House Backs Bill That Prohibits Mandatory Firm Rotation

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By Jason Bramwell

The US House of Representatives on July 8 approved legislation that would prevent the Public Company Accounting Oversight Board (PCAOB) from implementing a system of mandatory rotation for audit firms.

The bill, HR 1564, also known as the Audit Integrity and Job Protection Act, was passed by a vote of 321 to 62. The House Financial Services Committee unanimously approved the legislation by a vote of 52 to 0 on June 19. The bill will now go before the Senate for a vote.

Introduced in April by Virginia Republican Congressman Robert Hurt and New York Democratic Congressman Gregory Meeks, the Audit Integrity and Job Protection Act would amend the Sarbanes-Oxley Act of 2002 (SOX) to prohibit the PCAOB from requiring public companies to use specific auditors or require the use of different auditors on a rotating basis.

"Our small businesses have been negatively affected by harmful policies put forth in Washington for too long", Hurt said in a written statement following the House vote. "It is critical that we in the House of Representatives advance policies that will remove the federal government as a barrier to job creation in order to encourage robust economic growth and provide the opportunity for our job creators to hire and expand."

Established by Congress under SOX following the corporate and accounting scandals at Enron Corporation, Tyco International Ltd., Adelphia Communications Corporation, and WorldCom, the PCAOB is a nonprofit corporation that oversees the audits of public companies and broker-dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.

The PCAOB issued a concept release in August 2011 on ways to enhance auditor independence, objectivity, and skepticism in which the possibility of mandatory audit firm rotation was raised. Several public meetings on the concept release were held late last year by the PCAOB to gauge feedback from academics, investors, audit committee members, corporate officers, auditors, and other interested parties.

During a speech in the United Kingdom on the role of the audit in the global economy on April 18, PCAOB Chairman James Doty said after nearly ten years of inspecting the audits of issuers, the PCAOB identified hundreds of engagements that did not meet PCAOB standards. 

"These are serious audit deficiencies that mean, essentially, that the auditor left insufficiently audited an aspect of the financial statements that could include an undetected material misstatement", he said. 

Proponents of a rotation system believe that setting a limit on the continuous stream of audit fees that an auditor may receive from one client would significantly free the auditor from the effects of management pressure and offer an opportunity for a fresh look at the company's financial reporting, the PCAOB stated in the concept release. 

Opponents cite unnecessary additional costs that would be passed on to investors and consumers, as well as the possibility that audit quality would suffer as a result of firm rotation.

California Democratic Congresswoman Maxine Waters said she didn't understand how requiring a public company to change auditors every so often would contribute to auditor independence. 

"Given the time it takes an auditing firm to truly understand the business of a company, there will be at least a few years of less-than-ideal audits, as an auditor needs to learn everything they need to know about the new firm", she stated in front of her colleagues on July 8. "Additionally, the smaller number of major auditing firms coupled with specialization within the auditing industry means that requiring rotation, in many cases, will not leave companies much choice at all. In my view, while enhancing auditor independence is the crucial goal, I do feel that there may be better ways to accomplish it."

Barry Melancon, CPA, CGMA, president and CEO of the American Institute of CPAs (AICPA), which supported the bill, said the House sent regulators in the United States and Europe a clear message that the time has come to end the debate over rotation.

"In Europe, there is a misimpression that the continued consideration of the PCAOB's concept release means that the United States is headed toward adoption of a mandatory firm rotation requirement", Melancon said in a written statement on July 8. "Today's House vote will go a long way toward alleviating confusion and uncertainty for policymakers and stakeholders on both sides of the Atlantic."

In regards to the House vote on the Audit Integrity and Job Protection Act, PCAOB Spokesperson Colleen Brennan told AccountingWEB",The PCAOB issued a concept release seeking information and opinion on a long-standing debate over mandatory audit firm rotation and asking for views on other options to enhance auditor independence, objectivity, and professional skepticism. The board continues to pursue the best means of fostering auditor independence, objectivity, and professional skepticism as well."

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