
• Citation: 2023 JDR 1840 (SCA)
• Hearing Date: 05 May 2023
• Docket Number: 113/2022
• Court: Supreme Court of Appeal

Siwendu AJA (Ponnan, Nicholls, Mabindla-Boqwana and Weiner JJA concurring):

[1]

The first applicant, East Rand Member District of Chartered Accountants, is a voluntary association, and the second applicant, Mr Jaroslav Cerney serves as its chairman (the applicants). Members of the first applicant are chartered accountants. Approximately fifteen percent are registered auditors who practice in small to medium sized firms. They are subject to professional regulation by the first respondent, the Independent Regulatory Board for Auditors (IRBA), a statutory body established in terms of s 3 of the Auditing Professions

2023 JDR 1840 p4

Siwendu AJA (Ponnan, Nicholls, Mabindla-Boqwana and Weiner JJA concurring)

Act 26 of 2005 (the Act). [1] The objects and functions of the IRBA, which are set out in s 2 of the Act, include the regulation of audits performed by auditors, setting and maintaining requisite standards of competence and ethics, and providing for disciplinary procedures. [2]

[2]

The applicants seek the leave of this Court to appeal against the dismissal of their application by the Gauteng Division of the High Court, Pretoria (high court) to review and set aside the Mandatory Audit Firm Rotation Rule (MAFR), which was promulgated by the IRBA on 5 June 2017 in Government Gazette No 40888. The dismissal of the review by the high court, prompted a petition to this Court. The two judges who considered the petition referred the application for the hearing of oral argument in terms of s 17(2)(d) of the Superior Courts Act 10 of 2013, with a direction to the parties to be prepared to address the court on the merits if called upon to do so.

[3]

Audit firms play a pivotal role in ensuring that representations made by companies in Annual Financial Statements are reliable, accurate and portray a fair and balanced position of a company's financial affairs. Investors and the public rely on the accuracy of those representations to make investment decisions. The industry has been marred both locally and globally by accounting scandals with dire consequences for investors and the public. In part, the IRBA attributes

2023 JDR 1840 p5

Siwendu AJA (Ponnan, Nicholls, Mabindla-Boqwana and Weiner JJA concurring)

the genesis of the problem to the long tenure of audit firms, which have in some instances endured for 80 to 114 years. It claims that Chief Financial Officers, who hold sway in the decision to appoint an audit firm, are drawn from a limited pool of auditors, often from the same auditing firms. According to the IRBA, the acquaintance between audit committee chairs and incumbent auditors exacerbates the perception of a lack of independence and poses a threat to audit outcomes. It identified the need for measures to 'strengthen auditor independence to enhance audit quality', a trend adopted and followed by regulators in other international jurisdictions.

[4]

On 4 December 2015, the IRBA introduced its first innovation, namely, to make it compulsory for all audit reports of public entities to disclose the number of years that an audit firm or sole practitioner had been the auditor of a particular entity (the audit tenure). [3] After considering other measures like Mandatory Audit Tendering (MAT) [4] and Joint Audits (JA) [5] , it took a decision on 28 July 2016 to introduce the MAFR. The IRBA had prepared a consultation paper, which it had distributed to stakeholders for comment. On 6 December 2016, after receiving the first round of comments, it published a second notice, inviting comments by 25 January 2017 on prescribed parameters as to how to implement the MAFR. [6] The applicants made written comments, and thereafter held a meeting with the IRBA's then Chief Executive Officer, with a view to objecting to the introduction of the MAFR. The IRBA nevertheless took a decision to introduce the final rule, on 28 March 2017.

2023 JDR 1840 p6

Siwendu AJA (Ponnan, Nicholls, Mabindla-Boqwana and Weiner JJA concurring)

[5]

On 5 June 2017, the IRBA published the MAFR, [7] which was to come into effect on 1 April 2023. The MAFR in relevant part reads:

'1.

An audit firm, including a network firm as defined in IRBA Code of Professional Conduct for Registered Auditors, shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years.

2.

Thereafter, the audit firm will only be eligible for reappointment as the auditor after the expiry of at least five financial years.'

The publication of the MAFR must be viewed against the backdrop of s 92 of the Companies Act 71 of 2008, which regulates individual audit tenure. That section provides that an individual auditor or designated auditor may not serve as an auditor of a company for more than five years. It provides for a cooling off period of two years between the appointment cycles.

[6]

On 22 September 2017, the applicants, asserting their right under s 5(1) of PAJA, [8] requested reasons from the IRBA for the decision to adopt the MAFR. The IRBA furnished its reasons on 1 December 2017, as required by s 5(2) of PAJA. On 29 May 2018, the applicants instituted the review, some 179 days after receiving the reasons. Relying on PAJA, alternatively the principle of legality, the applicants sought an order to review and set aside:

'1.1

the decision by the first respondent ("IRBA") taken on or about 28 July 2016 to introduce mandatory audit firm rotation ("MAFR");

1.2

the decision by the IRBA taken on or about 28 March 2017 on a final rule in relation to MAFR; and

1.3

the promulgation of the final rule in relation to MAFR on or about 5 June 2017.'

2023 JDR 1840 p7

Siwendu AJA (Ponnan, Nicholls, Mabindla-Boqwana and Weiner JJA concurring)

[7]

The IRBA opposed the review on two grounds, the first being that the applicants delayed in instituting the review. The second was that the decisions were quintessentially policy pronouncements taken pursuant to the subordinate rule making powers conferred on it by the Act and therefore not susceptible to review. Before the hearing, the applicants reformulated the relief sought. Instead of seeking to review the preceding decisions, they restricted themselves to the promulgation of the...