Sarbanes-Oxley and your CPA

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At every trucking industry conference I attended last year, I encountered snickers when I mentioned that I was a CPA. I have Enron and Arthur Andersen, among others, to thank for that. After sheepishly accepting the ribbing a few times, I devised a great retort: “If you don’t tell anyone I’m a CPA, I won’t tell anyone you’re still a trucking company owner!” After all, both are groups that haven’t had a good couple of years.

Not surprisingly, scandals like Enron, WorldCom and Adelphia led to several corrective actions by Congress and the Bush administration. And now that the gleeful teasing of accountants has grown a little tired, business executives should be wondering how accounting industry reform will affect them and their own CPAs.

One response to the role that accountants played – or were perceived to have played – in these fiascos was the Sarbanes-Oxley Act, which was passed by Congress last July and signed by the President. This law has been billed as the most important business reform law in over 70 years.

Sarbanes-Oxley places new and more stringent regulations on the very largest of accounting firms – those that do the audits for companies traded on stock exchanges.

In addition, company officers face greater accountability for the accuracy of their company’s financial records. No longer can they plead ignorance and declare, “I didn’t know – it’s the accountants’ fault!”

On the surface, it wouldn’t seem that the owners of privately held trucking companies would be affected by an act that’s directed only at accounting firms that audit the big public trucking companies. But it’s quite likely that the so-called reform movement will have a ripple effect on the relationship everyone has with CPAs. How? Here’s a summary of the likely effects on trucking companies and their CPAs:

Increased state regulation of CPAs. Sarbanes-Oxley is just the opening shot in the new regulatory war on business. States are looking at their own versions of the concept to regulate CPAs, and, perhaps, business executives who must report financials to regulatory agencies. Most industry insiders feel that some of the harsh restrictions placed on public company auditors will filter down to regional and local CPA firms. Basically, there will be a state-by-state battle for increased regulations of CPAs.

Restrictions on tax or other advisory services. The new federal law limits or bans auditors from doing certain consulting work if they already do the audit work. CPAs that help smaller companies almost always assist in other areas, such as tax planning, and management or financial consulting.It is conceivable that one day you might have to hire multiple CPA firms because your CPA could be forced to choose which type of work he wants to do.

Increase in audit or accounting fees. Some observers predict that audit and other accounting fees will rise 20 percent or more. CPAs must comply with more regulations, spend more time on each assignment and train more people on complying with new laws and procedures. Plus, conducting audits is becoming more risky for CPA firms. Some firms may withdraw from auditing altogether unless they can obtain a higher return on that risk.

Big firm spillover of work. Because big firms can no longer do all the work for big public companies, medium and smaller accounting firms will get more work. This increased demand could make CPAs at smaller firms busier, creating time pressures and contributing to the upward fee pressures for businesses.

But it’s not all bad news. Small and medium-sized accounting firms are beginning to consolidate, and conflict-of-interest laws will force them to develop their strengths rather than be all things to their clients. So one windfall of Sarbanes-Oxley and its state-level clones should be improved service.


Resources
“Analysis of New Corporate Responsibility Law,” an online summary by CCH Business Owners’ Toolkit, at this site.

“How the Sarbanes-Oxley Act of 2002 Impacts the Accounting Profession,” published by the American Institute of CPAs, at this site.