[House Report 113-142]
[From the U.S. Government Publishing Office]
113th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 113-142
======================================================================
AUDIT INTEGRITY AND JOB PROTECTION ACT
_______
July 8, 2013.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 1564]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 1564) to amend the Sarbanes-Oxley Act of 2002 to
prohibit the Public Company Accounting Oversight Board from
requiring public companies to use specific auditors or require
the use of different auditors on a rotating basis, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Audit Integrity and Job Protection
Act''.
SEC. 2. LIMITATION ON AUTHORITY RELATING TO AUDITORS.
Section 103 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7213) is
amended by adding at the end the following:
``(e) Limitation on Authority.--The Board shall have no authority
under this title to require that audits conducted for a particular
issuer in accordance with the standards set forth under this section be
conducted by specific auditors, or that such audits be conducted for an
issuer by different auditors on a rotating basis.''.
SEC. 3. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC ACCOUNTING
FIRMS.
(a) Study and Review Required.--The Comptroller General of the United
States shall update its November 2003 report entitled ``Study on the
Potential Effects of Mandatory Audit Firm Rotation'', and review the
potential effects, including the costs and benefits, of requiring the
mandatory rotation of registered public accounting firms. In addition,
the update shall include a study of--
(1) whether mandatory rotation of registered public
accounting firms would mitigate against potential conflicts of
interest between public accounting firms and issuers;
(2) whether mandatory rotation of registered public
accounting firms would impair audit quality due to the loss of
loss of industry or company-specific knowledge gained by a
public accounting firm through years of experience auditing the
issuer; and
(3) what affect the Sarbanes-Oxley Act of 2002 has had on
registered public accounting firms' independence and whether
additional independence reforms are needed.
(b) Report Required.--Not later than 1 year after the date of
enactment of this Act, the Comptroller General shall submit a report to
the Committee on Banking, Housing, and Urban Affairs of the Senate and
the Committee on Financial Services of the House of Representatives on
the results of the study and review required by this section.
(c) Definition.--For purposes of this section, the term ``mandatory
rotation'' refers to the imposition of a limit on the period of years
in which a particular registered public accounting firm may be the
auditor of record for a particular issuer.
Purpose and Summary
H.R. 1564, the ``Audit Integrity and Job Protection Act,''
amends section 103 of the Sarbanes-Oxley Act of 2002
(``Sarbanes-Oxley''), 18 U.S.C. 1514A et seq., to prohibit the
Public Company Accounting Oversight Board (PCAOB) from
requiring U.S. public companies to use specific auditors or
require the use of different auditors on a rotating basis. H.R.
1564 also requires the Government Accountability Office (GAO)
to update its November 2003 ``Study on the Potential Effects of
Mandatory Audit Firm Rotation,'' and report to Congress on the
potential effects, including the costs and benefits, of
requiring mandatory rotation of audit firms.
Background and Need for Legislation
H.R. 1564 responds to an August 16, 2011 PCAOB Concept
Release on Auditor Independence and Audit Firm Rotation
(``Concept Release''), which sought public comment on ``whether
mandatory auditor rotation would significantly enhance
auditors' objectivity and ability and willingness to resist
management pressure.'' The Concept Release sets forth the
arguments for and against mandatory audit firm rotation, as
well as the history of proposals for audit firm rotation dating
back to 1977, when Congress created the Cohen Commission after
several corporate scandals. The Cohen Commission ultimately
decided against mandating audit firm rotation, and instead
recommended that audit committees retain discretion in deciding
whether to rotate audit firms or make periodic personnel
changes within the audit team of the auditing firm. Mandatory
audit firm rotation was raised again in 2002 during
congressional debate on what ultimately became Sarbanes-Oxley,
but was again rejected. In November 2003, the GAO released its
Study on the Potential Effects of Mandatory Audit Firm
Rotation, as required under Sarbanes-Oxley, which concluded
``that mandatory audit firm rotation may not be the most
efficient way to strengthen auditor independence and improve
audit quality. . . .''
The original comment period for the PCAOB's Concept Release
ended in December 2011. But after receiving more than 600
comments--with 96 percent of comments opposed to the concept of
mandatory audit firm rotation--the PCAOB extended the comment
period to the end of April 2012. The PCAOB also hosted two days
of roundtables on the issue in March 2012. The PCAOB has yet to
issue any rules requiring mandatory audit form rotation for
U.S. public companies.
Rather than promoting auditor independence, objectivity,
and professional skepticism, imposing a mandatory audit firm
rotation requirement on U.S. public companies would likely
degrade audit quality by hindering the ability of auditors to
develop detailed knowledge of their clients' management and
operations through long-term audit engagements. On December 14,
2011, BlackRock, Inc., the world's largest asset management
firm, wrote to the PCAOB, ``We do not support mandatory auditor
rotation, principally because we are not aware of any empirical
evidence that indicates that mandatory rotation would improve
auditor independence and skepticism. While auditor rotation may
theoretically reduce certain risks, it also is likely to create
other risks, such as auditor loss of institutional knowledge
and a reduced incentive for audit firms to invest in the audit
relationship by relocating the most qualified personnel or
investing in travel and training to learn the business.''
