edwards - 2014 - the battle over mandatory audit firm rotation [mafr]

The GAO issued its report, Public Accounting Firms: Required Study on the Potential Effects of Mandatory Audit Firm Rotation , in November 2003 as required in Section 207 of SOX the A

James B Edwards

We look at the battle over moves to impose mandatory audit firm rotation in a bid to improve auditor independence and audit quality And the author asks: Is a game of musical chairs the real answer to the issues relating to auditor indepen-dence, objectivity, and professional skepticism?

© 2014 Wiley Periodicals, Inc.

Rotation

The U.S House of

Representatives

passed the Audit

Integrity and Job

Pro-tection Act , H.R 1564,

by a vote of 321 to 62

on July 8, 2013 The bill

would prohibit the

Pub-lic Company

Account-ing Oversight Board

(PCAOB; the “Board”)

from requiring mandatory audit

firm rotation The bill amends

the Sarbanes-Oxley Act of 2002

(SOX) The bill now moves to

the Senate, where it is expected

to pass The lobbying in favor of

the bill has been strong

Prior to the House floor

vote on July 8, 2013, the House

Financial Services Committee

voted 52 to 0 in favor of the

legislation In his opening

state-ment at the committee hearing,

Chairman Jeb Jensarling said,

“It is boards of directors,

man-agement, and shareholders who

should ultimately make the

deci-sion about which accounting

firms should audit a company’s

financial statements—not the

PCAOB.” 1

On the eve of the floor vote,

the AICPA sent a letter to all

House members stating that, “It

is clear from the record that such

a requirement would be costly and likely have significant nega-tive impacts on audit quality with uncertain benefits.” 2 Another notable comment letter came from the U.S Gov-ernment Accountability Office (GAO) in which it comments,

“Even if the PCAOB could clearly establish that a lack of independence or objectivity is causing audit quality problems,

it is unclear that such a problem would be prevented or mitigated

by a mandatory audit firm rota-tion requirement.” 3

In a statement issued follow-ing the House action, Barry C

Melancon, CPA, CGMA, presi-dent and CEO of the American Institute of CPAs (AICPA),

said, “In the absence

of evidence that mandatory audit firm rotation would enhance audit qual-ity, the House has sent regulators in the United States and Europe a clear mes-sage that the time has come to end the debate over rotation Today’s House vote will go a long way toward alleviating confusion and uncertainty for policy makers and stakeholders on both sides

of the Atlantic.” 4 Many close to the audit profession as members of the profession, clients and those who use and rely on the work of external auditors believe manda-tory rotation is not in the public interest Some feel that it could

be economically disruptive and create negative consequences, risking harm to audit quality

As some have claimed that the SOX requirements impose sig-nificant costs on businesses and shareholders without commen-surate benefit, they fear the same would occur with mandatory auditor rotation

experience with the effectiveness

of the Act

In 2011, the PCAOB decided it had “sufficient experi-ence” and reopened the audi-tor rotation question PCAOB Chairman James Doty raised the idea of auditor rotation, say-ing, “Hundreds of inspections over the past ten years have con-tinued to reveal serious deficien-cies in auditor independence.” 7 The PCAOB encountered heavy resistance to the idea and never formally proposed a manda-tory auditor rotation rule, but it never withdrew the proposal to consider it

A cloud of suspicious mis-trust continues to hover over public financial reporting Until something happens to confirm

or deny these suspicions, the PCAOB will need to provide a consciousness to auditor inde-pendence This is necessary to protect public economic interests while still maintaining a balance between free-enterprise solutions

to economic accountabilities and government regulation Whenever financial irregularities

go undetected it is only natural

to ask, “Where were the audi-tors?” and “Somebody ought to

do something about it,” which forces Congress into action

GENESIS OF ISSUE

Subsequent to the conclu-sion of the work of the Cohen Commission in 1977 and the Public Oversight Board in 1979, the nature of business for firms practicing as independent audi-tors has changed significantly The ways in which these services are provided and the magnitude

of risks have changed In 1986 the National Commission on Fraudulent Financial Report-ing (NCFFR)—known as the Treadway Commission, after

into the state of the audit mar-ket finds Regardless, the United Kingdom will be required

to adopt the EU proposal if enabling legislation is passed by the European Parliament

