VideoThe healing has begun. It's been six years since the passage of the Sarbanes-Oxley Act, and four years since companies faced their first Sarbox audits. After a painful start, compliance with the act has become more or less routine for many businesses and their external auditors.
But what about the CFO-auditor relationship? Once close and collegial, it turned acrimonious at the start of the post-Sarbox era, when auditors drew back from their clients in the name of objectivity. Has the passage of time produced a détente, or are relations between the two parties still tense? What effect have regulations passed in the wake of Sarbox had on the relationship — and, for that matter, on audits? We decided to find out, through interviews with and surveys of finance chiefs and auditors. (The CFO's perspective is presented here; for the auditors' side of the relationship, see the companion story, "Auditor Angst.")
Let's start with some reasonably good news. In March, CFO magazine conducted a survey of 205 senior financial executives on the state of external audits (see the link to "What CFOs Have to Say about Auditors" at the end of this article). Forty-two percent of those executives said they were very satisfied with their audit firms, while 44 percent said they were somewhat satisfied. Anecdotally, CFOs who have seen both audits and auditor relationships improve in recent years attribute much of the change to greater familiarity with Sarbox.
"People have had a chance to digest Sarbanes-Oxley — to get used to it and work with it for a while," says Barbara Klein, CFO at CDW, a provider of technology products and devices that was recently acquired by a private-equity firm. Finance chiefs say their departments are documenting controls and accounting decisions more carefully and preparing more thoroughly for their audits; 27 percent have added internal-audit employees in the past two years, according to CFO's survey.
Auditors have come up to speed, too, say finance chiefs. "I wouldn't go so far as to say that auditors have loosened up, but they've developed a more standardized approach to working with [Sarbox]," says Chris Johns, CFO of PG&E Corp., the holding company of the California utility giant. "They've become more efficient."
At Johnson Controls, for example, auditors have developed a method for deciding when to refer issues to the national office. "There's more of a system now," says Bruce McDonald, CFO of the $34 billion diversified industrial company. "They set some parameters for people to exercise their local judgment." By contrast, in the early years of Sarbox, it was "frustrating" when auditors started passing questions on to the national office, says McDonald. "It extended the time frame on a lot of decisions."
Stingy with Advice
Still, many auditors continue to be reluctant to provide advice — and many CFOs continue to chafe at that reluctance. Forty-two percent of survey respondents who were dissatisfied with their auditors say they don't provide enough guidance on accounting issues.
At a recent gathering of finance executives from around the country, grumbling about reticent auditors was universal. One CFO complained that she was paying more for her audit but getting much less for her money, because her auditors no longer provided accounting advice, which she considered the most valuable component of audits past.
"They'll give you information, but they won't give you a recommendation," sums up Peter Kruse, CFO of Nissan Forklift. (Ironically, information delivery is among the key complaints that auditors levy against clients; see "Auditor Angst.")
PG&E is one of many companies that have engaged a third-party consulting firm to help address complicated accounting questions. "By the time we go to our auditors with an accounting issue, we've pretty much got it wrapped up," says Johns. "In the past there was a lot more willingness on the part of our auditors to engage and talk about the accounting. Now they'll listen, but it's by no means similar to the conversations we had before [Sarbox]."
Seventy percent of CFOs say they meet with their auditors ahead of time to determine the areas up for review, a critical exercise in which CFOs point out the greatest risks and share the work internal audit has already done. But these conversations are more guarded than they once were.
"The auditors leave a little bit in their back pocket," says Tom Ackerman, CFO at Charles River Laboratories, a provider of research models and laboratory services to biotech and pharmaceutical firms. "In earlier days they would lay out everything they were going to look at, but these days they don't share their entire audit program with you. There's a little bit left unsaid."
Too Expensive
Although practically everyone complains about the dearth of auditor advice, that ranks as the number-three gripe of finance chiefs. What's number one? Fees.
Audits in the post-Sarbox era are too expensive, according to nearly half of those who say they are dissatisfied. Fees were widely expected to fall after the first year of Sarbox implementation, but in fact they have continued to climb at most companies. Eighty-two percent of finance executives surveyed reported an increase in fees from 2007 to 2008, although the majority of those say the increase was slight — from 1 to 10 percent. Only 6 percent of companies saw fees fall. Seventy-three percent expect fees to rise again next year.
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