VideoWhen it comes to auditors, many companies are apparently deciding that bigger is not necessarily better. Auditor-Trak, a database that follows corporate-auditor changes, reported that in 2003 each of the Big Four accounting firms lost more public-company audit clients than it gained.
PricewaterhouseCoopers took the biggest hit, with a net loss of 91 audit clients. Ernst & Young finished 2003 with 76 fewer audit clients, while Deloitte & Touche suffered a net loss of 65 and KPMG lost 51.
More than half of those clients migrated to smaller auditors. Second-tier firms like Grant Thornton and BDO Seidman nabbed more than 21 percent of the clients that left Big Four firms, according to Auditor-Trak. Another 34 percent went with regional or local firms, and the rest moved within the Big Four.
Edward Nusbaum, CEO of Grant Thornton, says the world's fifth-largest accounting firm has picked up more than 1,000 new clients in the past year, including many defectors from the Big Four. "CFOs want more-personalized attention from their audit partners," says Nusbaum. He argues that firms like his can give midsize companies more attention at a better price than the Big Four, which, he claims, specialize in service to large caps.
Ace Comm Corp., an $18 million telecom-equipment provider based in Gaithersburg, Md., recently left Ernst & Young for Grant Thornton. CFO Steven Delmar says that price was the main consideration. "Grant Thornton's fees are lowered to meet customer demands," he says. "Big Four firms aren't going to reduce their fees below a certain level."
Apart from price, another impetus to move to a second-tier firm is that the Sarbanes-Oxley Act of 2002 prohibits companies from using the same firm for auditing and consulting services. Auditor-Trak publisher Richard Ossoff adds that the intense regulatory environment is causing many companies to reevaluate their relationship with their auditors. "Some audit committees will feel compelled to change auditors," he says, "even in the absence of any concerns about existing audit relationships." That could yield a bounty for smaller accounting firms.
Still, most large companies with global operations require the services of a Big Four auditor to handle their complex financial statements. Royal Bank of Canada recently named Deloitte & Touche as its sole auditor. "D&T has in-depth knowledge of securities and industry regulators in many international jurisdictions," says the bank's CFO, Peter Currie. He says that only Big Four firms were invited to submit proposals. —Lisa Yoon
Thanks, SEC
It's rare that companies welcome a ruling from the Securities and Exchange Commission. But recent news that the SEC was extending the deadline for companies to complete audited assessments of their internal financial controls nearly had CFOs dancing in the street.
Most companies now have until their first fiscal year ending on or after November 15, 2004, to comply with Section 404 of the Sarbanes-Oxley Act. The original deadline was June 15. Companies with a market cap under $75 million have until at least July 15, 2005.
"You could have heard us cheering for miles," says Scott Youngstrom, CFO of Compex Technologies Inc., a New Brighton, Minn.-based maker of medical devices. He says the deadline for his company now moves back a year, to June 2005. "This gives us the flexibility to use more of our own resources instead of relying on consultants to rush through it," he says.
Not everyone is cheering. The new deadlines don't affect microchip-design software firm Magma Design Automation Inc., for instance, which has its year-end on March 31. "We were kind of hoping to see it in action before we had to comply with it," says CFO Gregory Walker. —Joseph McCafferty
Down to a Trickle
Four years after the new economy ran out of gas, are companies finally ready to abandon fixed-price stock options? The impact of expensing, underwater options, and shareholder attempts to block companies from issuing new shares appear to be driving many to do so.
A new survey conducted by Deloitte & Touche found that three-quarters of the 165 S&P 500 companies surveyed plan to shift away from stock options, and 17 percent have already dropped them entirely. Companies that have announced such intentions include Dell; Microsoft, which now emphasizes restricted stock; and IBM, which will give its top executives options that vest only if the company's shares rise by 10 percent or more. In place of these options, companies are considering alternatives such as cash, restricted stock, and phantom stock (bonuses tied to an increase in stock price).
"As the economy began to slow, stock options became less of a motivation for employees, so we have had to look at other ways to incentivize," says Mike Maher, a spokesman for Dell, which has cut the number of options it grants by about half for two years in a row.
Many companies are decreasing their reliance on options because they believe they will have to start expensing them in 2005. More immediate pressure is coming from shareholders. Last year the New York Stock Exchange and Nasdaq altered their listing requirements to require companies to seek shareholder approval for changes to equity compensation plans, including the issuing of new shares to cover upcoming grants. (Formerly, such plans required only board approval.) The D&T study shows that two-thirds of companies will run out of shares within 24 months.
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