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By Che Odom
Feb. 1 — A shareholder resolution calling on several companies, including 3M Co., Intel Corp. and Norfolk Southern Corp., to consider changing external auditors every eight years won't go before stockholders for a vote this year.
In January, the Securities and Exchange Commission's Division of Corporation Finance said in “no-action” letters that the companies may exclude the shareholder proposals from their proxy materials under 1934 Securities Exchange Act Rule 14a-8(i)(7) because the resolutions appear to relate to “ordinary business operations.”
The resolutions, submitted by Canada-based Qube Investment Management Inc., may be the largest effort to use shareholder proposals in an attempt to force companies to change their audit firms periodically, according to a search of SEC filings.
The effort comes a year after the Public Company Accounting Oversight Board said it would no longer pursue rulemaking on a proposal that could have set limits on the number of years an audit firm may engage with an issuer.
PCAOB Chairman James R. Doty and some investors have expressed concern over the decades-long relationship audit firms have had with some public companies and said term limits should be considered as a way of improving auditor independence and skepticism.
Audit firms and many public companies, including some of those receiving the Qube proposals, have countered that mandatory audit-firm rotation would lead to costly inefficiencies and even more mistakes as an audit firm gets acquainted with a new client.
The Division of Corporation Finance granted no-action relief to 3M, ACE Ltd., Baxter International Inc., Colgate-Palmolive Co., E.I. du Pont de Nemours & Co., Intel, NextEra Energy Inc., Norfolk Southern, Praxair Inc., T. Rowe Price Group. and United Technologies Corp. on Qube's audit firm proposals.
Qube submitted substantially similar proposals to all of the companies.
In its Oct. 28 letter to 3M, Qube said auditor independence had “important implications for investors, on their comfort level when making investment decisions and the return they expect on their capital.”
“We have been unable to confirm a change in the audit partner at 3M since at least 1994,” Qube's letter said.
Regular market competition for the audit engagement would “increase share value by increasing long-term audit quality, without an unjustified increase in audit cost. Increased audit quality will increase investor confidence, making shares more valuable,” Qube said.
Attempts to reach Qube for comment were not successful Feb. 1.
While the PCAOB appeared to be leaning toward mandatory term limits for auditors, Qube's resolution would have called on directors to put up for bid the company's contract with the external audit firm every eight years.
“Having the audit committee issue a regular request for proposal on the audit engagement is a compromise to a forced rotation,” Qube said in its resolution. “It continues to empower the audit committee, but asks them to perform a genuine cost/benefit analysis on a potential change in auditor.”
The PCAOB decided to cease work on its proposed rule after the House passed the Audit Integrity and Job Protection Act (H.R. 1564) in July 2013, an attempt to preemptively prohibit PCAOB from adopting a rule.
Companies targeted by Qube did not immediately returned phone calls and e-mails from Bloomberg BNA seeking comment.
However, some did tell the PCAOB what they thought of mandatory audit-firm rotations in comment letters when the agency, which reports to the SEC, was considering a rule on the matter.
For example, DuPont said in a Dec. 12, 2011, letter to the PCAOB that mandatory audit-firm rotations would undermine corporate governance and lead to higher costs and potentially inaccurate audits.
“Mandatory audit firm rotation limits the discretion of an audit committee and it takes away from their ability to make the decision to consider a change in the independent auditors,” DuPont's letter said.
DuPont's auditor is PricewaterhouseCoopers LLP.
Robert Ripp, director and audit committee chairman of ACE, said in a Dec. 1, 2011, letter that a long-standing relationship allowed the external auditor to gain “cumulative knowledge” of operations, processes and financial risk, which serves to “reduce the risk that material misstatement could go undetected—a clear advantage for audit-firm continuity.”
The PCAOB's August 2011 concept release attracted more than 650 comment letters.
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|Name||Industry||Audit Firm||Reaction to PCAOB Proposal|
|3M Co.||Industrial||PricewaterhouseCoopers LLP||The company wrote to PCAOB, objecting to proposed mandatory audit-firm rotation. Company issued a 2005 restatement.|
|ACE Ltd.||Financial||PricewaterhouseCoopers LLP||ACE, recently acquired Chubb and adopted the name Chubb Ltd., wrote letters to PCAOB against mandatory audit-firm rotation.|
|Baxter International Inc.||Health/Medical||PricewaterhouseCoopers LLP||Issued significant financial restatements for 2001 through 2003. Subsidiary Baxter Healthcare Corp. wrote PCAOB, objecting to proposed mandatory audit-firm rotation.|
|Colgate-Palmolive Co.||Consumer Products||PricewaterhouseCoopers LLP|
|E.I. du Pont de Nemours & Co.||Basic Material||PricewaterhouseCoopers LLP||The company wrote to PCAOB, objecting to proposed mandatory audit-firm rotation.|
|Intel Corp.||Semiconductors||Ernst & Young LLP||The company wrote to PCAOB, objecting to proposed mandatory audit-firm rotation.|
|NextEra Energy Inc.||Utilities||Deloitte & Touche LLP||The company wrote to PCAOB, objecting to proposed mandatory audit-firm rotation.|
|Norfolk Southern||Transportation||KPMG LLP||The company wrote to PCAOB, objecting to proposed mandatory audit-firm rotation.|
|Praxair Inc.||Chemicals||Pricewaterhouse Coopers LLC|
|T. Rowe Price Group..||Financial||KPMG LLP|
|United Technologies Corp.||Industrial||Pricewaterhouse Coopers LLP||Filed a restatement for 2005.|
|Sources: Bloomberg Law and SEC filings.|
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