What will finally take place in the EU is still uncer-tain Under the current guide-lines, there will be transitional arrangements that would mean companies would not have to change their auditor until 9 years after the legisla-tion is passed No doubt the U.S House of Representatives’

action sent a strong message to regulators in Europe

THE PCAOB (BOARD)

In 2002, Congress consid-ered mandatory firm rotation when it passed SOX, but dis-missed it in favor of mandatory engagement partner rotation, and additional study Congress instructed the GAO to study firm rotation

The GAO issued its report,

Public Accounting Firms:

Required Study on the Potential Effects of Mandatory Audit Firm Rotation , in November

2003 as required in Section 207

of SOX (the Act) The report stated “that mandatory audit firm rotation may not be the most efficient way to enhance auditor independence and audit quality.”

The Act included the cre-ation of the PCAOB and estab-lishment of its authority to set auditing standards and inspect registered public accounting firms

The PCAOB claimed that more experience needs to be gained with SOX’s requirements and that it will take at least sev-eral years for the Securities and Exchange Commission (SEC) and the Board to gain sufficient

ON THE OTHER SIDE OF THE

ATLANTIC OCEAN

In November 2011, a

Euro-pean Commission proposal was

issued, emanating from its green

paper Audit Policy: Lessons

from the Crisis It included a

proposed requirement for audit

firm rotation On October 4,

2013, in a qualified majority

decision the ambassadors of the

European Union (EU) member

states agreed to give their

back-ing to a package of proposals

including a limit on keeping

the same auditor for banks and

“systemically important”

com-panies of 15 years and 20 years

for other public interest entities

(PIEs) Simply stated, banks

and other financial institutions

would be able to keep the same

auditor for up to 15 years unless

they have a joint audit, in which

case the cap is 20 years All other

PIEs will be able to hold on to

the same auditor for 20 years

They also agreed to cap

nonau-dit services at 70% 5

To some, the EU move

appears to be somewhat moot,

as the normal career span of

auditors at the in-charge level as

engagement managers would not

expect to exceed a 15- to 20-year

time period by very much One

would expect the normal

turn-over within the auditing firm to

closely resemble the effects of a

20-year firm rotation

The United Kingdom has

argued against absolute

man-datory rotation of auditors,

favoring instead the approach

adopted by the profession’s

regu-lator, the Financial Reporting

Council (FRC), which proposes

retendering (bidding) every 10

years on a “comply or explain

basis.” 6 However, they appear to

be waiting to see what final

con-clusions the U.K Competition

Commission’s (CC) investigation

the continuous stream of audit fees that an auditor may receive from one client would free the auditor, to a significant degree, from the effects of management pressure and offer an opportu-nity for a fresh look at the com-pany’s financial reporting.” The PCAOB also observes that some who favor mandatory rotation believe that potential pressures

on auditors to satisfy manage-ment would be replaced by a heightened sensitivity if their audit work stands to be scruti-nized in the future by a competi-tor, thereby providing an added incentive for firms to perform high-quality audits

At the same time, the PCAOB acknowledges that opponents of mandatory rota-tion believe that forcing U.S

issuers to change auditors would result in disruption and higher costs during a period of eco-nomic weakness and increased global competition The Release also points out that, according

to earlier studies, audit quality may actually suffer in the early years of a new engagement, as the new auditor climbs a steep learning curve Opponents of mandatory rotation also argue that mandatory rotation would fail to recognize that there may

be a limited number of qualified successors, since some account-ing firms have unique strengths

in certain industries or countries,

or that some businesses might engage in “opinion shopping”

when evaluating replacement auditors In addition, the only realistic replacement choice for some companies may currently

be providing important nonau-dit services that would be pro-hibited if that firm were to take over the audit

Congress considered such competing arguments

in 2002, while debating the

professional rules of right and wrong—“a code of ethics.”

