A House subcommittee held hearings Wednesday in which they questioned the Public Company Accounting Oversight Board’s recent proposal for mandatory audit firm rotation, along with the PCAOB’s push to make disciplinary proceedings against auditors public.
“I think it is important to remind the PCAOB that it is not a policy-making entity; Congress and this committee are the policy makers,” said Rep. Scott Garrett, R-N.J., who chairs the House Capital Markets and Government Sponsored Enterprises Subcommittee. “The PCAOB’s job is to regulate and oversee the auditing profession. I am very concerned about some of the recent activist proposals put forth by the PCAOB. I agree with the Chamber of Commerce and others that believe the PCAOB is ‘engaged in mission-creep, crossing the threshold of audit regulation in an attempt to regulate corporate governance…'”
The Chamber of Commerce sent a letter to the PCAOB last week during a roundtable meeting on mandatory audit firm rotation, which occasioned a tense exchange between PCAOB chairman James Doty and a representative from the chamber (see Big Four Audit Firms Accused of ‘Duopoly’ and PCAOB of ‘Mission Creep’).
Doty defended the PCAOB’s efforts at the congressional hearing. “The board, of course, has not proposed mandatory audit firm rotation,” he said in his opening statement. “Rather … the PCAOB is engaged in a deep and wide-ranging public dialogue about ways to enhance the independence, objectivity and professional skepticism of public company auditors. The board initiated this discussion by issuing a concept release, which asked not only whether others agree or disagree that the board should focus on this issue, but also sought specific ideas for improving independence, objectivity, and skepticism, including the possibility of rotation. This dialogue was prompted, among other things, by concerns developed over the last nine years of the PCAOB’s inspections of public company audits. It was also prompted by the Government Accountability Office’s statutorily required 2003 report on mandatory audit firm rotation, which noted the significant implementation issues that would be associated with mandatory audit firm rotation and concluded that the PCAOB and the SEC would need more time and experience to evaluate whether term limits are necessary to preserve auditor independence.”
One of the members of the subcommittee, Rep. Michael Fitzpatrick, R-Pa., introduced legislation that would amend the Sarbanes-Oxley Act to prohibit the PCAOB from requiring public companies to use specific auditors or require the use of different auditors on a rotating basis.
A representative from the Chamber of Commerce also testified at the hearing. “The PCAOB appears to have embarked on an agenda that is leading far afield from its specific, but important, mandate to regulate auditors,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “For example, the concept releases on mandatory audit firm rotation and auditor discussion and analysis have the Chamber concerned that the PCAOB is engaged in mission creep. It is leaving the realm of audit regulation and crossing the threshold of regulating corporate governance, a subject area that has been left to state corporate law and the Securities and Exchange Commission.”
American Institute of CPAs president and CEO Barry Melancon testified at the hearing, saying he opposed the proposal for mandatory audit firm rotation. “Interestingly, the PCAOB’s release acknowledges that there is little evidence linking audit firm tenure to audit failures or a lack of independence, objectivity and professional skepticism by the auditors,” he said. “The release also recognizes that mandatory audit firm rotation would represent a significant change in practice and would increase costs and cause disruptions for companies and external auditors. … Given the significant costs and disruption, the lack of evidence linking engagement tenure to audit quality, and, most importantly, the risk that mandatory rotation is actually a detriment to audit quality, we oppose mandatory firm rotation. We do however support the review underway to further enhance both the role of the auditor and of the audit committee in ways that enhance the quality of information provided to investors. We believe this is a much more beneficial and fruitful area on which to focus.”
Melancon also said the AICPA objects to the PCAOB’s proposals for amending Sarbanes-Oxley to allow making disciplinary proceedings for auditing firms public.
