The Securities and Exchange Commission and the Public Company Accounting Oversight Board have set the stage for another donnybrook between corporate executives and their independent auditors on matters concerning internal controls over financial reporting. The agenda for the regulators’ May 10 roundtable on second-year compliance experiences with Section 404 of the Sarbanes-Oxley Act certainly contains some points of contention. But don’t expect any knockouts: the punches are likely to be little more than love taps.
Like the 2005 roundtable covering first-year experiences with 404, the May panels are replete with Big Four executives and representatives of corporate giants. Friction lingers between them, of course, especially regarding what clients see as the accountants’ standoffishness and their rigid attitude toward testing internal controls.
But a lot of steam has seeped out of the debate. Costs have gone down—not down as much as expected by some, but down. In a poll of 238 public companies with a public float of more than $75 million and average revenues of $6 billion, Financial Executives International found that their total average cost of adhering to the internal-controls section had dropped 16.3 percent, to $3.8 million, in 2005. The previous year, however, respondents forecast that the costs would descend by 39 percent.
Wishful as that prediction now sounds, other studies have found even steeper expense drops. In a survey of 58 audit clients with market caps of over $700 million, three of the Big Four audit firms found that the clients’ total 404 compensation costs—including internal costs and fees paid to auditors and other third-party providers—fell a whopping 43.9 percent last year.
What’s more, 66 smaller companies (ones with market caps between $75 million and $700 million) enjoyed a 30.7 percent decrease, according to the survey by CRA International commissioned by Deloitte & Touche, Ernst & Young, and PricewaterhouseCoopers. The firms attributed the lessening expense at companies both large and small to three factors: efficiencies spawned as their clients scampered up the learning curve; reduced documentation; and cheaper consulting outlays.
Expect the accounting firms’ upbeat numbers to be disputed at the roundtable by those companies and industries that haven’t fared as well. One of the likely critics will be Bill Brunner, CFO of First Indiana Corporation, chairman of the American Bankers Association’s accounting committee, and a member of the event’s panel on management’s assessment and evaluation of internal controls. (The other four panels will take a broad look at 404′s second year and discuss the auditor’s role, the provision’s effect on the market, and possible next steps concerning the rule.)
A comment letter sent by ABA to the PCAOB says, in fact, that the bankers were “astonished” by CRA’s findings regarding audit fees, including those shelled out for internal-controls compliance. The bankers’ group took a swipe at the auditors’ numbers, contending that “this estimate does not come from the issuers, but from the accounting firms. Without input from the issuers, these estimates may not reflect all of the costs.”
The accounting firms’ study found that audit fees paid by large clients plummeted last year by 22.3 percent and that those paid by smaller ones decreased by 20.6 percent. “This is the exact opposite feedback that we are receiving from the banking industry. In fact, the feedback that we are receiving is that, generally, the costs are either the same or higher, the ABA wrote. “According to our members, the auditing firms are claiming that last year’s fees were insufficient to cover their costs and this year’s fees remain high in order to better cover this year’s costs.”