The “cornerstone” of the inde-pendent auditing profession is made of “competence, objectiv-ity, and integrobjectiv-ity,” rather than

“independence.” However, the appearance of independence has long been considered absolutely necessary for the public confi-dence in the reliability of public financial reporting

BACKGROUND ON AUDIT FIRM ROTATION

The concept of mandatory audit firm rotation is not new

To the contrary, it has been considered by legislators and regulators on several occasions since the 1970s 9 The debate stems from the indisputable fact that an accounting firm is paid

by its audit client to render an audit report on the client’s finan-cial statements but at the same time is expected to be indepen-dent and objective In the eyes

of some observers, there is an inherent tension in this approach that can lead firms to view an audit engagement as a long-term revenue stream, to the potential detriment of investors who are looking to firms to identify and highlight problems

There is a bit of a priori

rea-soning that reaches the conclu-sion that an auditing firm can-not serve two masters Conflict

of influences may place auditors

in a situation conducive to favor-ing one influence over another

For example, a client that pays

$1 million in fees is more likely

to influence the auditor’s actions than one that incurs a $100,000 fee

The PCAOB has been sensi-tive to these concerns It notes

in a 2011 Release 10 that propo-nents of mandatory rotation believe that “setting a limit on

the name of its chairman, James

Treadway—reviewed issues

related to the quality and

reli-ability of audited financial

state-ments 8

The research conducted

by the Treadway Commission

revealed that historical precepts

of independence are eroding

The vanguards of

professional-ism are more likely to be

compe-tency, objectivity, and integrity

Concurrent “savvy” and

“com-mitment” to quality service and

the public interest becomes the

source of professionalism, rather

than independence Inherent

values must be maintained The

independent audit profession

cannot continue to claim a state

of structural independence in

view of the prevailing

relation-ships with many clients

One may claim that the

pub-lic accounting profession has not

been unduly influenced by client

relationships, but this is evidence

of resistance to control rather

than freedom from the presence

of influence We cannot ignore

the alleged Enron influence

lead-ing to the collapse of the Arthur

Andersen public accounting

firm The public definition of

independence is “freedom from

control, influence, or help of

another” (see any dictionary)

Society’s general

under-standing of independence is not

exactly congruent with the

cur-rent usage of the word by many

independent certified public

accountants It is doubtful that

any individual group can quickly

obtain society’s

understand-ing and acceptance of a major

change in the generally accepted

definition of independence

The strength of the

inde-pendent auditor’s long-standing

image of reliability comes

from a system of conduct that

performs in accordance with

high standards of formal or

companies and vested public-interest organizations

QUESTIONS

A number of questions remain, as acknowledged by the PCAOB 18 :

Fundamental

1 Does the current “audit client-payer” model create

a fundamental conflict of interest, and, if so, would mandatory audit firm rota-tion eliminate or signifi-cantly mitigate that conflict?

2 Would mandatory audit firm rotation enhance the objec-tivity of audit firms and their willingness to stand firm in the face of client pressure?

3 What are the advantages, disadvantages, and potential unintended consequences of mandatory audit firm rota-tion?

4 What are the costs of audit firm rotation and how can those costs be mitigated?

5 To what extent have some audit committees already adopted policies that pro-vide for the periodic rotation

of the outside auditors, and what are the experiences of those audit committees that have implemented such poli-cies?

6 Are there alternatives to audit firm rotation that would meaningfully enhance auditor independence, objec-tivity, and professional skep-ticism?

