H. Rept. 113-142 - 113th Congress (2013-2014)
July 08, 2013, As Reported by the Financial Services Committee

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House Report 113-142 - AUDIT INTEGRITY AND JOB PROTECTION ACT

[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   ........  .........
----------------------------------------------------------------------------------------------------------------

                      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.

           *       *       *       *       *       *       *