by Roger Russell
In a potential windfall to accountants eager to take on Section 404 work created by the Sarbanes-Oxley Act, Grant Thornton and BDO Seidman, two of the profession’s largest firms, have said that they will not pursue any 404 work for their public company audit clients, and will seek other firms to handle that work.
Sarbanes-Oxley’s Section 404 requires public companies to implement internal controls for their financial statement preparation systems, monitor the controls, and issue periodic reports on their effectiveness. While the companies’ auditors will audit the 404 reports, Sarbanes-Oxley severely restricts the non-audit services that they can provide their audit clients, thereby opening the door for third parties to provide some of the 404 preparation assistance.
While the Public Company Accounting Oversight Board has not issued its final rule on the implementation of 404, Grant Thornton issued a public statement to clarify its position. A BDO executive said that his company is following suit, when asked to respond to Grant’s statement.
In announcing his firm’s relinquishment of all 404 work, Grant Thornton chief executive Ed Nusbaum acknowledged that not all parts of this area are clear, but said that he wanted to take the high road: “The guide in gray areas should be the spirit of reform and protection of investors that the bill’s authors intended.”
More specifically, Grant said that it “will not accept engagements to document our public audit clients’ internal controls, including documenting existing controls, or perform evaluations of existing controls that management uses to support their conclusions regarding the effective design of those controls.”
The firm said it plans to inform its audit clients of “other options” for getting that work done. “We’ll refer to whatever firm makes sense in a particular market - all sizes of accounting and consulting, as well as boutique firms,” Nusbaum said.
Meanwhile, some CPA firms have been preparing for the past several months to take on 404-related engagements themselves, or to handle them in alliance with other firms. While 404 work may not become prevalent until after the PCAOB makes its final ruling, the Grant Thornton and BDO disclosures spell good news.
“This sounds like a great opportunity to us,” said Charles Jones, an Atlanta CPA who has organized an alliance of 10 other CPA firms and three tech consulting firms to pursue 404 work. “While the deadlines for 404 compliance are set,” he added, “they still have not issued the final rules, so we’re wondering whether we should just sit around and wait.”
Also encouraged by the news is Frazier & Deeter, another Atlanta CPA firm that has been positioning itself for 404 work by helping Georgia State University put on 404 training courses for the executives of Atlanta-area public companies.
“We are preparing ourselves to have the best practices available for public companies who need assistance in driving the 404 process,” said Erinn Keserica, director of marketing for the 13-partner firm. She further said that the Georgia State University training was designed to provide an “added value” to companies in the area and to position Frazier & Deeter as experts in 404 work.
Two other Atlanta firms, Bennett Thrasher and Windham Brannon, and a project management company, Callaway Partners, worked with Frazier & Deeter in organizing the training. Keserica said that her firm has not created any formal alliances, but it has an informal agreement with Callaway to work together on 404 assignments as they surface.
In addition to 404 work, Grant Thornton also announced plans to relinquish other audit client services, including:
● Designing controls;
● Designing or implementing processes, controls or information systems that impact the financial reporting process; and,
● Providing access to Grant Thornton’s software that is used by its auditors to document and evaluate controls over financial reporting.
However, the firm said that it will continue to provide a wide array of internal controls services for public companies that are not audit clients.
The Section 404 arena, like other Sarbanes-Oxley issues, is considered a “gray area,” according to attorney John T. Bostelman, a partner in Sullivan & Cromwell’s New York office, and the author of “The Sarbanes-Oxley Deskbook.”
“The question that’s more difficult that everyone is struggling with is assisting, in a permitted way, companies that are doing their own documentation but giving them some feedback,” he said. “ It seems clear that some of that is permitted, but the question is where to draw the line.”
The PCAOB “hasn’t gotten into the auditor independence question yet, so it hasn’t really taken a position,” said PCAOB spokeswoman Christi Harlan. “Auditor independence is going to be way down the road. It’s not something they’ve formed a consensus on.”
Nusbaum hopes that other firms will follow Grant Thornton’s lead. “The national offices of larger firms may follow us, or they may take the same position quietly and internally, but I suspect there are some firms that are taking the opposite position.”
“Other national firms are interpreting this differently,” confirmed Allan Koltin, a Chicago-based practice management consultant. “Grant Thornton is taking a leadership role in this area. They’re the first to say they see a possible conflict or a question of objectivity.”
“The Securities and Exchange Commission has been inconsistent in defining what you can and cannot do,” said Koltin. “Some have said they’re splitting hairs. You have to wonder if what has gone on is, from a PR standpoint, that Grant Thornton is distancing themselves from other national firms in being more ‘pure’ in interpreting a gray area.”
“Here we are in a profession where national firms are starving to regain credibility,” he continued, “so anything they can do to put themselves on the side of the investing public, the SEC and the PCAOB can only score points.”
But Nusbaum said that the firm announced the decision “because it was the right thing to do. The profession has to step up and take a leadership position, not walk away with its tail between its legs.”
BDO Seidman national director of assurance Wayne Kolins agreed. “Our position is very similar to theirs,” he said. “It’s very unclear where to draw the line, so we are not doing what Grant Thornton is not doing.”
“We’re not designing controls or implementing control systems or providing any kind of packages or testing controls for them,” Kolins said. “It’s very much in the public interest to divorce ourselves from any aspect of auditing our own work. Smaller clients do need assistance, but given the statements of the SEC of late, until things settle down, it’s better to err on the side of conservatism.”
Both Nusbaum and Kolins declined to put a dollar value on the amount of business lost as a result of their firms’ positions. “It’s business that wasn’t here before,” noted Kolins.
“What should happen is that if every accounting firm adopts the same position, it will be a giant wash as we pick up each other’s business,” said Nusbaum.
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