On March 28, 2012, the House Financial Services Capital Markets Subcommittee held a hearing entitled "Accounting and Auditing Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard Setters and the Economy." The hearing covered a number of issues, including the topic of the PCAOB's recent concept release concerning mandatory audit firm rotation. Congressman Mike Fitzpatrick, a Republican member of the committee from Pennsylvania, has authorized draft legislation that would prohibit the PCAOB from taking such an action. The Forum had previously submitted a comment letter to the PCAOB opposing the concept of mandatory audit firm rotation.
In connection with the hearing, the subcommittee staff asked that the Forum formally submit its comment letter to the PCAOB as testimony for the record. We did so and the Forum's statement was admitted into the hearing record. There were two panels of witnesses, the first composed of regulators from the PCAOB, SEC, FASB and GASB. The second panel consisted of individuals with knowledge of the area.
At the hearing, most of the Congressmen who spoke about audit firm rotation were opposed to the PCAOB's concept release. Chairman Spencer Bachus (R-AL), Subcommittee Chairman Scott Garrett (R-NJ), Conference Chair Jeb Hensarling (R-TX), Rep. Mike Fitzpatrick (R-PA) and Rep. Robert Dold (R-IL) all either discussed it in opening statements or asked questions of the government panel about the concept, with much of the focus on whether the PCAOB had plans to do a cost-benefit analysis of the proposal.
Rep. Hensarling, in particular, was very aggressive with PCAOB Chairman Doty about the issue. Doty had said that it was premature to do a cost-benefit analysis because the proposal was simply a concept release, and doing a cost-benefit analysis would "put the cart before the horse." Rep. Hensarling also said that he has been told that most of the investor community is opposed to the proposal, and asked Doty if he agreed with that assessment. After a couple of back and forths where Doty clearly did not want to answer the question, he agreed "yes."
Most of the non-government witnesses on the second panel opposed the PCAOB's concept release. The witnesses noted there was no evidence that mandatory audit firm rotation would achieve anything, and that it could have a negative effect because of the challenges a new firm has in learning a company's business. The AICPA (American Institute of Certified Public Accountants) discussed the "human capital" side of such a requirement, noting that requiring audit firm rotation then means additional administrative work internal to companies as they review potential new firms every so many years.