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PCAOB Gets Mandate: Tone Down Rotation Talk

Tammy Whitehouse | March 29, 2012

The Public Company Accounting Oversight Board received a clear mandate from Congress to tone down its talk of mandating audit firm rotation, especially since it hasn't produced any hard evidence that the benefits justify the cost.

During a subcommittee hearing of the House Financial Services Committee, Rep. Scott Garrett of New Jersey told PCAOB Chairman James Doty that he's siding with the U.S. Chamber of Commerce in accusing the PCAOB of “mission creep,” or sticking its neck into corporate governance issues that extend beyond regulation of the auditing profession. “I want to remind the PCAOB that it's not a policy-making entity,” Garrett said, chiding Doty for recent “activist-type proposals,” including mandatory audit rotation. “What is the specific problem?” he asked Doty. “And what data, or what cost benefit analysis is being done?”

The PCAOB just wrapped up two days of roundtable discussions regarding the board's concern that auditors are not adequately independent of their public company clients, and therefore not acting objectively or skeptically enough when auditing those companies' financial statements. Dozens of speakers debated the merits and drawbacks of a system of mandatory rotation, positioned as a solution the board might consider in its August 2011 concept release, not to mention whether rotation would even achieve the objective. Congress reacted by convening the hearing and drafting legislation to amend Sarbanes-Oxley specifically to prohibit the PCAOB from establishing a rule on auditor rotation.

During the recent PCAOB proceedings, Doty chided the Chamber of Commerce for its accusation that the PCAOB is straying into an area of corporate governance where it has no authority. The table turned on Doty when he faced Congress, as Garrett challenged Doty to explain the basis for floating the mandatory rotation idea. “Too many times with regulators, the policy outcome is predetermined before the work to determine what the best solution would be,” Garrett said.

Doty assured the panel, the Subcommittee on Capital Markets and Government Sponsored Enterprises, that the board has not determined how it will proceed. “I can't tell you that we will be bringing a standard for mandatory rotation,” he said. “We're a long way from any kind of decision on whether firm rotation should be proposed as a standard.” He said one of the purposes of the roundtable session was to elicit views on other possible solutions to concerns about auditor independence, objectivity, and skepticism.

Garrett and other members of the subcommittee also criticized the PCAOB for pressing Congress to revise Sarbanes-Oxley to permit PCAOB enforcement and litigation proceedings to become public. Doty has said the privacy of its enforcement proceedings give auditors a veil of protection from public scrutiny. Rep. Robert Dold of Illinois said that idea, along with mandatory rotation, have been considered and dismissed by Congress before. “They are solutions searching for nonexistent problems,” he said.

Rep. Michael Fitzpatrick, who sponsored the draft legislation prohibiting the PCAOB from pursuing mandatory rotation, was one of several Congress members to lecture Doty and other panelists – including Leslie Seidman, chairman of the Financial Accounting Standards Board and James Kroeker, chief accountant at the Securities and Exchange Commission – that they need to consider the impact of their actions. “We need jobs,” Fitzpatrick said. “We don't need to have government getting in the way of job creation.” So when the PCAOB issued a concept release that elicited heavy criticism, “it more than justifies a careful examination,” he said.