HAPPY ANNIVERSARY?
Scandal-Inspired Sarbanes-Oxley Reform Causes Some Headaches, Relieves Others
By Chris Cziborr
The accounting industry has been shaken up in the one year since the Sarbanes-Oxley Act was passed, though real changes are still some time off.
Last year’s corporate scandals and the collapse of Arthur Andersen LLP cast an unwanted light on an industry that likes to work in the background.
Corporate reform enacted in the wake of the turbulence has spawned more work for accounting firms and officials at public companies. But most agree that there’s more work to be done.
The Sarbanes-Oxley Act of 2002 is the keystone of corporate reform and the new accounting regulatory environment.
Key tenets of Sarbanes-Oxley, which marks its one-year anniversary July 30, include: requiring executives to vouch for their companies’ financial results, making companies certify that their internal auditing procedures can catch fraud or shoddy accounting and prohibiting accounting firms from doing auditing and some types of consulting for the same client.
But one of the biggest changes has yet to kick in. Sarbanes-Oxley called for the creation of a government-backed Public Company Accounting Oversight Board. William J. McDonough, former president of the Federal Reserve Bank of New York, was tapped as board chairman in May.
Officials at big Orange County businesses such as Aliso Viejo-based engineering company Fluor Corp. said they haven’t had to remake their businesses to comply with Sarbanes-Oxley.
“We’ve told ourselves, ‘What does this documentation mean, how do we get to it, let’s get organized to get it done and be sure we get it done in a timeline,'” said Fluor controller Vic Prechtl. “That’s a lot of additional work, but it isn’t requiring us to rethink the way we do business or anything else.”
But Prechtl said Sarbanes-Oxley’s notorious Section 404, which calls for greater oversight of internal accounting controls, presents the biggest block of compliance work for Fluor.
“We have a huge effort under way to get up to speed on our documentation and to get prepared for our auditors to come in and do a certified audit of our audit controls,” Prechtl said.
He said that though auditors normally include internal controls in their work, Sarbanes-Oxley “has raised the bar in terms of documentation.”
Under 404, Fluor must do its own assessment of internal controls.
Fluor has hired another Big Four accounting firm, which Prechtl declined to name, to do work separate from its auditor, Ernst & Young International.
The second accounting firm will help with Fluor’s review of its internal controls. “The other firm will be totally independent of the auditor,” Prechtl said.
Sarbanes-Oxley has placed limitations on the scope of services a single firm can provide to one client.
That’s good and bad news for the accounting industry.
Bob Grant, managing partner of the Costa Mesa office of Deloitte & Touche LLP, said Sarbanes-Oxley’s restrictions have created greater competition among accounting firms.
“Every company in OC is a potential client for all the firms,” Grant said. “Even if the intense relationship is with one of the Big Four, there’s a host of other services that could be provided.”
The four largest remaining accounting firms after the demise of Arthur Andersen are Deloitte, Ernst & Young, Pricewaterhouse-Coopers and KPMG LLP.
Grant said that in the past, companies would generally hire one accounting firm for all of its audit and consulting work. “Sarbanes-Oxley has created a lot more activity and involvement for us with a larger number of companies,” he said.
Compliance doesn’t come cheap.
Boston-based AMR Research Inc. recently said that public U.S. companies will spend as much as $2.5 billion to comply with the Sarbanes-Oxley requirements.
The largest public companies have until June 15 next year to fully comply. Smaller companies get a little more breathing space,they have until April 15, 2005.
Small companies warrant more time to comply, said Sam Wild, partner in charge of accounting and auditing at Santa Monica Stonefield Josephson Inc., which has an office in Irvine.
“Big companies have far more sophisticated and extensive internal financial personnel and an internal audit department,” he said. Smaller to medium-sized businesses typically have a chief financial officer, a controller and a small accounting staff complement but little else, Wild said.
They are having “some difficulties” in getting up to speed, he said.
“They don’t have the resources to deal with what’s going to be a very extensive project,documenting, evaluating and testing their systems of internal control and then doing a formal written report assessing that,” Wild said.
Outside auditors must then come in and either OK or nix management’s report.
Some small public companies have even considered going private to bypass Sarbanes-Oxley’s compliance requirements.
“Some of my own clients have said they’ve considered it,” Wild said. “You’ve got the onerous reporting requirements already with quarterly reports and year-end audits. Now you need to have auditors come in and do quarterly reviews of the financial statements. The new requirements are going to squeeze some of the smaller companies out of the public market.”
For Gary Campanaro, chief financial officer at Irvine-based Keith Cos., complying with Sarbanes-Oxley has meant more time detailing the company’s accounting and auditing procedures. The engineering consulting company has a market value of about $77 million.
“We already did a majority of items required by Sarbanes-Oxley,” Campanaro said. “What we didn’t do was all the documentation that they now require.”
Campanaro said he spends about 20% of his time on Sarbanes-Oxley issues.
“It trickles through to the board meetings,those meetings are longer than they were previously,” Campanaro said.
Meanwhile, Santa Ana industrial design software maker MSC Software Corp. said it has changed the way it communicates with the public.
“We’re making things more transparent via the Web and via investor inquiries,” said MSC spokesman Todd Evans.
But Evans said the media has overhyped Sarbanes-Oxley reform.
“We haven’t changed what we’ve done in terms of accounting practices,” Evans said. “The press has grabbed onto Sarbanes-Oxley, claiming ‘it’s all about the stopping financial shenanigans.’ And it’s true that the regulations serve that purpose. But it’s really there so companies can show investors what they’re doing and make that information available to investors who want it.”
