(c) Hong Kong Institute of Certified Public Accountants. Contact HKICPA for permission to reproduce this article., Audit and Assurance

The new JSE auditor accreditation model

Under the previous accreditation regime, the Johannesburg Stock Exchange was primarily responsible for assessing the suitability of auditors of listed companies. The responsibility has now largely moved to audit committees.

The Johannesburg Stock Exchange (JSE) auditor accreditation model, under its amended Listings Requirements (LR), imposes additional obligations on audit committees in relation to the appointment of auditors of listed entities with effect from 15 October 2017 (the implementation date).

he accreditation process previously included an assessment by the JSE of the details of the firm and its individual auditors as reflected in the respective declarations. Once approved by the JSE, the firm was accredited and individual auditors and specialists were admitted to the JSE accreditation list. The firm and the individuals were considered suitable for appointment as auditors of listed entities after the conclusion of this process. The accreditation for individuals and the firm was subject to annual renewal by 1 June.

Inherent in the previous process was significant reliance on the inspections results of the Independent Regulatory Board for Auditors (IRBA). The IRBA announced in June 2016 that it would no longer be able to accommodate requests to perform inspections specifically for JSE accreditation purposes. This development, as well as the JSE’s own research and benchmarking resulted in revisions to the accreditation model for audit firms and individual auditors.

Although accreditation, including the annual renewal of accreditation, is still required for the audit firm, it is no longer required for individual auditors. The JSE will maintain a list of auditors and accounting specialists, which will include the names of accredited audit firms. A confirmation of the regulatory disciplinary status of the individual auditors of audit firms has replaced the declaration of the individual auditor, to enable the JSE to assess if the individual is disqualified from new appointment to audit a JSE listed entity, or if the previously accredited individual should be removed from the list. In relation to individual auditors, the JSE will maintain a list of disqualified individual auditors.

The process involving the audit firm, reporting accountant specialist and IFRS advisor declarations in principle remains the same. The JSE has however introduced a new reporting accountant specialist exam for new reporting accountant specialists and specialists who do not meet the minimum requirements.

The amendments that have been introduced place a bigger responsibility on the audit committees of listed entities with respect to their oversight over the external audit, including auditor independence and audit quality. The audit committee is responsible for performing an appropriate auditor suitability assessment that will inform their recommendation of the proposed auditor (audit firm and individual auditor) for appointment or re-appointment to the shareholders.

Auditors on the JSE accreditation list before the implementation date

  • Individual auditors who were on the JSE accreditation list before 15 October 2017 continue to qualify as JSE-accredited auditors, except if a potential disqualification event occurred after 30 April 2017. If a potential disqualification event occurred, the auditor may not accept new engagements until such time that the JSE has completed an investigation process. The auditor is continuously obliged to inform the JSE of disciplinary action instituted by a regulator and/or a professional body.
  • Both audit firms and individual auditors are subject to the auditor suitability assessment by audit committees for meeting requests after 15 November 2017 as per the JSE implementation letter. In practice this should include meeting requests to attend an audit committee before the next annual general meeting and where the appointment of the auditor is on the agenda.
  • Audit firms, reporting accountant specialists and IFRS advisors remain subject to the annual accreditation process by 1 June.

Auditors not on the JSE accreditation list before the implementation date

  • Individual auditors who were not on the JSE accreditation list as at 15 October 2017 must submit the new Form E2 to the JSE at least 20 business days before accepting an engagement. Auditors are eligible for recommendation to the audit committee once they have been ‘cleared’ by the JSE.
  • Once the individual auditor has been ’cleared’ by the JSE, the suitability assessment of the auditor must take place by the audit committee before appointment. It is also expected that this process be completed before an audit firm tenders for the audit of a new listed client.
  • New audit firms, reporting accountant specialists and IFRS advisors are subject to the accreditation process as per the previous requirements. New audit firms should be mindful of the IRBA’s communication relating to obtaining a firm-wide independent ISQC 1 review. The firm has to give the IRBA six months’ written notice for such a review, which could take between four to eight weeks to complete. Reporting accountant specialists should also be mindful of the new reporting accountant specialist exam that applies as prescribed.