7 Rather than pursue poten-tial proposals to require firm rotation, should the PCAOB seek to address its concerns regarding indepen-dence through its current inspection programs or, at

a minimum, allow more

illustrate this concern, the 2011 Release includes several excerpts from inspection reports, where PCAOB inspectors found that auditors had demonstrated a bias toward management’s per-spective and failed to develop an independent view; placed exces-sive reliance on management’s responses to the audit team’s inquiries; or failed to sufficiently challenge or evaluate manage-ment’s assumptions and conclu-sions The PCAOB recognized that such deficiencies did not necessarily result from a lack of objectivity or professional skepti-cism However, it expressed con-cern that many audit deficiencies may reflect situations where an auditor failed to place the inter-ests of investors ahead of those

of management, possibly as a result of unconscious biases

The 2011 Release does not assert, much less seek to establish, that mandatory firm rotation would address these concerns Indeed, the PCAOB notes that a preliminary analysis

of its inspection data “appears

to show no correlation between auditor tenure and number of comments in PCAOB inspection reports.” 17 Given the PCAOB’s characterization of its analysis

as “preliminary” and the lengthy comment period provided for

by the Release, along with the fact that the PCAOB has not withdrawn the current existing

2011 Proposal, as stated in the

2011 Release, it is likely that the PCAOB will continue to analyze findings from its inspection pro-gram Given the public interests,

it is prudent for the PCAOB to act in this manner The risks are too great for the PCAOB to abandon surveillance of these activities and the potential impacts on the quality and reli-ability of independent certified financial audits of publicly held

Sarbanes-Oxley Act At that

time, Congress chose not to

mandate the rotation of firms,

instead requiring firms to rotate

lead engagement and

concur-ring review partners every five

years 11 It also directed the GAO

to conduct a study and report

on the potential effects of

man-datory firm rotation The GAO’s

report, published in 2003,

con-cluded that mandatory firm

rotation “may not be the most

efficient way to enhance auditor

independence and audit

qual-ity.” 12 The GAO also found that

it would take several years for

the SEC and the Board “to gain

sufficient experience” with the

reforms enacted under

Sarbanes-Oxley to “adequately evaluate

whether further enhancements

or revisions, including

manda-tory audit firm rotation, may

be needed to further protect the

public interest and to restore

investor confidence.” 13

The PCAOB conducted

inspections of registered public

accounting firms for 8 years

(into 2011) According to

the 2011 Release, 14 the Board

believed in 2011 that the time is

right to revisit whether changes

are needed to bolster auditor

independence and, in particular,

whether mandatory audit firm

rotation would be an effective

counterweight to what PCAOB

Chairman James R Doty

char-acterized as “the fundamental

conflict of the audit client

pay-ing the auditor.” 15

In the 2011 Release, the

PCAOB states that

Sarbanes-Oxley has made “a significant,

positive difference in the

qual-ity of public company

audit-ing.” 16 However, the PCAOB

professes to be troubled by

the continued frequency and

nature of audit deficiencies

identified by its examiners

dur-ing the inspection process To

time to evaluate the impact

of recent additions to the

Board’s auditing standards?

8 Could retendering

accom-plish the same goals as

man-datory firm rotation with

less rigidity? The bidding

process enables the

free-mar-ket system to work naturally

At least this event within

itself would force more

con-sciousness on the essence of

such engagements

Assuming Rotation

1 What is an appropriate

rotation period, and, in

par-ticular, what would be the

advantages and

disadvan-tages associated with

requir-ing rotation after periods of

10 years or greater?

2 Should the PCAOB require

rotation for all audits, for

only larger clients that are

issuers, or for some other

subset of audit clients?

3 What would be the

signifi-cant transition and

imple-mentation issues associated

with mandatory firm

rota-tion, including:

a the impact on competition

for audit engagements;

b the impact on the market

for providing nonaudit

services to clients;

c the ability and capacity of

firms to staff new

engage-ments appropriately;

d whether multinational

audits would pose unique

challenges; and

e if the early years of a new

engagement pose a higher

audit risk, how that risk

can be mitigated

AUTHORITY

Does the PCAOB have the

legal authority to require

manda-tory audit firm rotation without

further legislation? In enacting

the Sarbanes-Oxley Act, Con-gress decided to require audit

partner , but not audit firm ,

rotation According to the law firm Fried Frank, the Release appears to assume that, because Congress also gave the PCAOB authority to establish profes-sional standards in Sarbanes-Oxley, the PCAOB can require mandatory firm rotation 19 The PCAOB’s authority

