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

3
© 2014 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.21948
C
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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.
T he Battle Over Mandatory Audit Firm
Rotation
T
he 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.
4 The Journal of Corporate Accounting & Finance / May/June 2014
DOI 10.1002/jcaf © 2014 Wiley Periodicals, Inc.
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 Journal of Corporate Accounting & Finance / May/June 2014 5
© 2014 Wiley Periodicals, Inc. DOI 10.1002/jcaf
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 integrity,” 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
6 The Journal of Corporate Accounting & Finance / May/June 2014
DOI 10.1002/jcaf © 2014 Wiley Periodicals, Inc.
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
The Journal of Corporate Accounting & Finance / May/June 2014 7
© 2014 Wiley Periodicals, Inc. DOI 10.1002/jcaf
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
8 The Journal of Corporate Accounting & Finance / May/June 2014
DOI 10.1002/jcaf © 2014 Wiley Periodicals, Inc.
and Chamber of Commerce v.
SEC ,
22
the court invalidated an
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 President 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)
The Journal of Corporate Accounting & Finance / May/June 2014 9
© 2014 Wiley Periodicals, Inc. DOI 10.1002/jcaf
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 nomia
.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 edfrank
.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 />/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
/>Pages/11082007_NiemeierGerman

PublicAuditorsCongress
10 The Journal of Corporate Accounting & Finance / May/June 2014
DOI 10.1002/jcaf © 2014 Wiley Periodicals, Inc.
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 business researcher, business 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
.