Enhanced duties of the audit committee to assess the suitability of the auditor

Duties of the audit committee in terms of section 94 of the Companies Act 2008

Audit committees have been subject to certain duties in relation to the auditor of the company in terms of section 94 of the Act. These duties include the following:

  • Nominating an auditor that the audit committee regards as independent
  • Determining the audit fee
  • Ensuring that the appointment of the auditor complies with the Act and other relevant legislation
  • Determining the nature and extent of non-audit services
  • Pre-approving any proposed agreement with the auditor for the provision of non-audit services
  • Preparing a report to be included in the annual financial statements describing how the committee carried out its functions, stating whether the auditor was independent, and commenting on the financial statements, accounting practices and internal financial control measures of the company
  • Receiving relevant complaints and dealing with them
  • Making submissions to the board regarding the company’s accounting policies, financial controls, records and reporting, and
  • Any other function designated by the board

Duties of the audit committee in terms of the JSE LR
Paragraph 3.84(g) (iii) of the JSE LR
In addition to the section 94 requirements of the Act, the audit committee is required to assess the suitability of the auditor for purposes of paragraph 3.84(g) (iii) of the JSE LR pursuant to the new model announced by the JSE on 18 September 2017.

  • The audit committee must request the audit firm to provide the information detailed in paragraph 22.15 (h) of the LR (set out below) and if necessary consult with the audit firm regarding the information.

Scope and frequency of the auditor suitability assessment
The auditor accreditation requirements apply to issuers and applicant issuers as defined in the LR. The practical implication of the LR is that the requirements impact entities, both locally and in external jurisdictions, with a primary debt or equity listing on the JSE, exchange traded funds and entities that are applying for the registration of a notes programme on the JSE.
The requirements apply to:

  • The auditor of an applicant issuer that intends to list securities on the JSE – that is, apply for registration of a debt or equity notes programme on the JSE
  • The auditor that is tendering for the audit of an issuer
  • Auditors of issuers in external jurisdictions with a primary listing on the JSE
  • The individual auditor replacing another individual auditor from the same auditing firm due to audit partner rotation

The suitability of the auditor must be assessed at least annually, or upon request in respect of both the current or prospective audit firm and designated individual auditor, on first appointment and thereafter annually for every re-appointment. Where new inspections from regulators such as the IRBA, are concluded after the audit committee has considered the appointment of the auditor, but before the assurance report is signed, the information as set out must be provided to the audit committee within 10 business days of the audit firm receiving written notification thereof.

Information that the audit committee must request from the auditor
Paragraph 22.15(h) requires that the audit committee request the following information from the auditor:

  • Information relating to the auditing firm:

The latest firm inspection letter by the IRBA or equivalent regulator or professional body for auditors in external jurisdictions. This includes the decision letter, the findings report and the proposed remedial action to address the findings. Where an inspection resulted in a follow-up re-inspection, both the original and re-inspection decision letters, findings reports and remedial action plans are required.

A description of and conclusion regarding the firm’s internal monitoring of its system of quality control, and a summary of the results of its monitoring findings that was communicated to the engagement partners of the firm , approved by the head of risk of the firm.

The outcome and a summary of any legal or disciplinary proceedings concluded within the past seven years, which includes matters settled by consent order.

  • Information relating to the individual auditor:

The latest individual auditor inspection letter by the IRBA or equivalent regulator or professional body for auditors in external jurisdictions, including the decision letter, the findings report and the proposed remedial action to address the findings, where the engagement file subject to the inspection was for that specific applicant issuer or one of its subsidiaries.

For all other engagement file reviews, i.e. not involving the specific applicant issuer or one of its subsidiaries, only the decision letter resulting from the inspection is required in relation to both the individual auditor who will be the designated individual auditor for the next audit and on the designated individual auditor of the same firm for the past audit. However, where the IRBA has identified that an issue is unsatisfactory and will perform a re-inspection on the individual auditor and/or has referred the matter for investigation, a redacted version of the detailed findings report and proposed remedial action plan are also required.

Where necessary, an explanation of the above findings to ensure that there is an understanding of those findings in the appropriate context.

The outcome and a summary of any legal or disciplinary proceedings concluded within the past seven years, which includes matters settled by consent order.

Carla Budricks is the Regulatory Leader in Deloitte