The House Financial Services Committee unanimously recommended a bill to Congress that would prohibit the Public Company Accounting Oversight Board from establishing a system of mandatory rotation for audit firms.

In a 52-0 vote, the committee passed the “Audit Integrity and Job Protection Act” to amend the Sarbanes-Oxley Act, which established the PCAOB's authority to regulate the audit profession in 2002. The amendment would say the PCAOB “shall have no authority” under Sarbanes-Oxley to require public companies to use specific auditors or to choose different auditors on a rotating basis. The committee first introduced the measure last March as the PCAOB issued a concept release looking for input on the idea and held a series of public roundtable discussions.

PCAOB Chairman James Doty re-ignited the age-old debate on mandatory in mid-2011 as the board got more vocal about the need to inject more objectivity and more professional skepticism into the audit process. Doty has championed the idea that mandatory rotation would sever the cozy client relationship ties between auditors and the companies they audit, with many issuers engaging the same audit firm for multiple decades.

The PCAOB issued a concept release in August 2011 looking for ideas on how to wring more objectivity and more skepticism out of auditors, and looking for support that mandatory rotation would do the job. Instead the board heard heavy resistance to the idea in hundreds of comment letters and from dozens of roundtable speakers through early 2012, with only a handful supporting rotation. Even members of the PCAOB, including Jay Hanson and Jeanette Franzel, have said the board would step back and regroup to determine its next move. “Personally, I struggle to see how we would ever do a mandatory rotation standard,” Hanson said at a late-2012 accounting conference. 

Congress has already imposed limits on the PCAOB with a measure under the JOBS Act that requires the board to produce cost-benefit evidence on new standards as a condition for adopting them -- and that applies to any new standard, not just a rule establishing rotation. In the same legislation, Congress also issued a pre-emptive exemption for the smallest, emerging companies from any rotation rule the PCAOB might establish. The PCAOB has searched for academic research or other evidence that rotation would produce the outcome it seeks, but has turned up little to support the notion.

Edward Yodowitz, an attorney of counsel with Skadden, says Congress is wise to step in. “Any benefit from forced rotation would be speculative,” he says. “However the detriments could be considerable and unavoidable.” He says a system of rotation would impose cost on public companies because each new audit engagement would involve a learning curve as new auditors become familiar with a company's business and its system of internal controls.