THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case No: 113/2022
In the matter between:
EAST RAND MEMBER DISTRICT OF
CHARTERED ACCOUNTANTS FIRST APPELLANT
JAROSLAV CERNY SECOND APPELLANT
and
INDEPENDENT REGULATORY BOARD
FOR AUDITORS FIRST RESPONDENT
CHAIRPERSON OF THE INDEPENDENT
REGULATORY BOARD FOR AUDITORS SECOND RESPONDENT
CHIEF EXECUTIVE OFFICER OF THE
INDEPENDENT REGULATORY BOARD
FOR AUDITORS THIRD RESPONDENT
Neutral Citation: East Rand Member District of Chartered Accountants and
Another v Independent Regulatory Board for Auditors and
Others (113/2022) [2023] ZASCA 81 (31 May 2023)
Coram: PONNAN, NICHOLLS, MABINDLA-BOQWANA and WEINER
JJA and SIWENDU AJA
2
Heard: 5 May 2023
Delivered: 31 May 2023
Summary: Application for leave to appeal – referral to oral argument in terms of
s 17(2) (d) of the Superior Courts Act 10 of 201 3 – Mandatory Audit Firm
Rotation Rule – Auditing Professions Act 26 of 2005 – review – dismissal based
on delay – prospects of success – whether promulgation of Rule ultra vires.
3
________________________________________________________________
ORDER
________________________________________________________________
On appeal from: Gauteng Division of the High Court, Pretoria (Davis J) sitting
as a court of first instance):
1. Leave to appeal is granted.
2. The appeal is upheld with costs, such costs to include the costs of two counsel,
where so employed.
3. The attorneys for both the appellants and the respondents shall only be entitled
to recover from their clients fifty percent of the costs associated with the
preparation, perusal and copying of the record in the appeal.
4. The order of the high court is set aside and substituted with the following:
‘1. The application succeeds with costs.
2. The Mandatory Audit Firm Rotation Rule (MAFR) as promulgated on 5 June
2017 in Government Gazette No 40888 is reviewed and set aside.’
________________________________________________________________
JUDGMENT
________________________________________________________________
Siwendu A JA ( 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 Pr ofessions
4
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 compan y’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
1 The predecessor of the IRBA was the Public Accountants’ and Auditors’ Board established in 1951.
2 ‘Section 2 states that: ‘The objects of this Audit Act are —
(a) to protect the public in the Republic by regulating audits performed by registered auditors;
(b) to provide for the establishment of an Independent Regulatory Board for Auditors;
(c) to improve the development and maintenance of internationally comparable ethic al standards and auditing
standards for auditors that promote investment and as a consequence employment in the Republic;
(d) to set out measures to advance the implementation of appropriate standards of competence and good ethics in
the auditing profession; and
(e) to provide for procedures for disciplinary action in respect of improper conduct. ’
5
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, a fter 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 w ritten 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.
3 Government Gazette (GG) 39475 Government Notice (GN) 138 4 December 2015.
4 MAT would make it compulsory for companies to put the engagement of an audit form out to a public tender
process to enhance competition and provide an equal opportunity for all audit firms to tender for appointment.
5 A joint Audit entails the appointment of more than one audit firm. This would ensure th at the firms rotate in
cycles to ensure continuity.
6 GG 40392 GN 170 1 November 2016.
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[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 a n 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 it s 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.’
7 The MAFR is published in GG 40888 GN 100 5 June 2017.
8 Section 5(1) states that ‘Any person whose rights have been materially and adversely affected by administrative action and
who has not been given reasons for the action may, within 90 days after the date on which that person became aware of the
action or might reasonably have been expected to have become aware of the action, request that the administrator concerned
furnish written reasons for the action.
(2) The administrator to whom the request is made must, within 90 days after receiving the request, give that person adequate
reasons in writing for the administrative action.’
7
[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 MARF.
[8] The high court found that the applicants had instituted the review outside
of the period prescribed in s 7(1)9 of the Promotion of Administrative Justice Act
3 of 2000 (PAJA), and that they had accordingly delayed unreasonably in doing
so. When the high court considered the prospects of success to determine whether
it should condone the delay, it held that it could not find ‘the proverbial smoking
gun’. It found it unnecessary on that account to fully traverse the merits of the
review. Thus, the application centres in the first place on whether or not the high
court’s finding on delay is correct. In order to decide whether the delay precluded
the applicants from pursuing the review, a consideration of the merits of the
review, is inescapably called into play. This matter turns on a question of statutory
interpretation. Although numerous grounds have been raised , the primary
complaint involves the IRBA’s power to promulgate the MAFR, and whether the
exercise of that power was ultra vires the Act.10 It became apparent during the
argument that there were reasonable prospects of success on appeal, and, in view
of the importance of the matter to the parties and the public, and its obvious
9 ‘Section 7(1) states that: ‘Any proceedings for judicial review in terms of section 6 (1) must be instituted without
unreasonable delay and not later than 180 days after the date—
(a) . . .