Similarly, on May 23, 2013, Robert Smith, Corporate Secretary,
Vice President & General Counsel of NiSource, Inc., testified
on behalf of the Society of Corporate Secretaries and
Governance Professionals before the House Committee on
Financial Services' Subcommittee on Capital Markets and
Government Sponsored Enterprises, ``Evidence in the [PCAOB]
Release indicates that audit quality in the first years of an
engagement tends to be lower, and therefore could lead to a
greater risk of audit failure. With a mandatory rotation rule
in place, companies will spend more time in a short-tenure
audit situation, and overall audit quality will be negatively
impacted.''
Moreover, any benefits of mandatory audit firm rotation are
questionable given that there are often only a limited number
of firms available to conduct public company audits,
particularly for the largest multi-national corporations. On
December 14, 2011, the Walt Disney Company wrote to the PCAOB,
``We believe that only four audit firms (the Big 4) currently
have the scope of operations and experience that most large,
global, multi-segment companies require for an effective audit;
the periodic elimination of one of those firms will
substantially reduce viable options. . . . Thus, mandatory
auditor rotation may force the selection of a sub-optimal firm
and, ironically, reduce audit quality.'' In a December 14, 2011
letter to the PCAOB, The Proctor & Gamble Company voiced
similar concerns, stating, ``As a large multinational company,
we employ all of the `Big 4' account firms--one as an
independent auditor and the other three through various
consultative capacities . . . . Requiring us to rotate auditors
on a regular basis would have a detrimental impact on our
ability to source our non-audit consulting needs. At a minimum,
we would need to effectively decide on our auditors one or two
rotations out in order to insure the new auditors are
independent at the time of rotation. This would effectively
lock us into our next auditor and eliminate any fee leverage we
have in selecting our auditors. This could dramatically
increase the audit costs and be harmful to shareholders.''
Mandatory audit firm rotation may also result in
significant added costs for public companies. On July 17, 2012,
the Business Roundtable informed the PCAOB of a survey it
conducted which found that companies ``that had changed audit
firms within the past ten years estimated that the cost of
doing so, including additional management time and company
resources, ranged from $500,000 to over $5 million.'' On May
23, 2013, Robert Smith testified before the Subcommittee on
Capital Markets and Government Sponsored Enterprises,
``Mandatory auditor rotation will lead to both increased audit
costs as well as increased costs for audit-related services.
This is supported by the GAO's 2003 Report, which found that
nearly all of the larger audit firms surveyed estimated that
initial audit year costs would be more than 20% higher than
subsequent year's costs; the responses from the Fortune 1000
public companies were similar.''
In addition, mandatory audit firm rotation would encroach
on important corporate governance responsibilities
traditionally exercised by public company audit committees. On
December 14, 2011, the National Association of Corporate
Directors (NACD) wrote to the PCAOB, ``NACD has not seen
evidence that supports the proposition that mandatory audit
firm rotation improves the auditor's independence, objectivity,
skepticism, or otherwise improves audit quality, and
consequently, the quality of financial reporting. Rather, we
believe that mandated audit firm rotation could potentially
undermine the statutory responsibility and authority of audit
committees to select the best auditor for their companies.'' On
May 23, 2013, Thomas Quaadman, Vice President of the U.S.
Chamber of Commerce Center for Capital Markets Competitiveness,
testified before the Subcommittee on Capital Markets and
Government Sponsored Enterprises, ``Mandatory audit firm
rotation would reduce the supervision and oversight of the
audit committee and management, rolling back strong corporate
governance policies. . . . With the continued consideration of
the concept release on mandatory audit firm rotation. . . .the
PCAOB 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
Exchange Commission.
Hearings
The Committee on Financial Services's Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing on H.R. 1564 on May 23, 2013.
Committee Consideration
The Committee on Financial Services met in open session on
June 19, 2013, and ordered H.R. 1564, as amended, to be
reported favorably to the House by a recorded vote of 52 yeas
to 0 nays (recorded vote no. FC-18), a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote occurred on the chairman's motion to report
H.R. 1564, as amended, favorably to the House. The motion was
agreed to by a vote of 52 yeas to 0 nays, as follows:
RECORD VOTE NO. FC-18
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling................. X ........ ......... Ms. Waters....... X ........ .........
Mr. Gary G. Miller (CA)........ ........ ........ ......... Mrs. Maloney (NY) X ........ .........
Mr. Bachus..................... X ........ ......... Ms. Velazquez.... X ........ .........
