VideoDuring the past three decades or so, Patrick Scannell has had countless conversations with accountants. It's hardly surprising. Scannell, 28 years in corporate finance, has served as CFO at five separate companies, overseen three initial public offerings, and orchestrated one private-market sale. Through it all, Scannell has, to some extent or another, relied on the advice, expertise, and plain good sense of his external auditors.
But Scannell, now at data-warehousing specialist Netezza Corp., in Framingham, Massachusetts, says the environment has become a lot more formal of late. "The consultative advice that auditors had been able to provide in the past has now changed to 'You tell me what you think the answer is, and I'll get back to you on that.' "
The change in tone speaks volumes about the suddenly fractured relationship between line partners and finance executives. Many finance managers complain that their engagement partners are not nearly as engaged as they used to be. This newfound formality (or as one executive calls it, "distancing") can be traced to the 2002 demise of Arthur Andersen, an implosion that shook the accounting world. More recently, a spate of damaging lawsuits against marquee firms — and a welter of new accounting regulations and independence requirements — have clearly pushed accountants onto the back foot. "We're a lot more cautious than we used to be," concedes Russell Wieman of Chicago-based Grant Thornton LLP. "In the past, you may have given [a client] the benefit of the doubt. We won't necessarily do that now."
In fact, some CFOs say dealings with external auditors have become a lot like encounters with the Internal Revenue Service: shrill, chilly, and frustrating as hell. Notes James Wall, CFO at San Francisco–based Core-Mark International Inc.: "Effectively, the audit firms are now working for the government — except for the fee." Another finance chief, upset over falling service and rising fees, says he's contemplating bringing in an additional firm to help sort out accounting issues. "Fifteen years ago, we had a partner [in our auditor]," says the executive. "Now, we have an overseer."
Shakedown Cruise
That, of course, may be exactly what legislators intended when they passed the Sarbanes-Oxley Act in 2002. Among other things, the act gave rise to the Public Company Accounting Oversight Board (PCAOB), a private agency empowered to police the accounting industry. Privately, auditors say they are still not entirely sure how rigidly the board will carry out its mandate.
The uncertainty has been amplified by the regulatory shakedown cruise known in finance circles as "Year One." Finance executives say the initial year of compliance with Section 404 of Sarbox has done more to sabotage auditor/client goodwill than any other piece of legislation in recent memory. "There was no clarity from the PCAOB or auditors," says Phil Livingston, a vice chairman at Approva Corp. and an audit-committee member at both Cott Corp. and MSC Software. "The process has audit committee members upset with the entire accounting profession."
Critics say the PCAOB provided auditors with too little 404 guidance — and too much. Until a May 16 statement from the board, accountants had been left to guess how much advice they could offer clients when assessing internal controls. At the same time, auditors had been bombarded with statements from regulators about what they were not allowed to do. "We kind of felt sorry for them," says Richard Wehrle, vice president and controller at Alamo Group Inc., a Seguin, Texas, maker of grounds-maintenance machinery. "New bulletins were coming out weekly. Each time we had a meeting, they'd say, 'Here's a new guideline.' "
Partners at accounting firms are taking no chances. "Auditors have reacted with a little bit of fear and a lot of uncertainty," grants William D. Travis, managing partner of Minneapolis-based accounting firm McGladrey & Pullen LLP. "[They're wondering,] 'What stance will the PCAOB take? Will they use a hammer to keep people in line?' "
Some finance executives say auditor concern about regulatory sanctions has translated into unnecessary 404 precautions. "There was a lot of duplication of work," claims Dennis Stevens, director of internal audit at Alamo Group. "They were making us do things that were really about protecting them."
Silent Treatment
Recent Website postings and comment letters echo that sentiment, with CFOs complaining about the documentation required by auditors. It hasn't helped that outside accountants have apparently gone quiet on clients. Dialogue, once considered the cornerstone of a good auditor/client relationship, has simply ceased.
The lack of input often has CFOs flying blind — leaving them little choice but to interpret complex accounting standards on their own. The silent treatment can be infuriating. "We recently went to our auditor [with a question]," says Leon Level, CFO of Computer Sciences Corp., "and it was like Fear Factor 101. They said, 'Where's your white paper?' " Eventually, Level went to three of the Big Four firms in search of written advice. He never got any. "I'm the CFO of a major public company," he bristles, "and I couldn't get an answer."
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