Wednesday, November 30, 2011

Chamber of Commerce Supports Expected Legislation Prohibiting PCAOB from Mandating Auditor Rotation

In a letter to Rep. Spencer Bachus (R-ALA), Chair of the House Financial Services Committee, the US Chamber of Commerce expressed support for an amendment the Chairman is expected to offer to H.R. 3213, the Small Company Job Growth and Regulatory Relief Act, prohibiting the SEC and PCAOB from issuing rules requiring mandatory rotation of a public company’s auditor or accounting firm. Mandatory audit firm rotation could increase costs and the incidence of fraud, said the Chamber, while degrading financial reporting.

Currently, HR 3213 would exempt smaller companies from the auditor attestation provisions of Section 404(b) of the Sarbanes-Oxley Act. The House Capital Markets Subcommittee has approved HR 3213, which expanding the exemption from 404(b) beyond the $75 million public float provided by the Dodd-Frank Act to a $350 million public float. HR 3213 is expected to be marked up in the near future by the full Financial Services Committee.

In an earlier letter to the PCAOB, the Chamber listed a number of reasons that it opposes mandatory audit firm rotation. The Chamber noted that the PCAOB has failed to demonstrate a need for mandatory audit firm rotation, and would deprive the audit committee of discretion and judgment in contravention of the Congressional intent expressed in Sarbanes-Oxley; The Chamber also pointed out that academic studies demonstrate that fraudulent financial reporting is more likely to occur within the first three years of an audit and that audit quality increases with auditor tenure length.

In addition to being costly to companies and markets, mandatory audit rotation is also impracticable, said the Chamber, since size, expertise and complexity may only allow two or three firms to conduct major audits per industry. In the Chamber’s view, the SEC and PCAOB have failed to move forward on 2008 recommendations to reduce restatements through the use of the concept of materiality as a determinative factor to trigger a restatement or further disclosure to investors.