The concept of mandatory audit firm rotation received two setbacks in a two-week period on opposite sides of the Atlantic.
Two weeks after the U.S. House of Representatives approved a bipartisan bill that would prohibit the PCAOB from requiring mandatory audit firm rotation for public companies, the U.K. Competition Commission proposed statutory audit services market reforms that did not include mandatory audit firm rotation.
The U.S. bill, sponsored by Reps. Robert Hurt, R-Va., and Gregory Meeks, D-N.Y., would amend the Sarbanes-Oxley Act of 2002 to prohibit the PCAOB from requiring public companies to use specific auditors or requiring the use of different auditors on a rotating basis.
Representatives voted 321–62 in favor of the bill, H.R. 1564, the Audit Integrity and Job Protection Act. The bill would have to be approved by the Senate, which has not taken up the issue, and signed by President Barack Obama to become law.
The AICPA has opposed mandatory audit firm rotation. AICPA President and CEO Barry Melancon, CPA, CGMA, issued a statement thanking the bill’s co-sponsors and supporters.
“In the absence of evidence that mandatory audit firm rotation would enhance audit quality, the House has sent regulators in the United States and Europe a clear message that the time has come to end the debate over rotation,” Melancon said. “In Europe, there is a misimpression that the continued consideration of the PCAOB’s concept release means that the U.S. is headed toward adoption of a mandatory firm rotation requirement. Today’s House vote will go a long way toward alleviating confusion and uncertainty for policymakers and stakeholders on both sides of the Atlantic.”
Two weeks after the House vote, the U.K. Competition Commission (CC) posted proposed measures that did not include mandatory rotation. But the CC did include mandatory tendering every five years for U.K. FTSE 350 companies in its proposal, a significant shift from the 10-year retendering period U.K. Financial Reporting Council (FRC) rules currently require. The FRC’s 10-year retendering rule includes a “comply or explain” provision that provides some flexibility, but the CC proposal does not include a “comply or explain” provision.
Tendering is the process by which a company opens its audit to bidding by audit firms that seek a contract to perform the audit work.
A summary of the U.K. reforms proposed by the CC is available at tinyurl.com/k6mz7mh. The CC is aware that its proposed measures may be affected by measures the European Union (EU) is considering. But the CC proceeded because the EU had not developed definitive proposals, according to a CC news release.
A draft law that would require public-interest entities to rotate audit firms every 14 years—a period that could be extended to every 25 years if certain safeguards are put into place—was approved by a European Parliament committee in April. When this issue went to press, the draft law had several legislative hurdles to clear before becoming law.
The CC is required to publish its final report by Oct. 20.
The U.S. Government Accountability Office (GAO) is recommending that the SEC consider requiring public companies to disclose whether they obtained an auditor attestation of their internal control over financial reporting (ICFR).
In a report to congressional committees, available at tinyurl.com/ky27s6g, the GAO said attestation reports increase investor confidence. Requiring disclosure of whether a company voluntarily included an attestation report in its annual report would increase transparency for investors, according to the GAO.
Many public companies are required to have an independent auditor attest to and report on management’s internal control over financial reporting to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002.
But many companies are exempt from the attestation requirement. The Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, enacted in July 2010, exempted companies with less than $75 million in public float from the auditor attestation requirement.
The Jumpstart Our Business Startups (JOBS) Act, P.L. 112-106, passed in 2012, defers the effective date of Section 404 compliance for the first five years after an initial public offering for companies that do not exceed certain market capitalization or revenue thresholds.
Before 2010, when certain companies were temporarily exempt from the auditor attestation requirement, the SEC required explicit disclosure of exemption status in companies’ annual reports, according to the GAO. That disclosure requirement was eliminated in 2010, the GAO report says.
Information on a company’s exempt status is available to investors, but requiring explicit disclosure would increase transparency and investor protection, according to the GAO. Required disclosures about whether a company voluntarily obtained auditor attestation over its internal controls would provide investors with an important indicator of the reliability of a company’s financial reporting, the GAO wrote.
Research performed by the GAO found that the percentage of restatements for companies exempt from the auditor attestation requirement was generally higher than the percentage of restatements for nonexempt companies from 2005 to 2011. In addition, empirical studies reviewed by the GAO suggested that auditor attestations appear to have a positive effect on investor confidence.
In a response included in the GAO report, SEC Chief Accountant Paul
Beswick and Lona Nallengara, who is now the SEC’s chief of staff,
wrote that they believe investors already can easily determine whether
a company has received auditor attestation over its internal controls
based on information currently available.