H.R. 1564: Audit Integrity and Job Protection Act

H.R. 1564

Audit Integrity and Job Protection Act

Date
July 8, 2013 (113th Congress, 1st Session)

Staff Contact
Communications

Floor Situation

On Monday, July 8, 2013, the House will consider H.R. 1564, the Audit Integrity and Job Protection Act. The bill was introduced on April 15, 2013 by Rep. Robert Hurt (R-VA) and referred to the Committee on Financial Services, which reported the bill by a vote of 52-0.

Bill Summary

H.R. 1564 amends the Sarbanes-Oxley Act of 2002 (SOX) to prohibit the Public Company Accounting Oversight Board (PCAOB) from requiring: (i) the audits of a particular issuer be conducted by a specific auditor; or (ii) an issuer’s audits be conducted by different auditors on a rotating basis.  It also prohibits PCAOB from requiring audits be conducted for an issuer by different auditors on a rotating basis.  An amendment adopted in committee requires a study be conducted regarding the costs of a mandatory auditor rotation.[1]

Background

On August 16, 2011 the PCAOB published Concept Release on Auditor Independence and Audit Firm Rotation (“Concept Release”), which sought public comment on “whether mandatory auditor rotation would significantly enhance auditors’ objectivity and ability and willingness to resist management pressure.” [1]  The Concept Release sets forth the arguments for and against mandatory audit firm rotation, as well as the history of proposals for audit firm rotation dating back to 1977, when Congress created the Cohen Commission after several corporate scandals.  The Cohen Commission ultimately decided against mandating audit firm rotation, and instead recommended that audit committees retain discretion in deciding whether to rotate audit firms or make periodic personnel changes within the audit team of the auditing firm.  Mandatory audit firm rotation was raised again in 2002 during congressional debate on what ultimately became Sarbanes-Oxley, but was again rejected.  In November 2003, the GAO released its Study on the Potential Effects of Mandatory Audit Firm Rotation, as required under Sarbanes-Oxley, which concluded “that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality….”

Rather than promoting auditor independence, objectivity, and professional skepticism, imposing a mandatory audit firm rotation requirement on U.S. public companies would likely degrade audit quality by hindering the ability of auditors to develop detailed knowledge of their clients’ management and operations through long-term audit engagements.  Moreover, any benefits of mandatory audit firm rotation are questionable given that there are often only a limited number of firms available to conduct public company audits, particularly for the largest multi-national corporations. 

Mandatory audit firm rotation may also result in significant, added costs for public companies.  On July 17, 2012, the Business Roundtable informed the PCAOB of a survey it conducted which found that companies “that had changed audit firms within the past ten years estimated that the cost of doing so, including additional management time and company resources, ranged from $500,000 to over $5 million.”  On May 23, 2013, Robert Smith testified before the Subcommittee on Capital Markets and Government Sponsored Enterprises, “Mandatory auditor rotation will lead to both increased audit costs as well as increased costs for audit-related services.  This is supported by the GAO’s 2003 Report, which found that nearly all of the larger audit firms surveyed estimated that initial audit year costs would be more than 20% higher than subsequent year’s costs; the responses from the Fortune 1000 public companies were similar.”

Cost

The CBO estimates that implementing H.R. 1564 would have a discretionary cost of about $1 million for the GAO to complete the study and provide a report.[1]

Additional Information

For questions or further information contact David Smentek in the Conference Policy Shop at 5-5107.