Auditor independence and professional scepticism in South Africa: Is regulatory reform needed?

Abstract

Background: Quality financial reporting, which requires high quality auditing outcomes, aids the smooth functioning of capital markets. Setting: The South African audit regulator argues that the key auditor attributes of independence and scepticism are dangerously compromised in South Africa, resulting in impaired audit quality. The regulator responded in June 2017 with the issuance of mandatory audit firm rotation (MAFR) regulations, effective April 2023. This ruling has caused considerable debate and opposing views in the audit industry. Aim: This study explores the state of auditor independence and the degree to which professional scepticism is being exercised by South African auditors of exchange-listed companies through an analysis of the perceptions of experienced key stakeholders. The findings contribute to the rationale behind the regulator’s argument for the necessity and efficacy of MAFR. Method: The study uses a survey methodology across four key stakeholder groups experienced in matters concerning the audit process, auditor appointment and reliance on the audit outcome on the Johannesburg Stock Exchange. Results: Respondents do not believe that auditor independence and professional scepticism are impaired, nor that existing regulations and codes of practice need amendment. In addition, audit failures and corporate financial scandals are not believed to be a result of compromised auditor independence and professional scepticism, nor do longer audit firm tenures impair independence and professional scepticism. Conclusion: These perceptions provide evidence against the rationale for MAFR adoption and indicate that it may not be necessary or effective. The study contributes to the South African audit profession in its objective to maintain audit quality. As such, it is relevant to regulators, standard-setters and stakeholders in South African capital markets.