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U.S. House panel probes audit watchdog's economic analyses

By Sarah N. Lynch

WASHINGTON (Reuters) - A U.S. House panel is probing whether the country's primary audit watchdog is doing enough to weigh the economic impact as it considers new regulations for the nation's auditors.

In a January 10 letter, House Oversight Chairman Darrell Issa and committee member Patrick McHenry told the chairman of the Public Company Accounting Oversight Board, or PCAOB, that they fear the board is "taking insufficient action to comply with the broad consensus that economic analysis is a critical element of credible regulatory policy."

The Republican lawmakers added that internal PCAOB documents they had obtained appeared to show an "institutional resistance to rigorous economic analysis." They demanded that the PCAOB hand over other records by January 24 involving internal communications on economic analysis.

Conservatives in Congress and business groups such as the U.S. Chamber of Commerce have questioned whether regulators are making good-faith efforts to weigh fully the costs and benefits of new rules.

The PCAOB, which was created by the Sarbanes-Oxley Act of 2002, has come under the microscope over the past year because it is contemplating whether to propose controversial new rules to impose term limits on audit firms.

It has been hosting public roundtables to weigh auditor rotation requirements, which are strongly opposed by many Republicans in Congress as well as the Big Four audit firms - PricewaterhouseCoopers, KPMG, Deloitte LLP and Ernst & Young LLP.

Those in favor of such a measure say it would help bolster auditors' independence.

The U.S. Chamber has won several key legal challenges to Securities and Exchange Commission rules on the basis of shoddy cost-benefit analysis in recent years, including a major 2011 case overturning a rule that aimed to help shareholders nominate directors to corporate boards.

Unlike the SEC, which has a legal requirement to weigh a rule's impact on capital formation, competition and efficiency, the PCAOB is under no such obligation.

Any rules the PCAOB ultimately adopts must be approved first by the SEC. In theory, if the SEC felt that the PCAOB needed to do more economic analysis, it could reject them.

PCAOB Chairman Jim Doty pledged to lawmakers during a March 2012 hearing and in subsequent letters that he was committed to more rigorous cost-benefit analysis.

In addition, the PCAOB's strategic plan for 2012-2016 commits to helping the SEC incorporate economic analysis in a variety of other rules.

In their letter to Doty, Issa and McHenry say they are concerned that a draft of the PCAOB's strategic plan mentioned an economic analysis only once, in a discussion of a possible rule on auditor rotation.

They said comments submitted by the PCAOB assistant chief auditor in response to the draft raised questions about whether an economic analysis would need to apply to all of the board's regulatory projects.

They added that they were troubled by a lecture at a PCAOB-organized training conference about rulings by the D.C. appeals court on cost-benefit analysis, titled "The Emperor Has No Clothes: Confronting the D.C. Circuit's Usurpation of SEC Rulemaking Authority."

In that training, they said the lecturer urged PCAOB rule-writing staff to use "buzzwords" that might help mitigate legal risk.

"The committee is concerned that despite the promises of your testimony and your written response to the committee, rigorous economic analysis is not being adequately incorporated into the PCAOB's rulemaking process," they wrote.

A PCAOB spokeswoman said on Monday that the board appreciates the "continued interest of Chairman Issa and Rep. McHenry in our ongoing efforts to further integrate economic analysis with PCAOB rulemaking."

"We look forward to addressing their questions," the spokeswoman added.

(Reporting by Sarah N. Lynch; Editing by Phil Berlowitz)

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