VideoThe give-and-take between public companies and their auditors in the reporting of financial results won't disappear with the passage of a reform package. Accounting involves interpretation, and judgment will continue to play a part in how financial results are presented. "We want to be as transparent as possible, but we also want to help investors see our performance," says Banks of First Data. The two objectives will always create points of contention with auditors. "We have arguments about a lot of things. Some we win, some we lose," he says.
More than likely, the arguments will be a lot more vigorous going forward.
Andrew Osterland is a senior editor at CFO.
A Beautiful Friendship
The CFO Survey of Auditor-Client Relationships
For the second in a series of four surveys on corporate finance practices, CFO E-mailed questionnaires to 2,750 senior finance executives about their relations with their external auditors. Fifty-two percent of the 170 respondents carried the title of CFO or finance director, and 51 percent worked for public companies. All but two of the companies had their financial statements audited by certified public accountants.
The survey respondents represent a broad cross-section of industries and company sizes. The most-represented industries were financial services (11 percent) and health care (10 percent). Two-thirds of respondents worked at companies with less than $1 billion in revenue, 15 percent at companies with revenue of $1 billion to $3 billion, and 18 percent at companies with revenue of more than $3 billion.
The next two surveys will focus on investment-banking relationships and corporate-governance issues.
1. Has your auditor challenged any of your accounting practices during the past 12 months?
- Yes 38%
- No 62%
2. What part of your financial statements did this involve? (Based on 62 respondents who have been challenged. Total exceeds 100% due to multiple responses.)
- Reserves 69%
- Revenue recognition 36%
- Business combinations 12%
- Fixed assets 15%
- Investments 12%
- Leases 8%
- Other 8%
3. What was the result? (Based on 62 respondents who have been challenged.)
- Convinced auditor to go along with practice 25%
- Convinced auditor results in question were immaterial 32%
- Changed practice to secure auditor's approval 43%
4. Have you switched audit firms for any reason in the past three years?
- Yes 24%
- No 76%
What was the reason?
A majority of those that switched were former clients of Arthur Andersen LLP. Other common reasons for switching included mergers, price concerns, and mistakes by the former auditor. A few respondents cited the practice of regularly rotating auditors.
5. Have you hired your external auditor to perform internal audit as well?
- Yes 14%
- No 86%
6. Have you bought consulting services during the past three years?
- Yes 92%
- No 8%
7. In what area? Please check all that apply. (Based on 154 respondents who bought consulting. Total exceeds 100% due to multiple responses.)
- Tax 67%
- Information technology 52%
- Business combinations 36%
- Other 21%
8. Have you bought these services from the same firm that performs your external audit?
- Yes 54%
- No 46%
9. Did you work for your current external audit firm prior to joining your company?
- Yes 13%
- No 87%
10. Have you hired staff from your current external audit firm during the past three years?
- Yes 19%
- No 81%
11. Have you ceased any of the following practices during the past six months: (a) hiring enternal auditor to perform internal audit? (b) purchasing consulting services from external auditor? (c) hiring staff from external auditor?
- Yes 12%
- No 88%
Which one(s)? (Total exceeds 100% due to multiple responses.)
- (a) 30%
- (b) 70%
- (c) 35%
12. Do you plan to cease any of the practices referred to above during the next 12 months?
- Yes 9%
- No 91%
13. Do you think audit firms should be banned from providing consulting services to clients?
- Yes 48%
- No 52%
14. Do you think auditors should be barred from going to work for clients for a specified period?
- Yes 35%
- No 65%
15. Do you think companies should rotate audit firms on a regular basis?
- Yes 48%
- No 52%
International Turf Wars
The new corporate governance rules and auditor oversight prescriptions in the Sarbanes-Oxley Act will apply to all companies that file financial statements with the Securities and Exchange Commission as well as all firms that audit those statements. Not surprisingly, the rest of the world — with Europe leading the way — is not pleased with the extension of U.S. regulatory reach to any company that has shares listed on a U.S. exchange. "Forcing the U.S. solution on the rest of the world is not acceptable," Mike Rake, the international chairman of KPMG, told the Financial Times. Adds Samuel DiPiazza Jr., global CEO of PricewaterhouseCoopers: "It could start a regulatory war, and audit firms might withdraw from servicing U.S. companies abroad." Others have suggested that the regulatory reforms will make the U.S. markets a far less desirable place to raise capital.
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