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Ironically, as the amount of communication between auditors and top executives has increased, the content of these conversations has become much more restricted.
Kate O'Sullivan, CFO Magazine
October 1, 2004
In years past, when CFO Jeff Tomz would sit down at the end of an audit engagement with the partner in charge, the meeting was usually brief. "I would ask, 'Any issues?' He'd say, 'No issues,' and we'd be done," he recalls. But since the passage of the Sarbanes-Oxley Act in 2002, "I'm involved [with the audit] from the get-go," says the finance chief of Isolagen Inc., a biotechnology company based in Houston.
Although daily management of the audit process still generally falls to the corporate controller or the director of financial reporting, many CFOs agree that their own involvement has increased sharply. Raymond Silcock, CFO of Toronto-based soft-drink maker Cott Corp., says he has become much more involved in specific accounting questions in the past two years, although he notes that "difficult accounting issues were always escalated" to his level. At PSS World Medical, a $1.3 billion medical-supplies distributor in Jacksonville, Florida, finance chief David Bronson also finds his opinion is required more often. "A lot of times I end up being the tiebreaker between the auditor and the controller," he says, as issues that used to be resolved at a lower level now demand top-level attention. He adds that, these days, the audit partner has frequent conversations with members of the audit committee, as opposed to two or three scheduled meetings a year. Auditors have found they have the CEO's attention as well.
At the same time, CFOs' relationships with auditors have grown more distant. "I don't consider them my friends anymore," says Tomz, only half joking.
Ironically, as the amount of communication between auditors and top executives has increased, the content of these conversations has become much more restricted. "The whole relationship is more at arm's length," explains Bronson. He has found that his auditors hesitate to provide their interpretation of accounting issues or take a stand on new accounting pronouncements, a service they provided routinely in the past.
"Part of it is that they want to stay independent," he says, "but part of it is that everyone's a little bit gun-shy." Many CFOs report that their auditors frequently check back with the national office on issues that in easier times would have been settled in a conversation with the on-site partner. "They appear to be much more careful to arrive at a consensus opinion," says Silcock of his auditors at PricewaterhouseCoopers.
In addition, auditors are documenting each step of the audit process, from engagement letters to fee estimates to final opinions, much more thoroughly. Bronson says the length of the quarterly and annual representation letters from PSS's auditors has grown "exponentially," from about 2 pages to 12. "It seems as though we're representing every single line item in the financial statements," he says. "It's turned into something I almost want my lawyer to review before I sign it."
While frustration like Bronson's is shared by many CFOs who feel the new auditor relationship is less efficient, some maintain that little has truly changed. Don Barger, finance chief at the $6.7 billion transportation company Yellow Roadway, headquartered in Overland Park, Kansas, says that "even though it's not popular today," he still considers his auditors "business partners," and involves them in the company's day-to-day business. For example, he includes them in regular meetings with his finance staff. "I try to set the tone that communication with the auditors should be continuous," he says. "That has been my philosophy for 20 years."
But even Barger acknowledges "a mind-set shift" on the auditors' part, noting that they have become much more watchful of their independence. In the past, his finance staff might have asked the auditors how to handle certain accounting procedures, but "now the accounting decisions are ours," he says. He turns to his own staff to research appropriate accounting treatments, "so it's a little more difficult."
But John Morrow, vice president of new finance at the American Institute of Certified Public Accountants, says there is unquestionably more stress on CFO-auditor relationships now. "When someone's been your auditor for 10 or 15 years, and they used to come to you with issues and now they have to go to the audit committee, that's going to create some tension," he says.
To compensate for the curbs on counsel from auditors, companies are turning to other outside advisers. Cott's Silcock says his company often seeks outside legal counsel on complex issues. Isolagen's Tomz has hired a former Securities and Exchange Commission accountant as a consultant to review his financial statements before his auditors do. "In the past, auditors used to work with you through issues," he says. "But now it's right or wrong, and if it's wrong, it's a material weakness. You can't ask an auditor how a rule change affects the company." Tomz has also hired a separate accounting firm to help Isolagen test its internal controls before its auditors review the systems this month. CFOs are expecting to hire more technical staff in-house as well, especially accounting experts who can keep up with new rules and regulations and provide advice — the kind of advice companies used to get from their auditors.