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Seizing upon Sarbanes-Oxley.

On a Wednesday morning in Los Angeles, Larry Russell, CPA, CITP, is stuck in traffic on the San Diego Freeway. But he's on the move. He's wielding a cell phone, trying to drum up business for AccounTech, his Los Angeles-based consulting firm that integrates accounting with technology systems.

Looking for an inroad to new revenue, Russell is working an angle of the Sarbanes-Oxley Act, the monumental legislation that ushered in a new era of corporate governance and a host of reforms aimed at making auditors more independent.

His strategy: form alliances with accounting firms that by law can no longer provide financial information systems consulting to their publicly held clients and offer specialized technology services for companies that must generate newly mandated internal control audits.

"Show me a CPA firm that doesn't need a tech guy in the back room," says Russell, realizing the opportunities that are out there for the taking in the wake of Sarbanes-Oxley.

NEW COTTAGE INDUSTRY

Russell, a former Ernst & Young network systems analyst and a member of the CalCPA Technology Committee, is not alone in maneuvering for new business. Sarbanes-Oxley--signed into law in July following accounting scandals at Enron, WorldCom and others--already has spawned a cottage industry.

Enter "Sarbanes-Oxley" on Internet search engine Google, for example, and you're bombarded with links from companies offering to set up anonymous employee hotlines--a feature now mandated by the act--and from consultants teasing Sarbanes-Oxley advisory services with "Are you compliant?" tag lines.

"There are a lot of people who are viewing Sarbanes-Oxley as a full employment act," says CalCPA member John Tonsick, managing director of Citigate Global Intelligence & Security in Los Angeles.

Huckstering aside, the reordering of the accounting industry resulting from Sarbanes-Oxley will undoubtedly create opportunities. Carolyn Brancato, director of the Global Corporate Governance Research Board at the Conference Board in New York, likens Sarbanes-Oxley to trust-busting legislation of decades ago that split the oil companies' ownership of railroads and laid new tracks for smaller, entrepreneurial companies vying for business in the aftermath of the breakup.

Sarbanes-Oxley "will definitely open doors," she says.

Just how wide those doors swing open is anyone's guess.

Many in the profession believe niche players now can chase--and land--ancillary consulting services, such as bookkeeping or appraisals, because they are off-limits to firms auditing public companies.

The Sarbanes-Oxley requirement for internal control audits also will boost business for both the Big Four and consultants.

But in an accounting scandal era, there will be a marketing edge for companies that tout independence.

Take Tonsick, for example.

His firm, which has eight offices in the United States, provides risk assessments, internal and business control reviews, and security consulting. Citigate Global has been pumping out press releases and sending out its managing directors to speak on corporate governance issues to position itself as a seasoned, independent option to the larger accounting firms.

"Instead of getting a 25-year-old, they're getting someone with 25 years of experience," says Tonsick, who has worked at PricewaterhouseCoopers and its predecessor, Coopers & Lybrand.

For his part, Tonsick has made a beeline for Fortune 500 companies, cold-calling and renewing old contacts to pitch his Los Angeles branch. While competition for Sarbanes-Oxtey driven services is fierce, Tonsick says he's making headway and is on the verge of landing several new accounts. He anticipates his Sarbanes-Oxley marketing push will add $1 million in revenue to his firm this year. And he's not taking any opportunity for granted. Aside from offering internal control audits, he's promoting in-depth background checks that can ferret out whether potential board or audit committee candidates have falsified their resumes or have criminal records.

Demand for credible board and audit committee members also presents opportunities for veteran consultants, such as executive recruiter Paul Herrerias, CPA, and a member of the CalCPA Council and Board of Directors.

Herrerias' fat Rolodex is coming in handy as he networks with executives and retired CFOs to market his firm--San Anselmo-based Herrerias & Associates--as a resource for companies looking to fill audit committee posts.

While Herrerias pounds the pavement to land Sarbanes-Oxley recruiting jobs, he's adding value to his consultancy by educating himself and others on the raft of legislative changes.

Several months ago, he put together a Sarbanes-Oxley--or "SOX"--advisory board made up of professionals ranging from Big Four accountants to partners at law firms to a CFO of a publicly held company. Herrerias, who has been lugging around a copy of the act, as well as reading an analysis of it in a phonebooksized binder, also has coordinated breakfast meetings with Bay Area chief executives. There's little idle chatter over bacon and eggs.

While discussing Sarbanes-Oxley issues, Herrerias is situating his firm to provide executive recruiting and compensation consulting to companies grappling with the changes.

"Who would have thought that Arthur Andersen shredding documents would lead to Congress passing a new law that would lead to companies going to executive recruiters to find credible candidates for boards?" he asks.

TOUGH EDUCATION

Like Herrerias, others are schooling themselves on the new legislative landscape not just to gain a marketing advantage but out of necessity. Some accounting firms, such as Los Angeles-based Good Swartz Brown & Berns, have instituted training programs, highlighting audit risk and fraud issues. Overall, the accounting profession has been getting a tough education in corporate governance for the past few years.

Long before Sarbanes-Oxley, concern had been brewing over the rising fees generated from auditors' consulting services and the conflict risks they posed.

