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 o m m e n t a r y 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 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 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 scjbedwards@cs.com . . 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/ . 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. exceed a 1 5- 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