to impose such a requirement through new rules, however, is not entirely clear Indeed, a con-trary view would be that Con-gress intended to reserve unto itself the power to impose such

a requirement, as evidenced by the fact that it directed the GAO

to report back to Congress, and not to the SEC or PCAOB,

on the issues associated with mandatory firm rotation The PCAOB presumably believes that Section 103(a) of Sarbanes-Oxley represents a grant of broad authority to the Board

to adopt professional standards for registered public accounting firms However, the Board has noted that any new firm rota-tion requirement would enhance auditor independence, and Sec-tion 103(b) of Sarbanes-Oxley speaks directly to the Board’s standard-setting activities relat-ing to independence That sec-tion provides only that “[t]he Board shall establish such rules

as may be necessary or appro-priate in the public interest or for the protection of investors,

to implement, or as authorized under, title II of this Act.” It

is not clear that any audit firm rotation requirement adopted

by the PCAOB would fall within this grant of authority, since Title II of the Act merely authorizes the PCAOB to add

to the list of prohibited nonau-dit services included in Section

201 of the Act and to exempt firms and issuers from such restrictions 20

COST/BENEFIT ANALYSIS

In the 2011 Release, the PCAOB refers to the need to weigh the potential costs and benefits of mandatory audit firm rotation carefully, particu-larly in light of the current eco-nomic environment The Release does not include, however, a detailed or meaningful cost/ben-efit analysis Instead, the limited discussion of costs and benefits

in the Release is constrained by the PCAOB’s current lack of empirical and reliable data on a number of key issues

For example, according to the GAO’s 2003 report, large accounting firms estimated that

a rotation requirement would increase audit costs in the ini-tial year of an engagement

by approximately 20% The PCAOB does not yet appear

to be in a position to confirm

or refute that estimate More-over, the PCAOB is still seeking input on other potential costs associated with mandatory firm rotation, including the impact

on registrants’ financial report-ing staffs and the impact on the costs associated with the provision of nonaudit services

In addition, by its own admis-sion, the PCAOB’s preliminary analysis of its inspection data does not provide clear support for a conclusion that firm rota-tion would enhance auditor independence or audit quality 21

It may be difficult for the Board

to approve an independence requirement that would sig-nificantly increase costs without demonstrating that it would pro-vide a clear benefit

In the D.C Circuit’s

deci-sion in Business Roundtable

and Chamber of Commerce v

SEC rule that required public

companies to provide

share-holders with information about

shareholder-nominated

candi-dates for boards of directors It

did so on the grounds that the

SEC had failed to apprise itself

of the economic consequences

of the rule, as required by

Sec-tion 3(f) of the Exchange Act 23

The PCAOB likely is mindful

of that recent decision, even if

the Board does not appear to

believe that it is subject to the

same requirements 24 Given that

(1) the SEC would be subject to

Section 3(f) if it were to propose

mandatory audit firm

rota-tion and (2) the SEC would be

required to approve any rules

on mandatory firm rotation

adopted by the PCAOB, there

is, at a minimum, a strong policy

argument that the PCAOB

should conduct a thorough

analysis of the effects that a firm

rotation requirement would have

on “efficiency, competition, and

capital formation” before

adopt-ing any such rule

OPPOSING WORDS

Barbara Roper, director of

investor protection for the

Con-sumer Federation of America,

expressed her disbelief in an

e-mail to CFO Journal :

Regulators around the

globe have expressed

concern over the

per-sistent lack of

indepen-dence and professional

skepticism in the audits

of public companies

Congress’s response?