“PCAOB enforcement proceedings currently are confidential under Sarbanes-Oxley, because Congress understood that auditors belong to a profession in which a good reputation is essential and publication of unproven charges may end an individual auditor’s career or audit firm’s existence,” he pointed out. “Congress created a special confidentiality regime for PCAOB enforcement proceedings because of that concern and because the PCAOB is not part of the government and thus is not subject to the procedural due process requirements imposed on government agencies pursuant to the Administrative Procedures Act. Most assuredly, the AICPA and the accounting profession want to eliminate bad actors from the profession. The stain from one affects all. But there needs to be an appropriate balance of the rights of the accused and due process for someone unjustly accused.”
Doty noted that two other members of the Financial Services Committee, Barney Frank, D-Mass., and Lynn Westmoreland, R-Ga., have introduced legislation to make the disciplinary proceedings public.
“Transparency would enhance the PCAOB’s effectiveness – as well as public confidence in the PCAOB’s oversight and in the auditing profession’s credibility as a relevant participant in the capital markets – by permitting the board to disclose its disciplinary proceedings, and I encourage the Congress to pass it,” said Doty.
FASB and GASB Efforts
The subcommittee also heard about the status of the convergence efforts between the Financial Accounting Standards Board and the International Accounting Standards Board. FASB chair Leslie Seidman noted that the two boards have substantially converged accounting standards in areas such as business combinations, non-controlling interests, fair value measurement, borrowing costs, segment reporting, stock compensation and non-monetary exchanges. But she acknowledged that significant differences remain.
“The FASB and IASB are working together and making progress on the four remaining priority projects (revenue recognition, leasing, financial instruments and insurance)," she said. "In areas in which we have not yet reached converged solutions, we are reviewing the differences to see if further convergence can be achieved.”
SEC chief accountant James Kroeker testified about the status of the work plan for how International Financial Reporting Standards might be incorporated into the U.S. financial reporting system.
“The staff at this point has completed what I would consider the ‘field work’ related to the work plan,” he said. “In executing the work plan, we have sought input from U.S. investors, issuers, regulators, auditors, and other constituents; evaluated financial statements of foreign companies that assert compliance with IFRS; and researched the experiences of other jurisdictions that have incorporated IFRS into their financial reporting systems.” He said the staff has already released several reports as part of that work plan and he anticipates releasing a final report in the upcoming months summarizing the SEC staff’s findings and observations for each of the areas of the work plan.
The SEC commissioners have not yet made a decision on whether and how to incorporate IFRS, in part due to the extended timeline for FASB and the IASB’s convergence projects.
“Despite rigorous efforts by the boards, including monthly joint meetings, the timetable for completing the priority projects has been gradually extended, from June 2011, to the end of 2011, and now into 2012 to allow for sufficient time to complete deliberations on certain projects and to allow for re-exposure of draft standards for public comment on other projects,” said Kroeker.
Robert Attmore, chairman of the Governmental Accounting Standards Board, also testified about the board’s work on pension accounting standards for state and local governments. “The board currently is considering improvements to existing standards of accounting and financial reporting for pension benefits by state and local governmental employers and by the trustees, administrators, or sponsors of pension plans,” he said. “One objective of this project is to improve the transparency of financial reporting, in regard to the financial effects of employers’ commitments and actions related to pension benefits. This objective would include improving the information provided to help financial report users assess the degree to which interperiod equity has been achieved. Another objective of this project is to improve the usefulness of information for decisions or judgments of relevance to the various users of the general-purpose external financial reports of governmental employers and pension plans.”
The subject that made the most waves at the hearing, however, was on mandatory audit firm rotation. Kurt Groeninger, senior manager for research at the National Association of Corporate Directors, told Accounting Today after the hearing, “We don’t see the benefits yet of this concept release. While we don’t have full details on the issue, we just feel that this sort of rule steps too much into the territory and responsibilities of the audit committee.”
Of the newly introduced congressional legislation that would prohibit the PCAOB from imposing mandatory rotation, he remarked, “It is certainly interesting to see that they are getting involved. That may be telling. It’s telling of the importance of the issue.”