For all the auditing experts here, this is an article from the AZ Republic. Not as easy as you think!!!
New rules are making dents in public firms' bottom lines
Russ Wiles
The Arizona Republic
May. 9, 2005 12:00 AM
Public companies in Arizona and nationwide are shelling out millions of dollars to pay for audits and other accounting services because of tough new regulations that arose out of the string of corporate scandals.
The extra costs, which stem from new rules related to the Sarbanes-Oxley Act, have made a seven-figure dent in some firms' bottom lines, in many cases doubling the costs. For others, the added scrutiny has kept them from receiving clean bills of auditing health or caused them to restate past financial results.
Of 42 Arizona-based corporations surveyed by The Arizona Republic, 36 paid higher fees last year to national audit firms such as Deloitte & Touche, Ernst & Young, KPMG International and PricewaterhouseCoopers. In about half those cases, audit-related fees surged 50 percent or more. advertisement
At the largest U.S. companies, audit fees jumped more than 40 percent last year to an average $13 million, according to Audit Analytics.com.
"The level of work has doubled for all companies and their auditors," said Donald Brandt, executive vice president and chief financial officer at Pinnacle West Capital Corp., the Phoenix-based parent of utility Arizona Public Service Co.
Audit and audit-related fees include everything from mainstream accounting work to tax consulting and analysis of a company's 401(k) plan. The costs are listed in corporate proxy statements. Serious stock-market investors should keep an eye on this issue because of the risk a firm will need to restate its financial reports due to audit woes.
What changed last year was a new requirement that auditors scrutinize a company's internal accounting controls to make sure proper procedures are in place and are documented. The intent was to reduce errors and fraud, and help better protect investors.
The new rules are linked to Section 404 of the Sarbanes-Oxley Act, passed in the wake of accounting scandals at Enron Corp. and elsewhere.
Sarbanes-Oxley was far-reaching federal legislation that beefed up the power of independent corporate directors, placed greater responsibility for accounting accuracy in the laps of top corporate officials and made other changes.
It forces company officers to assume personal responsibility for financial statements, beefs up the power of independent directors and has increased the demand for accountants and their workloads.
The rule changes also mean many companies need to take extra steps, and spend more money, to make sure their books are accurate.
Pinnacle West's audit-related fees, the highest in Arizona, rose to $5.2 million last year from $4.8 million in 2003 and $2 million in 2002.
Some smaller companies have been hit proportionately harder. At Hypercom Corp., a Phoenix maker of electronic payment devices, auditing and related fees nearly quadrupled to $3.1 million in 2004. That's sizable for a company that lost $8.7 million for the year.
Adding insult to injury, a recent auditing report issued by Ernst & Young cited ineffective accounting controls at Hypercom, raising the spectre of restated financial reports or other consequences. Hypercom's chief executive officer and chief financial officer both resigned earlier this year.
A company spokesman declined to comment, citing the firm's quiet period prior to a pending earnings release.
"Auditors look at how we control orders, shipments, receipts of money - whatever," said Stanley Laybourne, executive vice president and CFO at Insight Enterprises Inc., a Tempe firm where audit-related expenses doubled last year to $1.8 million.
"They're looking for segregation of duties, policies, procedures and steps," he said.
Most Arizona companies are small, and none faced such hefty dollar outlays. Yet second-tier firms also have been less likely to have proper internal controls in place, making for a tough transition.
"At small companies, things got done through tribal knowledge," Laybourne said. "But under Section 404, you can't operate that way - there has to be a formal process."
Top executives at some auditing firms have been predicting fees will decline for 2005, now that first-year transition issues have mostly been addressed. Yet plenty of public-company CFOs, for various reasons, don't expect costs to drop much if at all.
Nor do these outlays include the extra time and effort that senior executives must devote to accounting issues.
"We give our top executives every word to read" of quarterly 10Q and annual 10K reports, Laybourne said. If you factor in the extra managerial oversight, the new rules likely cost midsize firms like Insight $3 million to $5 million, he estimates.
Some corporate officials met with the Securities and Exchange Commission last month in Washington, seeking greater leeway for auditors as a way to ease costs. Nobody expects Sarbanes-Oxley to be repealed, but the SEC could tweak some requirements.
Despite the added burdens and costs, some executives grudgingly admit the new rules have improved procedures, while making financial reports more reliable.
"Everybody today is living up to a higher standard," Brandt said. "We think we're a better company because of it."
