Trying to Shut Off the Faucet

Following enactment of the Sarbanes-Oxley legislation, there was concern expressed by many local practitioners that similar requirements to those imposed on auditors of public companies by the federal legislation would work their way down to accountants who perform comprehensive services for closely held businesses.

This so-called "trickle-down" effect could take many forms including state legislation, regulatory action by state accounting boards, and newly imposed requirements by third parties that rely on financial statements prepared or reviewed by accountants.

Despite these initial fears, the trickling down hasn't really occurred as of yet. Although California legislation was enacted, it wasn't as comprehensive or restrictive as originally proposed. And, just recently, bills have been either defeated or stalled in a number of state legislatures.

Why hasn't there been more trickling down? I think it can be attributed to a number of factors. One is the action by the various state society, the AICPA, and local practitioners, which are proving to be a successful grassroots lobbying campaign. The second is support from third-party users of financial statements of nonpublic companies, such as banks, that are very comfortable with the role accountants play in advising their clients.

There are two other major factors. First is the understanding by many that there is a distinct difference between auditors of public companies that are helping to protect the interests of outside investors versus accountants for privately owned businesses.

The second is the political atmosphere. State legislatures are very extremely busy dealing with budget woes and other matters. They are also aware of the fact that accounting irregularities at public companies is what is making the newspaper headlines. Quite, simply, they don't feel a political need to put their reform stamp on the governance and regulation of accountants who serve the millions of nonpublic companies.

These factors have all combined to keep the faucet closed. However, like any other hold, it can be tenuous.

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