AUDIT FIRMS OFFER ADVICE ON NEW CLIENTS

New York - Asking the right questions when considering accepting new audit clients, or continuing a relationship with an existing client, is the key to establishing a quality relationship, according to a new paper issued by a group of audit firm networks.

Client Acceptance and Continuance summarizes the current practices in several of the large networks of international accounting firms and examines how asking the right questions can help ensure that only those entities that meet the same standards of quality as the audit firm be accepted or continued.

The document was issued by the Transnational Auditors Committee, the executive committee of the Forum of Firms, an association of networks of international accounting firms that perform transnational audits. The committee is also part of the International Federation of Accountants.

"Any business wishing to establish quality relationships with quality clients needs robust processes in place," said Forum of Firms chair Robert Dohrer. "Understanding the best practices in this area will hopefully contribute to all accounting firms being able to strengthen their approach and create more mutually beneficial auditor-client relationships - which ultimately will contribute to improved public confidence in the industry."

The paper focuses on how the large networks of international accounting firms have implemented the requirements of International Standard on Quality Control 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, in their client acceptance and continuance policies and procedures. The paper also discusses related tools and devices that firms have employed to strengthen their client acceptance and continuance decision-making processes.

Client Acceptance and Continuance can be downloaded free of charge from the Forum of Firms section of the IFAC Publications & Resources site at http://web.ifac.org/publications.

 

SOX 404 REDUCES FINANCIAL MISSTATEMENTS

Washington, D.C. - A new academic study has found evidence that Sarbanes-Oxley 404 audits of companies' internal controls significantly reduce the likelihood of issuing materially misstated financial statements.

The report, by Albert L. Nagy, an accounting professor at John Carroll University in Cleveland, and published in the American Accounting Association's journal Accounting Horizons, provides evidence that SOX 404 is meeting its objective of improving the quality of financial reports.

Section 404 of the Sarbanes-Oxley Act requires firms and auditors to annually assess the systems of internal control that govern company operations and financial reports. Nagy's study found that 20 percent of the financial reports from non-complying companies had to be re-issued because of material misstatements, compared to only 14.5 percent of the reports from compliers. In other words, non-complying companies proved almost 40 percent more likely than compliers to restate.

Much of the difference is attributable to factors other than compliance, however. Particularly prone to misreporting were companies that achieved four successive quarters or more of earnings growth, as well as firms that had recently sustained losses and companies that acknowledged material weaknesses in their internal-control systems.

The Dodd-Frank Wall Street Reform and Consumer Protection Act that Congress passed earlier this year permanently exempts companies with less than $75 million in market capitalization from a key provision of 404 requiring an outside auditor to attest annually to firms' internal-control evaluations. The small-company exemption becomes law just as the new study suggests that SOX 404 substantially lowers the incidence of financial misstatements.

The study takes advantage of the fact that SOX 404 was phased in over time, with companies below $75 million in capitalization initially exempt from the rule even while subject to other provisions of SOX. This temporary exemption created a population of complying companies with capitalizations above the threshold, and a second population of non-complying companies with capitalizations below that line.

The study's sample included about 1,000 firms capitalized within $50 million of the threshold - one group capitalized at $25 million to $75 million, and the second at $75 million to $125 million. Firms were observed over the two-year period of 2005-2006, when they issued a total of 1,951 financial statements, of which 375 had to be restated.

 

COMPANIES TAKE WAIT-AND-SEE APPROACH TO IFRS

New York - Corporate executives are getting ready to move to International Financial Reporting Standards, but say they probably won't do it until the Securities and Exchange Commission mandates it, according to a new survey.

The survey, by KPMG and Financial Executives International, found that 75 percent of the over 900 accounting and financial reporting executives polled said that their organizations would wait until the SEC requires IFRS as the standard for filing financial reports before they move away from U.S. GAAP.

Nearly half the survey respondents anticipate an SEC decision on IFRS in 2011, with only 15 percent of the executives saying they do not expect a vote next year on whether to incorporate IFRS into the financial reporting system for U.S. issuers. In addition, 94 percent of the respondents said that their organizations could accomplish the adoption of IFRS by 2016 if a decision is made in 2011.

One third of the survey respondents said that they understand IFRS well, compared with just 20 percent of executives who responded to a similar survey a year ago. Yet, one third of the executives also said that the lack of knowledge elsewhere in their organization would be their biggest concern if they were required to adopt IFRS immediately.

"There's an enormous lack of real knowledge," said Tom Jones, director of Pace University's Center for the Study of International Accounting Standards, and a former vice chairman of the International Accounting Standards Board. "When people are worrying about the international standards or adoption, they really don't know in great depth what it is. Obviously you get plenty of firms on the East Coast. IBM knows plenty about it. They're ready to go. But particularly for the midsized kind of companies, as you get away from the East Coast, the knowledge is based on hearsay."

A 57 percent majority of the respondents said convergence of U.S. GAAP and IFRS is the best approach to IFRS adoption, and 30 percent said that they would like to see a "date certain" established for when the U.S. market would adopt IFRS.

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