During the past three decades or so, Patrick Scannell has had countless conversations with accountants. It’s hardly surprising. Scannell, 28 years in corporate finance, has served as CFO at five separate companies, overseen three initial public offerings, and orchestrated one private-market sale. Through it all, Scannell has, to some extent or another, relied on the advice, expertise, and plain good sense of his external auditors.
But Scannell, now at data-warehousing specialist Netezza Corp., in Framingham, Massachusetts, says the environment has become a lot more formal of late. “The consultative advice that auditors had been able to provide in the past has now changed to ‘You tell me what you think the answer is, and I’ll get back to you on that.’ ”
The change in tone speaks volumes about the suddenly fractured relationship between line partners and finance executives. Many finance managers complain that their engagement partners are not nearly as engaged as they used to be. This newfound formality (or as one executive calls it, “distancing”) can be traced to the 2002 demise of Arthur Andersen, an implosion that shook the accounting world. More recently, a spate of damaging lawsuits against marquee firms — and a welter of new accounting regulations and independence requirements — have clearly pushed accountants onto the back foot. “We’re a lot more cautious than we used to be,” concedes Russell Wieman of Chicago-based Grant Thornton LLP. “In the past, you may have given [a client] the benefit of the doubt. We won’t necessarily do that now.”
In fact, some CFOs say dealings with external auditors have become a lot like encounters with the Internal Revenue Service: shrill, chilly, and frustrating as hell. Notes James Wall, CFO at San Francisco–based Core-Mark International Inc.: “Effectively, the audit firms are now working for the government — except for the fee.” Another finance chief, upset over falling service and rising fees, says he’s contemplating bringing in an additional firm to help sort out accounting issues. “Fifteen years ago, we had a partner [in our auditor],” says the executive. “Now, we have an overseer.”
That, of course, may be exactly what legislators intended when they passed the Sarbanes-Oxley Act in 2002. Among other things, the act gave rise to the Public Company Accounting Oversight Board (PCAOB), a private agency empowered to police the accounting industry. Privately, auditors say they are still not entirely sure how rigidly the board will carry out its mandate.
The uncertainty has been amplified by the regulatory shakedown cruise known in finance circles as “Year One.” Finance executives say the initial year of compliance with Section 404 of Sarbox has done more to sabotage auditor/client goodwill than any other piece of legislation in recent memory. “There was no clarity from the PCAOB or auditors,” says Phil Livingston, a vice chairman at Approva Corp. and an audit-committee member at both Cott Corp. and MSC Software. “The process has audit committee members upset with the entire accounting profession.”