Mr. King (NY).................. ........ ........ ......... Mr. Watt......... X ........ .........
Mr. Royce...................... X ........ ......... Mr. Sherman...... X ........ .........
Mr. Lucas...................... ........ ........ ......... Mr. Meeks........ X ........ .........
Mrs. Capito.................... X ........ ......... Mr. Capuano...... ........ ........ .........
Mr. Garrett.................... X ........ ......... Mr. Hinojosa..... X ........ .........
Mr. Neugebauer................. X ........ ......... Mr. Clay......... X ........ .........
Mr. McHenry.................... X ........ ......... Mrs. McCarthy ........ ........ .........
(NY).
Mr. Campbell................... X ........ ......... Mr. Lynch........ X ........ .........
Mrs. Bachmann.................. X ........ ......... Mr. David Scott X ........ .........
(GA).
Mr. McCarthy (CA).............. X ........ ......... Mr. Al Green (TX) X ........ .........
Mr. Pearce..................... X ........ ......... Mr. Cleaver...... ........ ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ X ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... X ........ .........
Mr. Westmoreland............... ........ ........ ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ X ........ ......... Mr. Himes........ X ........ .........
Mr. Huizenga (MI).............. X ........ ......... Mr. Peters (MI).. X ........ .........
Mr. Duffy...................... X ........ ......... Mr. Carney....... X ........ .........
Mr. Hurt....................... X ........ ......... Ms. Sewell (AL).. X ........ .........
Mr. Grimm...................... X ........ ......... Mr. Foster....... ........ ........ .........
Mr. Stivers.................... X ........ ......... Mr. Kildee....... X ........ .........
Mr. Fincher.................... X ........ ......... Mr. Murphy (FL).. X ........ .........
Mr. Stutzman................... X ........ ......... Mr. Delaney...... X ........ .........
Mr. Mulvaney................... X ........ ......... Ms. Sinema....... X ........ .........
Mr. Hultgren................... X ........ ......... Mrs. Beatty...... X ........ .........
Mr. Ross....................... X ........ ......... Mr. Heck (WA).... X ........ .........
Mr. Pittenger.................. X ........ .........
Mrs. Wagner.................... X ........ .........
Mr. Barr....................... X ........ .........
Mr. Cotton..................... ........ ........ .........
Mr. Rothfus.................... X ........ .........
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Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 1564
will, among other things, amend Sarbanes-Oxley to prohibit the
PCAOB from requiring the rotation of auditors of public
companies.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 3, 2013.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1564, the Audit
Integrity and Job Protection Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Robert A. Sunshine
(For Douglas W. Elmendorf, Director).
Enclosure.
H.R. 1564--Audit Integrity and Job Protection Act
H.R. 1564 would prohibit the Public Company Accounting
Oversight Board (PCAOB) from requiring public companies to use
a specific auditor or to use different auditors on a rotating
basis. The bill also would require the Government
Accountability Office (GAO) to update a report completed in
2003 that reviewed the potential effects of mandatory rotation
for auditing firms.
Based on information from the PCAOB, CBO estimates that
enacting H.R. 1564 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply. The
PCAOB has no immediate plans to issue a ruling specifying how
public companies should choose a financial auditor; therefore,
the prohibition in H.R. 1564 would not change its workload.
Based on information about similar reporting efforts, CBO
estimates that implementing H.R. 1564 would have a
discretionary cost of about $1 million for the GAO to complete
the required study and report.
H.R. 1564 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
The CBO staff contact for this estimate is Susan Willie.
The estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 1564 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013),
the Committee states that no provision of H.R. 1564 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013),
the Committee states that H.R. 1564 contains no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 1564 as the ``Audit Integrity and
Job Protection Act.''
Section 2. Limitation on authority relating to auditors
This section amends Section 103 of Sarbanes-Oxley by
removing any authority the PCAOB may have under that title to
require that audits conducted for a particular issuer be
conducted by specific auditors, or that such audits be
conducted for an issuer by different auditors on a rotating
basis.
Section 3. Study of mandatory rotation of registered public accounting
firms
This section requires the GAO to update its November 2003
report entitled ``Study on the Potential Effects of Mandatory
Audit Firm Rotation,'' and report to Congress within 1 year of
the date of enactment of H.R. 1564 on the potential effects,
including the costs and benefits, of requiring mandatory
rotation of registered public accounting firms.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SARBANES-OXLEY ACT OF 2002
* * * * * * *
TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
* * * * * * *
SEC. 103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STANDARDS AND
RULES.
(a) * * *
* * * * * * *
(e) Limitation on Authority.--The Board shall have no
authority under this title to require that audits conducted for
a particular issuer in accordance with the standards set forth
under this section be conducted by specific auditors, or that
such audits be conducted for an issuer by different auditors on
a rotating basis.
* * * * * * *