VideoThe altered economics for public accounting firms is also likely to launch audit fees into low-earth orbit. Sarbox, after all, bars auditors from offering a slew of non-audit services, including bookkeeping, financial-information-systems design, and internal auditing. Because they can no longer rely on the fees for those services, accounting firms who offer them are likely to charge more for audits, says Eisner LLP's Rosen.
Under Sarbox, accountants can still do tax work for audit clients. Since the PCAOB can bar auditors from performing "any other service," however, the board could choose to curb tax services, thinks David Hardesty, a tax specialist with Wilson, Markle, Stuckey, Hardesty, and Bott.
Given the current taste for auditor independence, many company managers are likely to seek separate tax consulting and audit vendors — even if auditors aren't banned outright from tax consulting. "The loss of those tax services is going to kick up the price of the audit," predicts Hardesty.
Firms have long sold audit services at a discount or even at a loss because such business gave them an inside track in selling more lucrative tax services, he explains. Without that incentive, audit firms will have to make a profit off their audit services. Upshot? A big jump in audit fees.
4. Greater Skepticism
Expect the shift from self-rule to government inspection to inject friction into a clubby world. "When it was firm on firm, the premise was that [a review] was to be to everybody's benefit, not like an IRS-type audit, in which you're guilty until proven innocent," says Rosen. Now, however, "the pressure might be to find issues."
Still, auditors agree that the inspections should yield better audits. "If somebody knows his work will be subject to oversight, that makes them [audit] with a greater sense of skepticism and diligence, especially if it's a government body," says Wayne Kolins, national director of accounting and auditing at BDO Seidman. "But that's not to say there won't be frauds, because you can't legislate morality."
Still, given PCAOB's powers, regulators can do a lot. If an accounting scandal breaks, for instance, board inspectors can go on with their work even if lawsuits ensue, Carmichael notes, adding that peer reviews shut down if there's litigation. Also new: inspections will include a look at audit-partner pay incentives.
Firms can expect some confusion at first. After all, conducting a peer review of a Big Four firm is typically a "massive effort," taking as many as 10,000 hours to finish, says Kolins. And the inspections are expected to be much more rigorous.
Peer reviews aren't completely vanishing yet, however. They might continue to exist side-by-side with board inspections, since 39 states currently require audit firms to undergo peer review every three years. "Unless all 39 of those states decide to go with a PCAOB review, we may be subject to our tri-annual peer-to-peer review, plus the PCAOB," says PwC's Masterson. The firm's tactic: Continue with peer reviews until further notice.
5. Adversarial Relations
The new rules of audit engagement have already started to drive wedges between auditors and clients. While relations aren't quite hostile yet, corporate executives and CPAs are "getting less chummy," says Stephen Giusto, CFO of Resources Connection, a professional services firm. One shining example: "It's hard for a partner in a public accounting firm to refer to their client as a 'partner' " any more, Giusto says.
That small change indicates a drastic shift in how auditors view clients. Clients may also have a different view of auditors after enduring incessant requests from them. Guided by SAS 99, for example, auditors might ask for numbers for each subsidiary — rather than for an aggregate figure — says Rosen. "The audit is an imposition on most companies," he adds. "The more you're there and bothering them, the more problems for the company."
One way senior mangers can relieve some of the pressure is to share lots of information with auditors and share it early. For example, Eli Lilly executives let Ernst & Young accountants know as soon as the company embarks on a significant business development, like licensing or selling a compound, says Hanish.
The intent is to avoid putting auditors in a bind. If they learn about questionable transactions too late, they could feel compelled to compromise their principles and let smaller miscues go because they don't seem material, Hanish claims.
If auditors are brought in early, however, "they don't have to opine based on materiality. They opine based on the facts and circumstance of a situation," Hanish asserts.
Even with such precautions, tempers are sure to fray. "Trying to help companies understand the meaning of unproven mandates is frustrating," says Jim Powers, a partner at Crowe, Chizek and Company. "We certainly have had spirited discussions with our clients on some of these subjects."
Expect more of the same.
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