Signium: The Best Defense Against Corporate Failure

This article by Auguste Coetzer, Director of Signium Africa (previously known as Talent Africa), and J. Michael Judin, partner of Judin Combrinck Inc., discusses the risks of mandatory audit firm rotation (MAFR) and includes suggestions to avoid corporate failure.

With current pressures in the realm of corporate governance and audit practice the focus has fallen on the tenure of directors and audit firms, which is said to contribute to cosy relationships and an 'old boys' club mentality.

The supposed solution is frequent rotation of independent non-executive directors and audit firms, or MAFR, as pressure continues to grow to get new faces in.

  • The danger is that institutional memory and industry knowledge will be sacrificed with no assurance new perspectives will improve company performance or corporate governance. Past errors might be repeated, incurring unnecessary costs while endangering competitive advantage and jobs.
  • Experience has traditionally been regarded as a key component of wisdom and a precondition for forward planning.
  • The EU has introduced mandatory audit firm rotation (MAFR), with a 10-year cap on client-auditor tenure. Brazil has a five-year cap, as does China (for banks and SOEs) while the UK prefers a 10-year limit.
  • One suggestion is that a phasing-in period be introduced, as an onboarding process for replacements to learn the ropes and draw on the experiences of their predecessors.
  • While welcoming a new generation of directors it is also appropriate to focus on strengthening boardroom diversity and confronting a generational issue- a lack of digital literacy in older board members.
  • Another challenge is talent availability, especially in certain markets.

A shake-up that weakens corporate governance must be avoided at all costs. Ethical leaders with strong values are the best guarantee that change is a change for the better.

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