Yesterday, it passed the Audit Integrity and Job Protection Act, which was unanimously passed by the influential House Financial Services Committee last week, by 321 (74%) to 62 (14%). It needed a two thirds majority to get through.
The bill will now be reported to the Senate which has yet to take up the anti-mandatory campaign.
The issue arose because the watchdog, the Public Company Accounting Oversight Board, issued a concept paper in 2011 looking for views on whether mandatory audit rotation should be introduced to ensure the integrity and independence of auditors.
Some well-known US companies have had extremely long associations with their auditors, including General Electric and Procter & Gamble who have used respectively KPMG and Deloitte (and their predecessor firms) for well over a century.
There was a major backlash against the suggestion, with nine out of 10 respondents opposing any such move.
Given the opposition, it was not before the issue was brought to attention of congressmen Gregory Meek and Robert Hurt who co-sponsored the bill. This amends the Sarbanes-Oxley Act to allow public companies to maintain quality auditing practices and avoid unnecessary additional costs that ultimately are passed on to investors and consumers.
According to Hurt, they introduced the bill “to remove the threat of federal over-regulation on our local businesses, so that employers can focus on hiring and expanding rather than more federal bureaucracy”.
After the House vote, he said that he was pleased with the cross-party support for the bill and expressed the hope that the Senate would “recognise the importance of preventing unnecessary federal regulations and take action on this legislation”.
“Forcing banks to frequently engage new auditors from a limited field of qualified auditors will dramatically undermine audit quality and greatly increase the cost,” said Michael Ewing, president and CEO of Oak View National Bank.
“In this economy, when a bank is expending scarce capital and resources complying with burdensome federal regulations, we are not getting our capital on to the streets and investing in our communities to help our local businesses and get people back to work.”
The reaction of the PCAOB has been muted so far. A spokesperson said, “The PCAOB issued a concept release seeking information and opinion on a long-standing debate over mandatory audit firm rotation, and asking for views on other options to enhance auditor independence, objectivity and professional scepticism.
“The board continues to pursue the best means of fostering engagement with other regulators to monitor the effects of their reform programs on auditor independence, objectivity and professional scepticism as well.”
However, PCAOB chairman James Doty believes that the audit profession needs a shake-up and is a keen supporter of mandatory rotation. In a speech he gave in April in the UK, he said, “After nearly 10 years of inspecting the audits of issuers, the PCAOB has identified hundreds of engagements that did not meet PCAOB standards in significant respects.
“These are serious audit deficiencies that mean, essentially, that the auditor left insufficiently audited an aspect of the financial statements that could include an undetected material misstatement.”