(b) where no such remedies exist, on which the person concerned was informed of the administrative act ion,
became aware of the action and the reasons for it or might reasonably have been expected to have become aware
of the action and the reasons.’
10 ‘Empowering provision’ is defined in section 1 of PAJA as ‘a law, a rule of common law, customary law, or an
agreement, instrument or other document in terms of which an administrative action was purportedly taken.’
8
Constitutional implications, leave to appeal must be granted. In what follows the
applicants will accordingly be referred to as the first and second appellants.
The Delay
[9] Section 7(1) of PAJA states in the relevant part that:
‘Any proceedings for judicial review in terms of section 6(1) must be instituted without
unreasonable delay and not later than 180 days after the date—
. . .
(b)… on which the person concerned was informed of the administrative action, became aware
of the action and the reasons for it or might reasonably have been expected to have become
aware of the action and the reasons.’
[10] The high court departed from the premise that each of the decisions taken
by the IRBA was subject to review ‘despite their quasi-legislative nature’. The
high court concluded that: ‘The first decision on 28 July 20 16 and the 180 days
period lapsed on 25 January 2017; the second decision was on [28] March 2017
and the 180 day period lapsed around 20 September 2017.’
[11] This Court in Esau and Others v Minister of Co -Operative Governance
and Traditional Affairs and Others held that:
‘As a general rule, policies that have been formulated and adopted by the executive will not
be ripe for review until they are implemented, usually after having been given legal effect by
some or other legislative instrument. Two prin ciples come into play in this regard: first, that
in order for an exercise of public power to be ripe for review, it should ordinarily be final in
effect; and secondly, that the decision must have some adverse effect for the person who
9
wishes to review it, because otherwise its setting aside would be an academic exercise which
courts generally eschew.’11
On the strength of Esau, the decisions preceding the publication of the MAFR
were not ripe for review until the promulgation of the rule on 5 June 2017. The
high court accordingly erred.
[12] Ordinarily, the period within which to institute the review would have
commenced on 5 June 2017, the date of the promulgation of the MAFR .12
Reasons for the decision were sought on 22 September 2017. Those reasons were
furnished on 1 December 2017. It was thus only from that date that the 180 days
began to run.
[13] Although the high court accepted that the review ‘in respect of the last
impugned decision’ was launched 179 days after the applicants received the
reasons, it critici sed the applicants for its dilatory conduct and found the delay
unreasonable. It held that, even though the statutory period in s 7(1) of PAJA was
180 days, the appellants were required to explain the delay in only launching the
review on the 179th day. The criticism was not justified. The IRBA received the
request for reasons on 22 September 2017, it delayed its response until
1 December 2017. When one has regard to the content of the reasons, they amount
to no more than a regurgitation of what was conveyed in the public notices
preceding the publication. The IRBA was not without fault . It could have
provided those reasons earl ier to prevent a ny further delay, if time was of the
essence. There has been no explanation for its own delay.
11 Esau and Others v Minister of Co -Operative Governance and Traditional Affairs and Others [2021] ZASCA
9; [2021] 2 All SA 357 (SCA); 2021 (3) SA 593 (SCA) para 45.
12 In terms of section 7(1)(b) of PAJA, this was when the applicants were ‘informed’ of the administrative action,
‘became aware of the action and the reasons for it or might reasonably have been expected to have become aware
of the action and the reasons.’
10
[14] Importantly, although published on 5 June 2017, the MAFR was only to
take effect on 1 April 2023 , approximately five years after the institution of the
review. Potentially, the real effect of the MAFR will only be fully known or felt
some 10 years from the date of its implementation. There was no unreasonable
delay in the institution of the review. In these circumstances, the decision of the
high court accordingly falls to be set aside.
[15] Turning to the merits of the appeal, we have read the voluminous record,
and the high court has pronounced itself on the merits of the review, albeit briefly.
Both parties agreed that t he matter is indeed important and that they and the
profession at large would benefit from this Court’s consideration of the matter.13
Is the MAFR ultra vires the Act?
[16] The IRBA may not exercise a power not conferred on it by its founding
legislation nor can it act in a manner that is inconsistent with the Act.14 Counsel
for the IRBA submitted that s 10(1)(a), read with ss 4(1)(b), (c) and (e), of the
Act is the source of the IRBA’s power to promulgate the MAFR. Section 10(1)
reads:
‘10. (1) The Regulatory Board may, by notice in the Gazette, prescribe rules with regard to–
(a) any matter that is required or permitted to be prescribed in terms of this Act; and
(b) any other matter for the better execution of this Act or function or power provided for in
this Act.’
