VideoSome companies are feeling like they've just been through a difficult divorce. That's because Big Four auditors have dropped them — in some cases after years of service.
In the first nine months of 2004, Big Four accounting firms resigned from 157 accounts. While some of those resignations followed unclean opinions, others reflect a move away from smaller clients that are perceived as riskier bets in today's regulatory climate. Not only are some small-caps struggling to implement appropriate internal controls, but they also generate less fee revenue. And with the Big Four stretched thin thanks to Sarbanes-Oxley internal-controls work, they appear to have decided it's better to trim their client lists.
Last July, Ernst & Young LLP ended its relationship with Redhook Ale Brewery, a $39 million Seattle-based company, after auditing the books for its 23-year history. Redhook CFO David Mickelson says the audit committee was anticipating a fee hike and had considered a change anyway. "It was kind of like when you're thinking about breaking up with your girlfriend and she does it first," he says. The timing could not have been worse, however. The company, in the final months of a distribution contract with Anheuser-Busch, had just received a going-concern opinion. Mickelson feared the resignation would make the situation look even worse. (The contract was subsequently renewed.) Together with the audit committee, he pushed to have Seattle-based Moss Adams LLP in place to handle the third-quarter filings.
Michael Perry, finance chief at Vitria, a $66 million software and services business, was less prepared when Ernst & Young resigned from its account in August. "I was stunned," says the CFO. "I thought I had an excellent relationship with the firm." Vitria quickly launched a search for a new auditor and signed with BDO Seidman LLP.
"It's very clear that there's a trend toward bigger firms resigning from small accounts," says Mark Cheffers, CEO of AuditAnalytics.com, which tracks auditor changes. Ernst & Young, however, denies that it is targeting small companies. "Along with other members of the accounting profession, we constantly reexamine our client relationships...we have resigned from a range of clients, both big and small," said the company in a statement.
Mickelson, for one, is happy with the attention of his new auditors: "Having firms competing for our business really made us feel better." —Kate O'Sullivan
Unsettling
In the past few years, the Securities and Exchange Commission has launched hundreds of cases against executives in the financial-services industry, but few of them have resulted in courtroom battles. Instead, the accused usually agrees to pay a hefty fine and is barred from the industry for a certain period, without admitting or denying guilt.
Two former executives of the PIMCO mutual-fund group, however, intend to test the merits of a quick settlement. Stephen Treadway and Kenneth Corba are asking the SEC to prove its charges in federal court. The two are accused of allowing a client to use PIMCO funds to engage in market timing. "[Corba] is confident he will prevail," says his attorney, Jim Rehnquist, a partner at Goodwin Procter LLP in Boston.
The fact that they are proceeding means they must feel they have a good shot at winning, says Thomas Frongillo, an attorney at Mintz Levin. But the move is risky. If they are found liable, Treadway and Corba will likely face stiffer penalties than if they settled. The SEC may have even more to lose in the case. "The SEC has been very successful at resolving cases short of litigating," says Frongillo. If the defendants win, he says, the SEC will have a much harder time pursuing similar cases. —Joseph McCafferty
Who's Got It Made?
The congressional authors of the American Job Creation Act of 2004 wanted to give a tax break to the struggling manufacturing sector in the United States. But by the time the bill was signed by the President on October 22, the definition of manufacturing had been expanded to include nearly everything.
The act eliminates the extraterritorial income (ETI) exclusion , a subsidy for U.S. exporters that has been called illegal by the World Trade Organization. It replaces the exclusion with a tax deduction on net income derived from the sale, exchange, rental, lease, or licensing of "qualifying production property." As long as the property was "manufactured, produced, grown, or extracted by the taxpayer in whole or significant part within the United States," a company can claim the tax break. The deductions are expected to yield $76.5 billion in tax savings over 10 years for qualifying companies, which include such "manufacturers" as coffee roasters, meat packers, and even publishers.
So what qualifies as qualified production property? What doesn't. Included in the roundup are makers of all "tangible personal property"; computer software; water, natural gas, or electricity; sound recordings, film, videotape, and live or taped television programming (except pornography); agricultural products; construction services; and architecture and engineering services performed for construction projects in the United States.
Reader Comments» Post a comment