Period of Adjustment: CPAs Are Finding Ways to Put Auditing and Consulting on Different Sides of the Conflict-of-Interest Dividing Line
EXECUTIVE SUMMARY * THE NONAUDIT SERVICES Sarbanes-Oxley prohibits CPAs from providing to their public company audit clients are bookkeeping or services related to the accounting records or financial statements of the client; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker/dealer, investment adviser or investment banking services; and legal and expert services unrelated to the audit. * REGIONAL FIRMS CAN CONTINUE TO CROSS-SELL nonaudit services--just not to the public companies they audit. Mid-size firms will have a better chance to sell their consulting services now that all firms are proscribed from offering specific nonaudit services to audited public clients, some say. * SOME CPAs HAD BEEN EFFECTIVELY SHUT out from marketing nonaudit services to publicly traded companies because the larger national accounting firms charged significantly lower audit fees. Now that cross-selling is prohibited, small firms are in a position to credibly pitch nonaudit services. * MANY FIRMS ARE PROVIDING CONSULTING services to clients on the consequences of Sarbanes-Oxley, adding more service specialties, increasing marketing budgets, dividing marketing between two staffs, adding marketing staff and hiring marketing directors to oversee their sales efforts. * TO PURSUE AUDIT AND NONAUDIT MARKETING, a firm will need to analyze its client base, restructure the firm to effect the best provision of services and then market services according to each client's primary needs balanced against what's most profitable for the firm. CPAs should work out the decision together with their clients. * BECAUSE AN INDIVIDUAL FIRM NO LONGER CAN serve as both the internal and outside auditor for a public company client, one CPA says it benefits his firm if a major competitor wins the work it loses. It effectively prevents that competitor from seeking a significant portion of work the firm wants and ensures that the internal auditor's work is top quality. The auditor independence rules mandated by passage of the Sarbanes-Oxley Act in August 2002 are a double-edged sword for regional CPA firms. No longer able to use audit engagements as an opportunity to spot client needs and sell remedial consulting services such as internal controls tune-ups, information technology, actuarial research or human resources management, many multiservice, midsize firms must change their marketing plans. To avoid sacrificing the considerable investment they made to become versatile business services providers, most still will sell nonattest services--just not to the public company clients they audit. What these firms aren't doing is exiting one service market to focus on another--the strategy the largest firms have been forced to use. Here's how some midsize firms are adapting to the law's strict cleaving of audit and nonaudit services. BRAVE NEW WORLD Sarbanes-Oxley is the most major overhaul of federal securities regulation since the Securities Exchange Act of 1934. By founding the Public Company Accounting Oversight Board, the legislation creates a system for federal oversight of public auditors. It also mandates new disclosure requirements for public companies and harsher civil penalties for individuals and firms convicted of accounting or reporting violations. The act's prohibition against CPAs' performing any of eight nonaudit services for the public companies they audit is the biggest challenge to accounting firms. Those services are * Bookkeeping or other services related to the accounting records or financial statements of the audit client. * Financial information systems design and implementation consulting. * Appraisal or valuation services, fairness opinions or contribution-in-kind reports. …