No More Mr. Nice Guy

A CFO survey suggests that recently passed rules for auditors may be a wise idea.

An Auditor by Any Other Name

In the past two decades, the accounting firms have ventured far beyond their humble roots. While they have always provided some degree of nonaudit services to clients, the opportunities for new business have exploded in the past 20 years. With the spread of information technology, the biggest auditors became designers and implementers of IT systems. They expanded their tax, legal, and investment advisory services, and branched out into all manner of management consulting work. Since SEC auditor-independence rules enacted in November 2000 began requiring firms to disclose their sources of revenue, the magnitude of the industry’s transformation has become apparent. A survey conducted by the Investor Responsibility Research Center found that 72 percent of the $5.7 billion in fees paid by 1,200 public companies to their auditors in 2000 was for nonaudit services.

In his seven and a half years as SEC chairman, Levitt tirelessly pushed the issue of auditor independence, arguing that corporate audits were being compromised by the firms’ growing reliance on other sources of revenue. Indeed, in the broader offering of professional services by the audit firms, the actual audit has arguably become a loss leader to land more lucrative consulting contracts. “Some firms used to refer to audits as a commodity,” says Nussbaum. “No one believes that now.”

The American Institute of Certified Public Accountants (AICPA) has long argued that no evidence exists that the provision of consulting services has ever resulted in a tainted audit, but there is certainly an apparent conflict of interest. “Independence in appearance is as important as in fact,” says Charles Mulford, an accounting professor at the Georgia Institute of Technology. “Even if there’s a wall between the consultants who might design and implement a system and those who audit the statements, appearances matter.”

The Sarbanes Act lists eight distinct services that firms will no longer be allowed to provide to their audit clients, and it gives the new oversight panel the authority to prohibit other services as it sees fit. It also requires that corporate audit committees preapprove all services provided by auditors to the company.

Investors have already been attempting to reduce the ties between public companies and their auditors this proxy season, says Ann Yerger, a director of research at the Council of Institutional Investors. A handful of shareholder proposals to eliminate all nonaudit service contracts with auditors made it onto corporate proxies this spring. Several were withdrawn after discussions with management yielded a compromise, but a few, including proposals at Walt Disney and Motorola, drew shareholder support in the range of 40 percent.

At Motorola, the Sheet Metal Workers National Pension Fund proposed that the company sever all nonaudit service contracts with its auditor, KPMG. Last year, Motorola paid the firm $19 million — only $4.1 million of which was for audit work. Thanks to a large IT implementation, the audit fees paid to KPMG in 2000 were only $3.9 million of a total bill of $62.3 million. Motorola spokesman Scott Wyman says the company had already committed to discontinuing IT consulting, internal audit, and financial transaction-structuring contracts with its auditor prior to the March 29 shareholder vote. It may have to further curtail its business with KPMG in the coming year.


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