Wednesday, July 31, 2013

H.R. 1564: Changing Auditing Engagement Rules

Looks like the accounting profession is headed for uncertain times. On July 8th, the House passed H.R. 1564, the Audit Integrity and Job Protection Act, changing work relationships in public auditing. 

As the bill stands now, it would allow corporations to remain with the same auditing firm without limitations. SOX rules require firms to switch off every few years to discourage the close relationships that lead to fraud in the past. Lead audit partners are required to rotate out of an auditing engagement every five years. Other rules are in place to encourage independence, such as the hiring of executives or auditors that had worked on the same audit. 

During the accounting scandals of the past, it was discovered through subsequent investigations that auditors had played a big role in carrying out those frauds. The accounting profession paid a big price afterwards, mostly with its reputation, and it tried to make amends through legislation. The solution was to monitor relationships between public firms and the corporations they audit. Why legislators are now taking steps to change the status quo is unclear.  What is clear though, is that they are setting a dangerous precedent, or judging by the accounting frauds of the past, revisiting an old one. The word on the street now is that those representatives have something to gain by catering to lobbyists. What I need to know is, if this measure is being pushed by the profession itself, what benefit does it foresee in changing the independence rules now in place? As of now, I don't see any. 

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