13 Liberty Group Limited v Moosa (126/2021) [2023] ZASCA 52 (14 April 2023) para 1 (which refers with
approval to Body Corporate of Marine Sands v Extra Dimensions 121 (Pty) Ltd [2019] ZASCA 161 para 1). In
contrast, see A Penglides (Pty) Ltd and Another v Minister of Agriculture, Forestry and Fisheries and Another
[2022] ZASCA 74; 2022 (5) SA 401 (SCA) para 18, where the court did not pronounce itself on the merits.
14 Fedsure Life Assurance Ltd v Greater Johannesburg Transitional Metropolitan Council 1999(1) SA 374 (CC).
See also Affordable Medicines Trust v Minister of Health 2006 (3) SA 247 (CC) at para 119.
11
[17] Section 10(1)(a) permits the IRBA to prescribe rules on matters ‘required
or permitted’ to be prescribed by the Act , while s 10(1) (b) provides for rules
aimed at a better execution of the Act. The matters that the IRBA is permitted to
prescribe under s 10(1) (a) are located in s 4, which deals with its general
functions. The section states in relevant part that:
‘4(1) The Regulatory Board must, in addition to its other functions provided in this Act
. . .
(b) take steps it considers necessary to protect the public in their dealings with registered
auditors;
(c) prescribe standards of professional competence, ethics and conduct of registered auditors
. . .
(e) prescribe auditing standards.’
Section 4 confines the IRBA’s rule making power to ‘the prescription of
standards’ in respect of defined functional areas. As the appellants correctly
contend, the MAFR is not a standard of competence or a professional standard.
The net effect of the MAFR , as counsel for the IRBA conceded during the
hearing, is that it imposes a broad restriction on companies, audit committees and
their current and future shareholders from appointing an audit firm of their choice.
At the same time, it prohibits audit firms from accepting appointments even if
selected by a company.
[18] Confronted with thes e difficulties, counsel for the respondents sought
instead to rely on s 10(1)(b) of the Act and submitted that the IRBA took steps to
protect the public from a series of accounting scandals. However, when
published, no reference was made to that provision. Reliance was then only
placed on s 10(1) (a). That was the stance taken by the IRBA in its opposing
affidavit as well. There is thus no support for the submission. I accordingly find
that the promulgation of the MAFR is ultra vires the Act and falls to be set aside.
12
[19] What remains is the issue of costs. The costs of the appeal, including those
of the application for leave to appeal must obviously follow the result. The
appellants contended that insofar as the proceedings before the high court were
concerned, they should be awarded costs on a punitive scale . In motivating for
such an order, it was submitted that account had to be taken of: (a) the failure by
the IRBA to fully comply with an interlocutory order by Basson J ; (b) the costs
associated with an application to amend its notice of motion and the objection by
the IRBA in terms of rule 30 and rule 30A; and, (c) the general conduct of the
IRBA in the litigation, which led to a striking out application. The interlocutory
order by Basson J, granted the appellants costs on a punitive scale. That addressed
many of the appellants’ complaints. Moreover, the subsequent interlocutory
disputes formed the subject of an application to strike out , which the appellants
abandoned.
[20] It is necessary to comment on the size of the record , which consists of
15 volumes, comprising 2633 pages. It is awash with reports and unnecessary
material, not required for the adjudication of the matter. This Court has expressed
its displeasure in numerous matters at the disregard for the rules in the preparation
of the record and the cost to the parties when that happens.15 The necessary record
to resolve the application should not have exceeded seven volumes. Both parties
were responsible for the state of the record. Accordingly, the attorneys for both
the appellants and the respondent s shall only be entitled to recover from their
clients no more than fifty percent of the costs associated with the preparation,
perusal and copying of the record in the appeal in this Court.
[21] In the result, I make the following order:
15 City of Ekurhuleni Metropolitan Municipality v Takubiza Trading & Projects CC and Others [2022] ZASCA
82; 2023 (1) SA 44 (SCA) para 18 to 19.
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1. Leave to appeal is granted.
2. The appeal is upheld with costs, such costs to include the costs of two counsel,
where so employed.
3. The attorneys for both the appellants and the respondents shall only be entitled
to recover from their clients fifty percent of the costs associated with the
preparation, perusal and copying of the record in the appeal.
4. The order of the high court is set aside and substituted with the following:
‘1. The application succeeds with costs.
2. The Mandatory Audit Firm Rotation Rule (MAFR) as promulgated on 5 June
2017 in Government Gazette No 40888 is reviewed and set aside.’
_________________________
N T Y SIWENDU
ACTING JUDGE OF APPEAL
14
Appearances
For the applicants: HF Oosthuizen SC with him DJ Smit
Instructed by: Warrener de Agrela & Associates Inc, Johannesburg
Honey Attorneys, Bloemfontein
For the respondents: LT Sibeko SC with him S Tshikila and RV Mudau
Instructed by: Cliffe Dekker Hofmeyer Inc, Sandton
Webbers Attorneys, Bloemfontein