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Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, the 2008 financial crisis cost Americans more than $13 trillion, leaving many families unable to make ends meet as they lost their jobs and saw their nest eggs disappear. Five years later, as we began to pick up the pieces of the mess largely caused by deregulation, the American investing public is now much more cautious when investing its valuable savings. As a member of the Financial Services Committee, I see my job to ensure that there are appropriate rules in place that will hopefully prevent such a debacle from ever happening again.
One such initiative to improve the functionality of our markets is to improve the independence of the market's fact checkers--the public company auditors. These companies play a vital role of validating the authenticity of a company's financial statements and keep all public companies honest when reporting to investors how they have performed.
I applaud the government regulator of the auditors, the Public Company Accounting Oversight Board, or PCAOB, for its persistent efforts to identify structural changes in the current system that may improve auditor independence. After all, we know that auditors generally performed poorly leading up to the 2008 financial crisis, failing to warn investors of the outsized risk posed by banks' bets on the housing market.
Having said that, I understand that one such proposal floated by the PCAOB, the mandatory rotation of auditors, has raised serious concerns that will significantly increase costs for companies, as well as diminish the quality of information upon which investors base their investment decisions. For these reasons, I support H.R. 1564, which prohibits this proposal from being implemented.
It is not clear to me that requiring a public company to change auditors every so many years would contribute to auditor independence. What's more, given the time it takes an auditing firm to truly understand the business of a company, there will be at least a few years of less than ideal audits as an auditor has to learn everything they need to know about the new firm.
Additionally, the small number of major auditing firms, coupled with specialization within the auditing industry, means that requiring rotation, in many cases, will not leave companies with much choice at all. In my view, while enhancing auditor independence is a crucial goal, I do feel there may be better ways to accomplish it.
I would also note that this bill does not in any way limit the ability of a company's audit committee to rotate its auditors. Such committees, as some investors have pointed out, are best suited to select their own auditors.
Having said that, I do have concerns about tampering with the authority of a regulator when it raises an issue that we disagree with. The PCAOB asked the public for feedback on a range of proposals all targeting the concern that auditors have become too close and dependent on the companies they are supposed to examine. It's not unreasonable for the PCAOB to include this as one of a large range of issues it's examining.
To address this concern with the bill, I offered an amendment during our markup of H.R. 1564 that requires the GAO to update its previous study regarding auditor rotation. The previous GAO study, completed shortly after the passage of the Sarbanes-Oxley Act of 2002, found that ``mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve auditor quality.'' However, the GAO also noted that ``several years' experience with implementation of the Sarbanes-Oxley Act's reforms is needed before the full effect of the act's requirements can be assessed.'' The GAO needs to update this outdated study.
This amendment requires the GAO again to evaluate the potential costs and benefits of mandatory audit firm rotation, now that more than 10 years have passed since the passage of Sarbanes-Oxley. The amendment requires consideration of various factors, including whether rotation would actually mitigate against conflicts of interest between audit firms and issuers and whether audit quality could suffer due to audit firm rotation. And the study would also include an assessment of the impact of Sarbanes-Oxley on audit firm independence and whether additional reforms are needed.
Importantly, this study will inform a future Congress as to the wisdom of the statutory prohibition on auditor rotation in H.R. 1564.
With the adoption of my amendment, I and every member of the committee voted for this bill.
Let me reiterate, I am supportive of the role and mission of the PCAOB but believe that the regulator would do well to look at the benefits to investors as it examines auditor independence. Doing so will take the PCAOB away from focusing on auditor rotation and towards other areas that provide more meaningful improvements in auditing and financial reporting.
Mr. Speaker, I reserve the balance of my time.
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