Jan. 2, 2014
The Honorable Mark Warner
United States Senate
Washington, DC 20510
Dear Sen. Warner:
On behalf of the Virginia Society of CPAs (VSCPA), we would like to express our strong support for S. 1526, the Audit Integrity and Job Protection Act, introduced by Sens. Pat Toomey (R-Pa.) and Joe Manchin (D-W.Va.). This bipartisan legislation would limit the Public Company Accounting Oversight Board (PCAOB) from requiring mandatory audit firm rotation for public companies and bring the lingering firm rotation debate in the United States to a swift conclusion. We ask that you sign on as a cosponsor of this bill.
In August 2011, the PCAOB issued a Concept Release that included the possibility of mandatory firm rotation (MFR) with the express intent to increase auditor independence, objectivity and professional skepticism. In the two years since the issuance of the Concept Release, the PCAOB has held three public meetings and received nearly 700 comment letters with 91 percent of commenters opposing mandatory rotation. The vast majority of the letters were averse to MFR, citing costs, negative impacts on audit quality, enhanced fraud risks and uncertain benefits.
Further, the Sarbanes-Oxley Act (SOX) mandated reforms to strengthen auditor independence and improve audit quality. One such reform includes the rotation of the lead audit partner on an audit engagement every five years found in Section 203. The discussion on audit firm rotation was raised during the SOX debate; however, Section 203’s partner rotation was determined to be the better pursuit.
In SOX, Congress also sought additional information on the question of MFR. The bill required the U.S. General Accounting Office (GAO, now named the Government Accountability Office) to study the question of audit firm rotation. In 2003, the GAO issued a report (GAO-04-216) in which the “GAO believes that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality…” In fact, the report raised concerns that audit quality may be strained by firm rotation, specifically in the first few years of a new audit engagement. The GAO further concluded that implementation of SOX and an understanding of its impact are necessary precursors to a firm rotation requirement, and “GAO therefore believes that the most prudent course of action at this time is for the Securities and Exchange Commission and Public Company Accounting Oversight Board to monitor and evaluate the effectiveness of existing requirements for enhancing auditor independence and audit quality.” Eight years later, following the PCAOB’s issuance of its Concept Release on audit firm rotation, the GAO commented that “...we are not convinced that the audit quality issues identified by the PCAOB in its Concept Release are caused by a lack of auditor independence or professional objectivity (http://pcaobus.org/Rules/Rulemaking/Docket037/390_GAO.pdf).”
We remain concerned that MFR could have unintended consequences and ultimately reduce audit quality. MFR could obstruct the accumulation of knowledge and experience upon which an audit firm develops an understanding of a specific company’s operations. MFR may also increase the potential for higher audit risk during the first year of the audit engagement for a new audit firm. Despite the overwhelming evidence and the robust discussion, the PCAOB has not finalized the process. Therefore, we believe S. 1526 would appropriately conclude the U.S. policy debate regarding the concept of MFR. For these reasons, we ask that you cosponsor S. 1526.
Thank you for your consideration of this important matter. If you have any questions, or if we can be of any further assistance, please contact me or VSCPA Government Affairs Director Emily Walker at [email protected] or (804) 612-9428.
James M. Shepherd, CPA
Virginia Society of CPAs