Consider the July 9 passage by the House of HR 1564, the “Audit Integrity and Job Protection Act.” Neither title topic is remotely addressed; instead the bill would, if fully enacted, prohibit the American audit regulator -- the Public Company Accounting Oversight Board, inflicted on the world’s oversight of financial information by the Sarbanes-Oxley law of 2002 – from acting to mandate the rotation of audit firms.
Although vigorous and unambiguous for over a decade (here to here) in my belief that mandatory auditor rotation is a flawed and unworkable idea, unsupported by any empirical showing of a relationship – causal or otherwise – between auditor tenure and audit quality – I search for any adult rationale for this goofy piece of legislation, and draw a total blank.
To start, the supportive record is bare. Whereas the primary occupation of American law-makers is the conduct of endlessly self-promoting “hearings” – exercises in vanity and posturing well deserving the description by Shakespeare’s MacBeth (V, 5) of “tales told by an idiot, full of sound and fury and signifying nothing” – the House Financial Services Committee launched HR 1564 without report, analysis or commentary.
So what reasons underlie this idiots’ tale? The PCAOB is a critic’s easy target, for sure, but any momentum there in favor of rotation has long since petered out. PCAOB Chairman Doty’s initiative of 2011 generated a series of public declamations of unsurpassed vacuity, and comment letters taking 95% unfavorable positions – and, in the event, attracted plain signals that he lacked the votes – if indeed he ever had the desire.
Across the Atlantic, committees of the European Parliament have drawn the teeth of Markets Commissioner Michel Barnier’s rotation aspirations.
And the UK’s Financial Reporting Council took an apparent deep finesse on rotation last fall, by instead requiring large public companies to put their audits out for re-tender every ten years or explain why not – a process that sources in London indicate might well see a real volume of auditor changes.
Yet, that country’s Competition Commission has just proposed a reduction to five years. The likely perverse result of which -- taking account of the huge costs for too-frequent proposals, engagement transitions and first-time learning curves -- would be these: round-robin exchanges of engagements among the Big Four; further Big Four concentration as smaller firms are squeezed out by the costs involved; replacement names on otherwise identical auditor reports; and no observable difference in innovation, performance or quality.
So what constituencies were interested in HR 1564? The cynical view of Matt Kelly at Compliance Week is that the Big Four firms’ half-million dollars in campaign contributions to the bill’s sponsors in 2011 and 2012 bought the bill. But these amounts are merely distasteful spoonfuls in the huge cesspool of Beltway lobbying monies. And with no fear that rotation was to be forced on them, auditors in America should have been indifferent, if not resistant to a form of “protection” that could not be beneficial to their already-fragile public reputations for accountability.
The same for corporate issuers. And as noted, the PCAOB was already tied in knots, so another imposed constraint would fall somewhere between unnecessary and simply irrelevant.
In my own rather jaundiced view of the legislative process, the answer lies in Washington’s devotion to “motion” masking as “progress”. When the environment is so poisoned that such fundamental needs as immigration reform and gun control and social policy issues like food stamps and student loans are beyond the grasp of reasoned debates, legislative time and energy devoted to auditor rotation is merely wasted.
It is thoroughly dispiriting to think that as silly and stupid a proposal as HR 1564 should have come this far under the disguise of useful law-making.
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