To make it more

dif-ficult for the PCAOB

to take even modest

steps to address that

problem You’d think

that, after dozens of major financial institu-tions either failed or were saved from failure

by a government bail-out, Congress might want to know why the auditors failed to provide any advance warning or, better yet,

to prevent any of the accounting games that helped put those finan-cial institutions at risk

But apparently they are more concerned with assuring that nothing changes in our dys-functional financial system 25

Vincent Ryan notes, “U.S

House of Representatives are not merely waging a fight against auditor rotation They are trying to marginalize the Public Company Accounting Oversight Board.” 26 He sees this action as a “flagrant example of pandering to business interests

in the financial arena.” 27

LAST WORD

Charles D Niemeier, board member of the PCAOB, speak-ing at the German Public Audi-tors Congress of 2007, may have captured the perpetual nemesis

of the public auditing oversight dilemma He reminds us that in

1933 and 1934 the U.S Senate’s Committee on Banking and Currency held a series of hear-ings to examine the causes of the 1929 stock market crash and explored potential reforms

One of the central ques-tions in those hearings was whether companies should be required to provide outside investors with detailed finan-cial statements and, if so, what assurance the public would

have that those statements were reliable One proposal under consideration was whether to require periodic government audits of companies’ state-ments As an alternative, the accounting profession pro-posed that Congress require companies to hire indepen-dent auditors to certify their financial statements But the profession’s proposal had its skeptics, including Alben Bar-kley, a prominent senator who went on to become vice presi-dent under Presipresi-dent Harry Truman He and the profes-sion’s representative, Colonel Arthur H Carter of Deloitte, Haskins & Sells, engaged in an exchange on the record that portended some of the policy challenges we would face in the United States over the next several decades According to Niemeier, it went to the heart

of the purpose of the audit and

in that respect remains relevant today Niemeier recounts the exchange:

Senator Barkley: Is there

any relationship between your organization with 2,000 mem-bers and the organization of controllers, represented here yes-terday with 2,000 members?

Colonel Carter: None at all

We audit the controllers

Senator Barkley: You audit

the controllers?

Colonel Carter: Yes, the

public accountant audits the controller’s account

Senator Barkley: Who

audits you?

Colonel Carter: Our

con-science

The Congress ultimately chose to accept the profession’s proposal, by requiring pub-lic companies to file audited financial reports and vesting the newly created Securities and Exchange Commission (SEC)

with the authority to establish

accounting principles to be

applied in preparing those

finan-cial reports

According to Niemeier, the

story of what the SEC did with

that authority over the past 70

years has not played out well

for the profession This is

bet-ter described as abandoning

the profession to the vagaries

of client pressures, thus

sup-pressing the conscience of the

profession instead of

protect-ing it 28

There may never be a final

word that provides closure

to the prevention of

fraudu-lent financial reporting in an

economic world operated by

human beings A world without

thieves and liars does not need

protection whether preventive

or detection The real answer to

the question of regulating

audi-tors may not be found in rules

but in professionalism bound by

one’s oath to duty As discovered

by the Treadway Commission,

“the tone at the top” is the

pru-dent path to travel Perhaps this

simply calls for the exercise of

“statesmanship” in steering the

process of independent auditing

to provide optimum value to the

public

NOTES

1 House Passes Legislation Banning

Auditor Rotation Mandate, American

Institute of Certified Public

Accoun-tants (AICPA) Published July 18,

2013 Retrieved from http://www

.aicpa.org/advocacy/cpaadvocate

/2013/pages/housepasseslegislation-banningauditorrotationmandate.

2 Ibid.

3 Ibid.

4 Ibid.

5 Mandatory auditor rotation agreed,

Economia Published October 7, 2013

Retrieved from http://www.economia

.icaew.com/news/october-2013 /mandatory-rotation-agreed

6 Ibid.

7 House passes bill to ban auditor term

limits, CFO Journal Published July 9,

2013 Retrieved from http://www blogs.wsj.com/cfo/2013/07/09/house -passes-bill-to-ban-auditor -term-limits/

8 As a part of the Treadway Com-mission Review the author of this article (James B Edwards) conducted follow-up research on the 1979 Report of the Public Oversight Board (POB) on nonaudit services and the continued applicability of the POB’s conclusions The paramount topic of inquiry in this research was auditor independence.

