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From Securities Regulation Daily, July 9, 2013

House passes legislation prohibiting PCAOB from requiring mandatory audit firm rotation

By Jim Hamilton, J.D., LL.M.

The House passed the bipartisan Audit Integrity and Job Protection Act, H.R. 1564, by a vote of 321-62. The law prohibits the Public Company Accounting Oversight Board from requiring mandatory audit firm rotation. Co-authored by Rep. Robert Hurt (R-Va) and Rep. Gregory Meeks (D-NY), H.R. 1564 would amend Section 103 of the Sarbanes-Oxley Act to expressly prohibit the PCAOB from requiring that the outside audits of a company’s financial statements be conducted by different audit firms on a rotating basis. The Act would also prohibit the Board from requiring that audits be conducted by specific auditors. This is bi-partisan legislation that was reported out of the Financial Services Committee by a vote of 52-0.

Mandatory audit firm rotation. Rep. Hurt said that the legislation would eliminate the threat of mandatory audit firm rotation by prohibiting the PCAOB from moving ahead with a potential rulemaking. He mentioned that the Board has put out a concept draft on mandatory audit firm rotation and, to his knowledge, has not withdrawn it. Thus, the PCAOB has left the issue unresolved. In his view, Congress must act because mandatory audit firm rotation would impair auditors, reduce the role and significance of audit committees, reduce audit quality in the first years of the new audit firm’s tenure, and create a disincentive to go public.

Rep. Meeks noted that mandatory audit firm rotation would cause significant disruption, could weaken audit quality, and is essentially unworkable. He also pointed out that mandatory audit firm rotation was considered during the Dodd-Frank Act deliberations and was rejected. There was no data showing that it would improve audit quality. Rep. Meeks acknowledged that there is some merit to auditor rotation and that Sarbanes-Oxley deals with that by requiring mandatory rotation of the lead partner responsible for the audit.

Although she voted for passage of H.R. 1564 in the House, the Committee’s Ranking Member, Rep. Maxine Waters (D-Cal), has viewed the legislation with mixed feelings. On the one hand, she does not believe that mandatory audit firm rotation would enhance auditor independence, but on the other hand she does not believe that Congress should micromanage the PCAOB. The small number of audit firms and industry specialization means that requiring audit firm rotation will leave companies with little choice. Essentially, the dominance of the Big 4 makes mandatory audit firm rotation unworkable. But again, the Ranking Member is concerned with tampering with PCAOB authority at a time when it is not clear how serious the Board is about mandatory audit firm rotation. It is not unreasonable for the PCAOB to consider a wide and broad range of issues, she added. However, the Ranking Member cautioned the Board to keep in mind if there are any benefits to investors as it examines mandatory audit firm rotation.

Amendment. During Committee mark-up of H.R. 1564, Rep. Waters offered an amendment that would sunset the prohibition on adopting mandatory audit firm rotation so as not to indefinitely constrain the PCAOB. The amendment would also require a study on the issue, updating the 2003 GAO study. Rep. Hurt opposed the amendment, stating that it would gut the bill and create uncertainty. Rep. Scott Garrett (R-NJ) proposed an amendment to the Waters Amendment that would eliminate the sunset provision, but retain the study. Rep. Hurt agreed to the compromise amendment as long as it specifically required the study to consider the costs of mandatory audit firm rotation. Rep. Waters agreed to the changes, indicating that cost considerations should be included in the amendment. The amendment requiring a study of mandatory audit firm rotation, updating the GAO 2003 study, was unanimously approved by voice vote in the committee.

MainStory: TopStory AccountingAuditing

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