by Martha Leonard on Monday, Sep. 2, 2002 12:00 am
On July 30, President Bush signed into law a corporate reform bill known as the Sarbanes-Oxley Act of 2002, aimed at restoring investor confidence in public companies.
The bill largely reflects legislation introduced by Sen. Paul Sarbanes, D-Md., and later amended by Rep. Michael Oxley, R-Ohio. It outlines tough reforms affecting the business practices of public companies, focusing on fraudulent and deceptive management practices. It also establishes criminal penalties for corporate officers who knowingly file false financial reports.
Congress and the U.S. Securities and Exchange Commission began working on the bill following the Enron Corp. scandal and widespread news of other accounting fraud on Wall Street, including WorldCom Corp.'s announcement
that it hid $3.8 million in expenses in 2001.
In April, Andersen — Enron Corp.'s auditor and a member of the "Big Five" national accounting firms — shook the industry when it was slapped with federal obstruction of justice charges for shredding pertinent documents relating to Enron. Clients began dropping Andersen, and many of its branch offices across the country closed.
Andersen, whose major Arkansas public clients included Alltel Corp. and Acxiom Corp., closed its Little Rock office this spring after both companies took their business elsewhere. Acxiom signed on with KPMG, and Alltel went to PricewaterhouseCoopers. Neither of those accounting firms has offices in the state.
The Securities and Exchange Commission, which has oversight over the stock of publicly traded companies, already had rules in effect governing the auditing of public companies. But the events concerning Enron, WorldCom and Andersen convinced Congress that the accounting industry needed greater controls.
The Sarbanes-Oxley Act, some of which applies immediately but most of which will apply as of April 2003, will affect only a handful of firms operating in Arkansas. (See list of Arkansas' public company auditors on this page). Three firms with offices in the state audit Arkansas public companies: BKD LLP, Ernst & Young and Deloitte & Touche.
The Sarbanes-Oxley Act calls for creation of a private-sector board, the Public Company Accounting Board, that will oversee the accounting industry.
Until now, accounting firms were self-regulated, following guidelines set by the American Institute of Certified Public Accountants.
AICPA uses a peer-review system much like the one hospitals use for oversight of hospital personnel. Every three years, firms working for public companies are required to be audited by an accounting firm of comparable size. The results are made public through SEC filings.
"We don't see this part of the regulation as having that great an impact on us," said Bill MaGee, a partner with BKD LLP in Little Rock. "We are already under peer review, where a firm from outside our geographic area comes in and makes sure we are performing our audits to industry standards. In the past we've always received an 'unqualified opinion,' which is the most desirable opinion issued by the reviewing firm."
Even so, Sarbanes-Oxley's public accountability board is structured to retain independence from the accounting industry and won't be dependent on the AICPA or traditional peer review.
The board is under the direct supervision of the SEC and has authority to:
• register firms that audit public companies;
• establish auditing, quality control, ethics, independence and other rules;
• conduct inspections;
• perform investigations, conduct disciplinary proceedings and impose sanctions; and
• seek issuance of subpoenas by the SEC.
The law also places restrictions on accounting firms that try to sell other services to their audit clients. These include consulting, bookkeeping, tax services, internal auditing and/or information systems design and implementation.
Many large accounting firms in recent years have increased their revenue sharply by offering one-stop-shopping to their clients. But lawmakers believed auditors offering other services were in danger of losing their objectivity in performing financial audits.
Non-audit fees can provide a lucrative side business to auditors. In Arkansas, four of the state's top public companies — Acxiom, Alltel, Dillard's and Tyson — represented more than $11.5 million in non-audit fees paid to auditing firms last year, according to the companies' SEC filings:
• Acxiom paid Andersen $2.53 million in non-audit fees, compared with $385,000 in audit fees.
• Alltel paid Andersen $4.58 million in non-audit and $2.38 million in audit fees.
• Dillard's Inc. paid Deloitte & Touche $3.12 million in non-audit fees and $732,538 in audit fees.
• Tyson Foods Inc. paid Ernst & Young $1.32 million in non-audit fees and $2.13 million in audit fees.
As auditors are forced to give up non-audit practices for their public company clients under Sarbanes-Oxley, other accounting firms will be jostling to gain a share of the up-for-grabs business.
"We see this as a huge opportunity for us to do internal audit work for companies that are not our audit clients," said Greg Flesher, managing partner of Moore Stephens Frost in Little Rock. "We already do internal auditing for several large agricultural companies, so we're set up to do it."
Other key provisions in Sarbanes-Oxley include calling for longer prison terms and bigger fines for executives found guilty of fraud and the creation of a federal account to compensate defrauded investors that would use civil fines, payments and assets of corporate wrongdoers.
One issue not addressed by Sarbanes-Oxley is the recent focus on the questionable practice of companies paying executives hugely valuable stock options without having to list any associated expenses on their balance sheets.
Even though Sarbanes-Oxley will have little effect on the operations of most Arkansas accounting firms, some believe it may precipitate a rash of state regulatory proposals in next year's legislative session.
"Our fear is that state organizations will propose bills that will make us regulation heavy. California, New York and 10 or 12 other states have already reacted this way," said Barbara Angel, executive director of the Arkansas Society of CPAs.
If the Sarbanes legislation cascades down to state regulatory bodies, it could adversely affect small and medium firms in Arkansas, Angel said.
Regulations in the Sarbanes-Oxley Act are not the only changes facing the accounting industry. Federal rules governing the auditing of agencies and other entities that receive federal funds — such as certain nonprofit organizations, hospitals and universities — were revised this year and will apply to audits taking place on or after Jan. 1, 2003.
On Jan. 25, the General Accounting Office issued significant changes to its Government Auditing Standards relating to auditor independence. The revisions greatly changed the previous standard and, like Sarbanes-Oxley, especially addressed consulting and non-auditing services.
"Recent private sector accounting and reporting scandals have served to reinforce the critical importance of having tough but fair auditing independence standards to protect the public and ensure the credibility of the auditing profession," said U.S. Comptroller General David Walker in a July 2 statement, accompanying a report answering auditors' questions regarding the changes.
Who Audits Arkansas' Public Companies?
Champion Parts Inc., Hope
Simmons First National Corp., Pine Bluff
Crowe Chizek and Co.
Brass Eagle Inc., Bentonville
Deloitte & Touche?
Delta Systems Inc., Rogers
Dillard's Inc., Little Rock
First Federal Bancshares of Arkansas Inc., Harrison
HCB Bancshares Inc., Camden
P.A.M. Transportation Services Inc., Tontitown*
Pocahontas Bancorp Inc., Jonesboro
Ernst & Young?
Arkansas Best Corp., Fort Smith
Baldor Electric Corp., Fort Smith
Bank of the Ozarks Inc., Little Rock
Beverly Enterprises Inc., Fort Smith
PetQuarters Inc., Lonoke
Superior Financial Corp., Little Rock
Tyson Foods Inc., Springdale
USA Truck Inc., Van Buren
Wal-Mart Stores Inc., Bentonville
Kemp & Co.
ThermoEnergy Corp., Little Rock
Acxiom Corp., Little Rock*
Deltic Timber Corp., El Dorado
J.B. Hunt Transport Services Inc., Lowell
Murphy Oil Corp., El Dorado
Alltel Corp., Little Rock*
Tullis Taylor Sartain & Sartain
Advanced Environmental Recycling Technologies Inc., Springdale*
Cannon Express Inc., Springdale*
? Companies with offices in Arkansas *Companies that switched from Arthur Andersen LLP during 2002.
Sources: Corporate filings with the Securities & Exchange Commission, the companies.
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