“Ancient Rome
declined because it had a Senate,” the American cowboy philosopher Will Rogers
querulously observed, “so what’s going to happen to us, with both a Senate and
a House?” 

Consider the July 9
passage by the House of HR 1564, the “Audit Integrity and Job Protection Act.” Neither title topic
is remotely addressed; instead the bill would, if fully enacted, prohibit the
American audit regulator — the Public Company Accounting Oversight Board,
inflicted on the world’s oversight of financial information by the
Sarbanes-Oxley law of 2002 – from acting to mandate the rotation of audit
firms.

Although vigorous
and unambiguous for over a decade (here to here) in my belief that mandatory auditor rotation is a flawed and
unworkable idea, unsupported by any empirical showing of a relationship –
causal or otherwise – between auditor tenure and audit quality – I search for
any adult rationale for this goofy piece of legislation, and draw a total
blank.

To start, the
supportive record is bare. Whereas the primary occupation of American
law-makers is the conduct of endlessly self-promoting “hearings” – exercises in
vanity and posturing well deserving the description by Shakespeare’s MacBeth (V, 5) of “tales told by an
idiot, full of sound and fury and signifying nothing” – the House Financial
Services Committee launched HR 1564 without report, analysis or commentary.

So what reasons
underlie this idiots’ tale? The PCAOB is a critic’s easy target, for sure, but
any momentum there in favor of rotation has long since petered out. PCAOB Chairman
Doty’s initiative
of 2011 generated a series of public declamations of unsurpassed vacuity, and
comment letters taking 95% unfavorable positions – and, in the event, attracted plain signals that he lacked the
votes – if indeed he ever had the desire.

Across the
Atlantic, committees of the European Parliament have drawn the teeth of Markets
Commissioner Michel Barnier’s rotation aspirations.

And the UK’s Financial
Reporting Council took an apparent deep finesse on rotation last fall, by
instead requiring large public companies to put their audits out for re-tender
every ten years or explain why not – a process that sources in London indicate
might well see a real volume of auditor changes.

Yet, that country’s
Competition Commission has just proposed a reduction to five years. The likely perverse result of
which — taking account of the huge costs for too-frequent proposals, engagement transitions
and first-time learning curves — would be these: round-robin exchanges of
engagements among the Big Four; further Big Four concentration as smaller firms
are squeezed out by the costs involved; replacement names on otherwise
identical auditor reports; and no observable difference in innovation,
performance or quality. 

So what
constituencies were interested in HR 1564? The cynical view of Matt Kelly at Compliance
Week is that the Big
Four firms’ half-million dollars in campaign contributions to the bill’s
sponsors in 2011 and 2012 bought the bill. But these amounts are merely distasteful spoonfuls in the huge cesspool of Beltway lobbying monies. And with
no fear that rotation was to be forced on them, auditors in America should have
been indifferent, if not resistant to a form of “protection” that could not be
beneficial to their already-fragile public reputations for accountability.

The same for corporate
issuers. And as noted, the PCAOB was already tied in knots, so another imposed constraint would
fall somewhere between unnecessary and simply irrelevant.

In my own rather jaundiced
view of the legislative process, the answer lies in Washington’s devotion to “motion”
masking as “progress”. When the environment is so poisoned that such
fundamental needs as immigration reform and gun control and social policy
issues like food stamps and student loans are beyond the grasp of reasoned debates,
legislative time and energy devoted to auditor rotation is merely wasted. 

It is thoroughly
dispiriting to think that as silly and stupid a proposal as HR 1564 should have
come this far under the disguise of useful law-making.

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