Risk & Compliance

Auditor Rotation: an Example of “Mission Creep”?

Congress puts pressure on the PCAOB to drop any plan for requiring companies to switch accounting firms.
Sarah JohnsonMarch 28, 2012

Pressed by members of Congress to jettison a plan to require companies to rotate auditors, Public Company Accounting Oversight Board chairman James Doty stressed today that the proposal is in a very early stage and may not become a rule.

Members of the House Subcommittee on Capital Markets and Government Sponsored Enterprises pressed Doty on the merits of mandatory auditor rotation and questioned whether the regulator is overstepping its bounds.

Last summer the PCAOB, which oversees accounting firms, issued a concept release on the issue — the first step toward a proposed rule. The board got an overwhelmingly negative response, with at least 90% of the letters it received on the issue opposed to the idea. “If this process results in the PCAOB proposing any rules, and I emphasize ‘if’ . . . any such proposed standard would be subject to further public comment and [the Securities and Exchange Commission’s] approval,” Doty said.

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The PCAOB is facing pressure to back off the measure. Rep. Michael Fitzpatrick (R-Pa.) has introduced a draft of a bill that would bar the board from requiring public companies to use certain auditors or rotate them. A similar motion was included in the JOBS Act now awaiting President Obama’s signature, which gives so-called emerging growth companies five years before they’d have to comply with an auditor-rotation rule.

Today’s congressional hearing included as witnesses SEC chief accountant James Kroeker and Financial Accounting Standards Board chair Leslie Seidman, who were invited to talk about accounting and auditing proposals in general. But most of the discussion centered on Doty and auditor rotation, one week after the PCAOB received an earful of feedback after a two-day roundtable on the topic.

Doty said the concept release was prompted by nine years of PCAOB inspection findings of “failures of skepticism” by auditors. Other countries are looking into making similar requirements in an effort to make audits appear more objective and to prevent auditor-client relationships from getting overly cozy.

However, Doty acknowledged, the PCAOB doesn’t have a solid justification for its rule beyond observations made by its investigators during its inspection processes. A few lawmakers asked about the timing of its concept release, nearly a decade after a Government Accountability Office report suggested the topic be dropped. “If you’re asking do we have a clear . . . connection between some failure of independence and objectivity, and an obvious audit flaw that led to the collapse of a major financial institution, we don’t have it,” Doty said.

Rep. Scott Garrett (R-N.J.), who chairs the subcommittee, said he shares concerns expressed by the U.S. Chamber of Commerce and other business advocates that the PCAOB is partaking in “mission creep.” In testimony later in the day, Chamber of Commerce vice president Tom Quaadman said: “The PCAOB appears to have embarked on an agenda that is leading far afield from its specific, but important, mandate to regulate auditors.”

Doty was repeatedly asked what the PCAOB had done to analyze the costs and benefits of the proposal and how many economists the board would use to come up with such an evaluation. He acknowledged that such analysis had not been conducted as of yet. For a proposal, “we would be doing a very careful analysis of costs, unintended consequences, benefits,” said Doty.

Asked about the feedback the board has received so far, Doty said that “a large segment of the CFO, preparer community is opposed to it.”