The House Financial Services Committee has unanimously passed legislation prohibiting the Public Company Accounting Oversight Board from mandating the automatic rotation of a public company’s independent external auditor.
The PCAOB issued a concept release in August 2011 proposing mandatory audit firm rotation as one way to improve audit firm independence and held a series of roundtable meetings across the country last year to gauge sentiment from accountants, investors, academics, business leaders and other groups (see PCAOB Hears Input on Auditor Independence and Firm Rotation). After hearing a series of objections to the concept, the PCAOB has not yet formally said what decision it would make. The congressional bill, H.R. 1564, the Audit Integrity and Job Protection Act, was introduced by Rep. Robert Hurt, R-Va., and Rep. Gregory Meeks, D-N.Y., with the goal of short-circuiting the process. They argued that selecting a company’s external auditor should be a decision made by a public company’s board of directors and ratified by its shareholders, not a decision made by a regulator. H.R. 1564 would amend the Sarbanes-Oxley Act to allow public companies to maintain their auditing practices and avoid additional costs.
“The Audit Integrity and Job Protection Act would prevent the threat of federal overregulation so that our businesses can continue to focus on creating the jobs that our local communities need rather than cutting through more government red tape,” Hurt said in a statement.
The bill passed unanimously by a vote of 52 to 0 by the House Financial Services Committee Wednesday and will go before the House for a vote.
Edward Yodowitz of the law firm Skadden Arps Slate, Meagher & Flom LLP believes mandatory audit firm rotation would have problems. “Any benefit from forced rotation would be speculative,” he said. “However the detriments could be considerable and unavoidable. Companies potentially face the additional cost of a learning curve that a new audit firm would have and issues that could be caused by the lack of familiarity with a client’s internal systems and controls.”
The PCAOB declined to comment on the bill.
Three other bills were also passed Wednesday by the Financial Services Committee after heavy lobbying by industry groups.
H.R. 2374, the Retail Investor Protection Act, introduced by Rep. Ann Wagner, R-Mo., would link the Department of Labor’s expected rulemaking to amend the definition of a “fiduciary” under the Employee Retirement Income Security Act of 1974 with the permissive rulemaking authority provided to the SEC in Section 913 of the Dodd-Frank Act regarding standards of care applicable to broker-dealers and investment advisers. The legislation would prevent the Secretary of Labor from prescribing any regulation under ERISA defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the SEC issues a final rule relating to standards of conduct for brokers and dealers pursuant to Section 913 of the Dodd-Frank Act. Section 913(g)(1) of Dodd-Frank authorizes, but does not require, the SEC to promulgate rules to extend the fiduciary standard of conduct applicable to investment advisors to broker-dealers when providing advice about securities to retail customers. The bill passed by a margin of 44 to 13.
H.R. 1105, the Small Business Capital Access and Job Preservation Act, introduced by Rep. Hurt, would exempt advisers to certain private equity funds from the new registration requirements imposed by Title IV of the Dodd-Frank Act. The bill passed by a vote of 38 to 18.
H.R. 1135, the Burdensome Data Collection Relief Act, introduced by Rep. Bill Huizenga, R-Mich., would repeal Section 953(b) of the Dodd-Frank Act. Section 953’s mandate related to “median pay” compensation disclosures could require all public companies to determine the compensation of all of its employees around the world, calculate the median annual compensation, and include this information in every filing with the SEC. The bill supporters argued that the personnel resources required to develop and monitor these statistics would be extensive. The bill passed by a vote of 36 to 21.
“This committee is continuing to consider targeted, pragmatic, and bipartisan fixes to some provisions that are unnecessary or unduly burdensome upon our job creators—when today, we still have millions of our fellow countrymen unemployed or underemployed,” said House Financial Services Committee chairman Jeb Hensarling, R, Texas, in a statement. “We have an economy that regrettably is growing at perhaps 1 ½ to 2 percent GDP growth when we know 3 ½ percent is the norm. That is not good enough for low and moderate income families who are still struggling to either secure the paychecks they have or seek the paychecks they do not yet have.”