The Sarbanes-Oxley Act of 2002 mandated significant changes in the relationship between CPA firms and their publicly held clients.
Specifically, Section 301 of the law established that "the audit committee ... be directly responsible for the appointment ... [of the] public accounting firm." The section further states that "the public accounting firm shall report directly to the audit committee."
The intent of the law was to forge a strategic relationship between CPAs and audit committees. Any operational inconsistencies or problems would become visible at the audit committee level, leading to greater fiduciary oversight at the company's operational level.
However, I continue to observe public companies making decisions on multi-million dollar audits, with the audit committee approving management's choice - usually following a mere hour-long "show and tell" session with each "finalist" provider. These oral reviews by the audit committee provide minimal substantive input or exchange.
Where are the due diligence interviews with audit committee members to assess a company's needs? Or observations on areas of audit committee concern? Audit committee members may perceive organizational needs in a different way from operational management, due to their different roles and responsibilities within the organization.
A CPA firm that I work with offers a case in point. This firm was being considered for a major corporate audit assignment. The efforts of its audit team leaders to communicate with the audit committee members as part of their due diligence interviews were rebuffed; the chief financial officer explained that the CPA firm would only get one hour in front of the audit committee if the firm became a finalist.
After reviewing endless documents and communicating with top management, the firm acquiesced, believing that it had a complete understanding of the company's needs and would be awarded the audit. The firm made it to the finals. However, during their painful oral hour before the audit committee, it became clear that the audit team did not fully understand the issues as perceived by the audit committee.
As a result, the firm's strategy and focus were off course. Committee members asked key questions that didn't surface during interviews with management. The firm could not adequately answer the audit committee's questions and, ultimately, the opportunity was lost.
There is no question that if the firm had been able to complete their due diligence in preparation for the final proposed solution, they would have been selected to perform the work.
This is not an isolated case, as I am observing this scenario across the country and among many firms. Also, this situation is not just limited to audits. As audit committees are determining which non-audit services qualify as being "conflicted out," they are also in a position to influence the selection of providers for other services. And they have a valuable perspective to provide regarding the company's needs for non-audit services.
Don't get me wrong. During the due diligence phase, a majority of the time should and will be spent with management in order to get an understanding of the issues, records and details. And because the audit engagement requires a relationship between the auditor and company management, it is important that management assess the ability to work with the audit firm.
However, gathering strategic-level input from the prospect's audit committee is just as important to properly scope the project during the due diligence phase. This step ensures that the audit firm is on course with their proposed approach.
At one level, we as a profession are at fault for not insisting on performing our fiduciary due diligence by interviewing audit committee members early in the opportunity cycle. Equally complicit are corporate leaders who block the important interview process, and audit committee members who are inaccessible.
Operational executives prefer to screen competing firms, rather than providing the firms with valuable face time with members of the audit committee. Does a CFO who claims to be speaking for the company's audit committee (until the final presentation) inhibit the audit committee from playing the outside oversight role that the ruling intended?
I suggest that being closed out from interviews with committee members early in the process makes it nearly impossible for a CPA firm to comprehensively assess a company's critical issues, values and concerns. Deprived of essential contact with key constituents and information sources, it is difficult to thoughtfully assess needs and develop optimal tailored solutions.
Opportunity development is properly executed when audit committee due diligence is performed early on, and not when a firm is making a final presentation to a prospective client!
Change what we can
Implementing certain best practices can bring us closer to the spirit of the law, and improve a firm's proposed solution in the process. I believe that the intent should be to move away from a model in which operational management "gatekeepers" tell us whom we can and cannot see, toward a more proactive, and ultimately higher-quality, approach.
I recommend that your accounting firm formalize due diligence to include a review of financial statements, tax returns and other documents, as well as formal interviews with both operational management and at least one audit committee member. Rather than hope that a company's financial executive will give us the green light, I suggest that you stand tall and say, "This is how our firm professionally approaches due diligence."
I know some of you are thinking to yourselves, "But if we play hardball with operational management, we won't have a chance of being selected as the auditor." However, messages can be delivered diplomatically and convincingly - especially when they are coupled with a reminder that we are living in a highly visible risk-laden environment.
Will your appeal prevail? Not always, but perhaps often enough. Especially if you can persuasively communicate that it's a prudent approach for audit committee members to invest a few hours with firm leaders before spending millions. If we are disallowed from interviewing an audit committee member, we then decide our next step. Letting the prospect know - again diplomatically - that this will be an exception from our standard procedure might be enough for the gatekeeper to think twice about continuing to block access.
Large-scale change starts with strong-minded firms and strong-minded individuals willing to alter their policies and implement them with conviction. Are you willing to lead the charge?
Gale Crosley, CPA, is founder and principal of Crosley + Co. (www.crosleycompany.com), and consults with CPA firms on practice growth issues and opportunities. Her background includes experience with two national CPA firms, and nearly 30 years in business development and senior management. Reach her at gcrosley@crosleycompany.com.
