Shifting sands: the changing relationship between financial executives and auditors.

When I started auditing, I remember a training videotape called "Auditor in Court," with memorable images of the auditor being questioned by an ambitious prosecutor over shoddy audit procedures. I understood my role as ensuring that the financial statements of the company I was auditing reflected the company's transactions appropriately.

The relationship with the auditors has evolved over the last few decades, as audit firms began getting increasingly into providing services other than the annual audit. When I left auditing for a corporation, I embraced the idea of auditors as "business partners." It was far easier to ensure a transaction would pass their inspection if they were involved in helping to structure it.

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With complex transactions, particularly, I always asked my auditors' advice to ensure that my interpretation of complex rules aligned with theirs. This was healthy dialogue that served the company and investors well. It did not seem to be an independence issue, as I viewed the auditors' primary role as ensuring the integrity of the financial statements. This enhanced the annual audit process, as the auditor was already familiar with the complex transactions prior to the year-end audit.

Arguably, in companies like Enron, the role of the auditor as business partner was taken too far, with the consulting services provided by the audit firm greater than the annual audit. Then, the auditor's primary role was no longer being to ensure financial integrity, but ensuring that those consulting dollars kept rolling in.

Sarbanes-Oxley's intent with respect to auditors was to focus them, appropriately, on auditing. Auditing firms can no longer offer consulting services to their audit clients. Auditors meet more often with corporate audit committees, which are now empowered to hire them. The relationship has definitely shifted. The auditor's client is no longer management, but rather the audit committee, impacting the manner in which management and the auditor communicate.

An unintended consequence of the regulation is the changing relationship--and communication--between financial executives and their external auditors. The relationship is increasingly adversarial, with financial executives no longer seeing the auditor as a valued business partner. Indeed, even thinking of the auditor that way is dangerous, as it could raise independence issues. And, outside auditing firms are gun-shy about providing guidance that could be viewed as "consulting" or, worse, as the auditor being an integral part of the organization's internal control structure.

As auditors grow more conservative in the wake of Sarbanes-Oxley, the time needed to get feedback from them on complex accounting issues has grown tremendously. With new internal procedures requiring consultation and double-checking on every issue, there are no quick answers anymore.

The audit firms have moved from being self-regulated to having a very engaged regulator in the Public Company Accounting Oversight Board (PCAOB). They are still unclear what all of this means, and how the PCAOB will communicate issues that it has with the firms. In this unforgiving environment, no one wants to be put on the defensive. With Sarbanes-Oxley Section 404 and SAS 99 (requiring auditors to take a more skeptical approach in engagements), billable hours for assurance work have gone up. Firms now must make their profit on the audit--possibly a loss leader in the past. And, they must perform more robust audits.

A key constraint is the free exchange of information. It is now dangerous to provide auditors with preliminary financial information with which to begin the audit process. Changes in this preliminary information spark questions as to whether management or the auditor initiated the changes and whether an internal control breakdown has occurred. This is not helpful to anyone.

Recently, questions have arisen as to when companies will release their earnings for 2004 calendar year-end. Many companies' historic internal policy has been that earnings would be released when audit procedures on the main financial statements were completed. The audit report date generally coincided with the earnings release date.

This year-end, the auditor attestation on the internal control environment kicks in. The dates for the financial statement audit and the internal control attestation are part of an integrated engagement and are, therefore, the same date. As a result, the "official" date of the financial statement audit will likely be pushed out. It remains to be seen how this will impact the earning release date; if this is pushed out by an additional month, that certainly flies in the face of the primary goal of those regulations--enhancing investor confidence.

Healthy dialogue throughout the year is extremely valuable, and I am dismayed that the current regulation has caused the free exchange of information to be inhibited.