A controversial study by Stanford Graduate School of Business faculty member Karen Nelson reviewed the proxies of 3,000 companies in 2001 and found that more than half paid their auditors more for consulting services than for audit services and that 95 percent of the firms purchased at least some non-audit services. Nelson's study concluded that corporations with the least independent auditors--those companies that paid more in consulting fees than in audit fees--were more likely to meet or beat earnings benchmarks and to report large discretionary earnings, suggesting that more earnings management went on at companies that paid more in consulting fees to their auditors.

The accounting profession has railed against such conclusions, arguing that audit and consulting work doesn't inherently pose a conflict of interest. But with many accounting firms generating sometimes half their fees from consulting services, audits seemed to have become a loss leader.

"The CPA profession was moving away from being thought of as auditors," says David Hardesty, a Larkspur-based CPA with Wilson Markle Stuckey Hardesty & Bott and the author of "Corporate Governance and Accounting Under the Sarbanes-Oxley Act of 2002."

Even the jokes about the profession bore out the shift from a focus on audits to the salesmanship of consulting, says CalCPA member Hardesty.

Early in Hardesty's 25-year career, the cocktail party line was, "Ask an auditor what color the cow in the pasture is, and he'll respond: 'It's brown on this side.'"

In the heyday of lucrative consulting, the joke became: "Ask an auditor what two plus two is, and he'll respond: 'What do you want it to be?"'

PRESSURES FORCE CHANGE

The bad jokes only underscored mounting pressure from the SEC and from the public, which eventually prompted the Big Four to spinoff their consulting arms. But the changes were not limited to the accounting firms. Major corporations also began to feel that pressure and companies such as Walt Disney Co. and Apple Computer Inc. ditched their auditors who were also working as their consultants. Apple adopted a policy in February 2002 banning its auditors from performing nonfinancial consulting, such as information technology advisement and internal audit services. Amazon.com, along with other companies, has curtailed outside consulting services in its sales and local tax division because of high fees.

It's for those reasons that many at the Big Four downplay the effects of Sarbanes-Qxley, which they say codified the separation of consulting and audit practices that already was occurring in the marketplace.

"We saw this on the horizon three to four years ago," says Brad Oltmanns, managing director of PricewaterhouseCoopers in Los Angeles, about the eventuality of the spinoff of his firm's consulting practice.

That may be so, but the Big Four will continue to be impacted as many corporations don't want the appearance of having an auditor that isn't independent. Oakland-based Clorox, for example, recently fired Deloitte & Touche, its auditor since 1957, because the firm hadn't separated its auditing and consulting units.

"Everyone is looking at the enterprise risk of the poor corporate governance that has toppled major companies in an unprecedented way," says the Conference Board's Brancato.

As a result, Hardesty predicts that audits will stop being a loss leader for the purpose of winning consulting business and that the Big Four will begin to compete more on the rigor of their accounting. Audit fees also will likely go up. But don't expect the large firms to leave consulting behind. There's still no limit for the Big Four firms to chase consulting work at public companies they don't audit or at private firms.

"The firms will see a significant increase in their revenue over the next three years," predicts David Thompson, deputy managing partner of the Pacific Southwest Region for Deloitte & Touche. "Whether that translates into additional profit remains to be seen, because the cost of doing business is also rising."

While Sarbanes-Oxley will create opportunities for new business, that work will be won on long-term experience and specific skills in particular areas, as well as with a lot of savvy marketing.

"There's a lot of refinement that needs to be made," says Herrerias, adding that many companies are still in the process of determining how best to comply with the reforms. "But we can make an impact."

RELATED ARTICLE: Independence

To strengthen auditor independence, the SEC voted recently to prohibit nine nonaudit services, barring auditors from providing them to their publicly held clients. After heavy lobbying from the accounting profession, the SEC backed down on regulations that would have restricted auditors from providing tax consulting services. Still, in today's post-Enron world, these services may be a tougher sell than before.

"Some audit committees as a matter of course will simply begin to say 'no' to anything that invites the appearance of a conflict,' says CalCPA member David Hardesty, author of Corporate Governance and Accounting Under the Sarbanes-Oxley Act of 2002.

"Unless the auditors are the only ones who can do it. it's going to go to someone else."

Here is a listing of the services that Sarbanes-Oxley prohibits auditors of publicly held clients from providing:

* Bookkeeping or other services related to the accounting records or financial statements of the audit client;

* Design and implementation of financial information systems;

* Appraisal or valuation services, fairness opinions or contribution-in-kind reports;

* Actuarial services;

* Internal audit outsourcing services;

* Management functions or human resources;

* Broker or dealer, investment adviser or investment banking services;

* Legal services; and

* Expert services unrelated to the audit, such as expert witness testimony.

Source: SEC

Kelly Barron is a free-lance writer in Los Angeles You can reach her at kelly@kellybarron.com.
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Title Annotation:cottage industries
Author:Barron, Kelly
Publication:California CPA
Article Type:Cover Story
Geographic Code:1USA
Date:Mar 1, 2003
Words:1838
Previous Article:SEC OK's rules, amendments. (Sarbanes-Oxley).
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