"Mission Creep" replaced "Increased skepticism" as the "word of the day" and at the top of the latest list of buzzwords related to the auditor rotation discussion following a hearing held by the U.S. House Subcommittee on Capital Markets and Government Sponsored Enterprises centered on the PCAOB’s ongoing discussion of auditor rotation.
PCAOB Chairman Jim Doty’s testimony at the hearing was less an even exchange of ideas and more a Steel Cage Match.
Rep. Scott Garrett (R-NJ) set the tone at the Mar. 28 hearing with his opening comments.
"I do think it is important to remind the PCAOB that it is not a policy-making entity; Congress and this committee are the policy makers here. The PCAOB’s job is to regulate and oversee the auditing profession. I am very concerned about some of the recent activist proposals put forth by the PCAOB."
Things didn't get any more pleasant for the PACOB Chairman from there, even after Doty possibly sensing the temperature in the water tried to ratchet the mood down a couple of notches.
Doty told the lawmakers in his opening remarks, the recent concept releases did not propose new auditing standards rather they sought the public’s views.
"I am certainly not wedded to any particular outcome," Doty said. "But I do believe the PCAOB should continue to explore issues of such fundamental importance to the audit."
His words did little to cool the legislator’s fury.
Rep. Spencer Bachus (R-AL) seemed confused as to why if the only thing that had been done was to issue a concept release, the public perception was very different.
"Your statement is we are only at the start of considering this, we have made no decisions," Rep. Bachus said. "There seems to be a misinformed public on this that believes you are well on your way to doing that and I don’t know why that is."
Doty responded to repeated pointed questions from lawmakers about cost-benefit analyses that it was "premature" at this stage.
"It would be putting the cart before the horse to start evaluating the costs and benefits of some form of rotation before you have the sense of whether you’re going to go there or what it would be," Doty said in response to a question by Rep. Bachus. "The initial inquiry here is what should be done to enhance not only the perception of independence, which suffered in the financial crisis, but also the fact of auditor independence."
Rep. Garrett asked Doty what prompted the rotation discussion.
"was there any data from anyone that said here is that data that shows us this is a problem area as opposed to anecdotal this is just another topic area we should be looking at," he asked.
Doty replied the Board’s decision to open the discussion was more than a whim.
"The board’s inspectors had in inspecting over the years found questions of skepticism and issues of whether auditor skepticism was present, whether professional independence was being compromised," Doty said. "This is an area that crops up. It recurs in our findings over the years. It is not an isolated issue. It’s not something that was raised without the basis."
Doty also noted that other jurisdictions worldwide are proposing auditor rotation requirements.
CPA Caucus co-founder Rep. Brad Sherman (D-CA) went after Doty about why the PCAOB didn't ask what percentage of an audit firm's revenue a client's fee represented.
"Standards for independence generally say that an accounting firm should not have more than 5 or 10 or 15% of its revenue coming from one client because even if you have just enough staff to service that one big client if that one big client is half your business then your not so much an independent as an appendage," he said. "What steps are you taking to make sure that in dealing with these smaller auditing firms around the country that they are big enough so that they can do the audit of the relevant broker dealer and still have 90% of their resources available to handle other clients. In other words they are big enough to do the job but are big enough to have other sources of revenue and be independent
of the client."
“Congressman you have put your finger on an issue not simply for broker dealers but for many of the triennial firms,” Doty said.
Sherman cut the PCAOB Chairman off in mid explanation.
“Mr. Doty do you have standards?” Sherman said. “Or is it entirely legal for an accounting firm to get 30% of their revenue from a company and attest or opine on their financial statements?”
Doty started to answer saying it could be one of independence and capacity
Sherman cut him off again.
"In a profession best known for focusing on numbers you don’t have a numerical standard?"
Doty again started to answer before he was cut short.
"We think we would be precipitous to establish some kind of hard threshold at this point," the Chairman said.
"Would 50% be enough?" Rep. Sherman asked "60%? 80%? Do you even know when the broker dealer files a statement with
you what percentage of the CPA firms revenues come from that one client."
“Yes we do look at that,” Doty said.
“Is it on your form?” Sherman asked. “Or do you look at in only the 1% of the cases that you gather additional information.”
Doty said it was covered in all of the Board's inspections
"In all of your inspections," Sherman said. "In 99% of the cases you don't inspect. Why don't you ask for that information in every filing?"
Rep. Bachus stepped in to give Doty a breather requesting Doty get a chance to respond to the question.
"Mr. Doty I'll rephrase the question," Sherman said. "Why don't you simply ask the firms when they submit the statement to indicate whether that one client is less than 10% or 15% of their revenue all the time. Not just in the one-tenth of 1% of the time"
(At least he called him Mister)
If the exchange between Doty and Rep. Sherman could best be called terse or tense
The "back and forth" between Doty and Rep. Michael Fitzpatrick (R-PA) was less back and forth and more back alley beat down.
Rep. Fitzpatrick, who introduced a draft bill that would prevent the PCAOB from requiring public companies to use certain auditors or from implementing mandatory audit firm rotation, asked Doty about the GAO’s prediction in an earlier study that audit costs would rise 20% with audit firm rotation.
"The GAO study did recite that it had been the estimate that some had," Doty said. "I would tell you that there are people who would dispute the accuracy of that amount."
"Do you dispute the accuracy of it?" Rep. Fitzpatrick asked. "Have you disputed the accuracy of the 20% number?"
"I have no basis for saying it is right or wrong," Doty said.
"What do you believe," Fitzpatrick asked. "Do you have an opinion?"
Doty finally responded to the uncomfortable grilling.
"We have been told by people who are on audit committees and who have engaged in rotation of auditors for very substantial companies that in fact audit rotation lowers the cost of the audit, reduces the fees that are charged and lowers the cost to the company," Doty said. "So there is conflicting testimony among people who are engaged in this process."
"That is why Mr. Doty we really believe it is incredibly important to have a good cost benefit analysis done at the very beginning."
Doty again tried to stress that there was no auditor rotation proposal.
"We have not gotten a proposal out for any kind of firm rotation," Doty said. "We are not committed to any particular approach to independence and objectivity."
"Will you do a cost benefit analysis before you start pushing that concept?" Fitzpatrick asked.
After Fitzpatrick pressed him further, Doty said the PCAOB would do an analysis if it gets to the proposal stage.
"Before we came in with a proposal on mandatory firm rotation we would be doing a very careful analysis of costs, unanticipated consequences and benefits," Doty said.
Ernst & Young and Business Alumni Professor at University of Tennessee Joe Carcello, a member of the PCAOB’s Standing Advisory Group defended the PCAOB’s discussion of the auditor rotation subject in his testimony.
"In my view, any serious observer of the accounting profession needs to be concerned about the current level of professional skepticism exhibited by auditors," he said. "Given that the PCAOB’s mission is to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports, exploring this issue is not only appropriate – not only is it within the clear mission of the Board as articulated by Congress -- it is arguably the very mission of the Board and the reason the Board exists."
Doty and Carcello were not the only panelists to testify at the hearing, although Doty and the PCAOB’s discussion surrounding auditor rotation seemed to occupy most of the lawmakers attention.
Other panelists included SEC Chief Accountant James Kroeker, FASB Chairman Leslie Seidman, GASB Chairman Robert Attmore, Xerox Corp. VP and CAO Gary Kabureck, AICPA President and CEO Barry Melancon and U.S. Chamber of Commerce VP Center for Capital Markets Competitiveness Tom Quaadman.
This is an excerpt of the story that was published in the Mar. 30, 2012 issue of Accounting News Report.