9 See, e.g., Staff of Subcommittee on Reports, Accounting and Manage-ment of the Senate Committee on Government Operations, 95th

Con-gress, The Accounting Establishment,

21 (Committee Print 1977); American Institute of Certified Public Accoun-tants, The Commission on Auditors’

Responsibilities: Report, Conclusions, and Recommendations, 108–109 (1978);

SEC, Office of the Chief Accountant,

Staff Report on Auditor Independence, 52–54 (1994); Accounting Reform and Investor Protection Issues Raised by Enron and Other Companies:

Hear-ings Before the Senate Committee on Banking, Housing and Urban Affairs, 107th Congress, 15, 17, 24, 51, 52, 65,

76, 84, 220, 249, 347–348, 821, 990,

1079, and 1122 (2002).

10 See Concept Release on Auditor Independence and Audit Firm Rota-tion; Notice of Roundtable, PCAOB

Release 2011-006 (August 16, 2011) (the “Release”).

11 See Section 203 of the Sarbanes-Oxley Act (adding new Section 10A (j) to

the Exchange Act); Strengthening the Commission’s Requirements Regard-ing Auditor Independence, Securities Act Release No 8,183 (Jan 28, 2003)

(adopting final rules implementing, among other things, Section 203 of the Sarbanes-Oxley Act).

12 U.S General Accounting Office,

GAO-04-216, Public Accounting Firms: Required Study on the Poten-tial Effects of Mandatory Audit Firm Rotation, 8 (2003).

13 Ibid.

14 See supra note 10.

15 James R Doty, Remarks at PCAOB Open Board Meeting (August 16, 2011) (“Doty Remarks”).

16 See supra note 10.

17 See supra note 10.

18 See supra note 10.

19 Fragments extracted from a Client Memorandum providing “Comments

in Response to PCAOB Issues Concept Release Soliciting Comments,” Fried Frank Law Firm, p 4, July 7, 2011

Retrieved from http://www.friedfrank com/siteFiles/Publications/1–10–1.

20 Ibid.

21 See supra note 10.

22 647 F.3d 1144 (D.C Cir 2011).

23 See Section 3(f) of the Exchange Act (stating that “[w]henever pursuant to this title the Commission is engaged

in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or deter-mine whether an action is necessary

or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote effi-ciency, competition, and capital for-mation.”) The decision also held that the SEC failed to comply with Section 2(c) of the Investment Company Act

of 1940, which requires a similar determination regarding the economic impact of new rules.

24 Instead, the Board provides the SEC with a summary of the Board’s view

of the burden on competition when submitting a final rule for Commis-sion approval While this summary may comply with Section 19 of the Exchange Act, which governs pro-posed rule changes submitted by the

PCAOB, the Business Roundtable

decision suggests that Section 3(f) requires a more robust assessment of the economic effects of a new rule.

25 Vincent Ryan, The House sticks its nose into audit rotation, Auditing,

CFO Journal, July 9, 2013 Retrieved

from http://www.cfo.com/auditing /2013/07/the-house-sticks-its-nose -into-audit-rotation/

26 Ibid.

27 Ibid.

28 See Independent oversight of the auditing profession: Lessons from U.S History, PCAOB Retrieved from http://www.pcaobus.org/News/Speech/

Pages/11082007_NiemeierGerman PublicAuditorsCongress

James B Edwards, PhD, CPA, is a retired distinguished professor emeritus in the Moore School of

Busi-ness at the University of South Carolina and an international busiBusi-ness researcher, busiBusi-ness architect, business advisor, and management development mentor He holds BBA, MBA, and PhD degrees earned at the University of Georgia His professional certificates include: Certified Management Accountant (CMA), Chartered Global Management Accountant (CGMA), Certified Cost Analyst (CCA), Certified Computer Profes-sional (CCP), Certified Internal Auditor (CIA), and Certified Public Accountant (CPA) He can be contacted at scjbedwards@cs.com