​Will mandatory audit firm rotation reduce audit market concentration in South Africa?

Mandatory audit firm rotation will come into effect in South Africa on 1 April 2023. Mandatory audit firm rotation in this country aims to enhance auditor independence, accelerate transformation and enable deconcentration in the audit profession. This study explored the effect of mandatory audit firm rotation on one of these three objectives, namely audit market deconcentration.

This study used disclosures on audit firm identity in annual reports to analyse and describe trends in audit market concentration of JSE-listed companies for the period 2010–2018. In the last three years of the research period, when data on the tenure and rotation of audit firms became publicly available, these too were incorporated. Concentration ratios were calculated, while rotations and tenure per audit firm size were analysed to envisage the effect of mandatory audit firm rotation on audit market concentration.

South African audit market concentration mirrors evidence from most developed countries, with Big 4 audit firms dominating the audit market in each of the years studied, while a monopoly within the Big 4 audit firm grouping was also evident. Based on observed audit firm tenure and rotation behaviour over the target period, it is anticipated that the mandatory rotation of audit firms will further increase audit market concentration. The sheer scale of rotations that need to be carried out before 2023 may disrupt the South African audit market.

Regulators are urged to implement remedies to address the unintended consequences of mandatory audit firm rotation well in advance of the 2023 commencement date.

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