Audit Fees Cost Public Companies Millions

by Luke Jones  on Monday, Aug. 20, 2012 12:00 am  

The Wake of Sox

Enron and other accounting scandals cost stockholders billions, and public companies are still feeling the ramifications of the Sarbanes-Oxley regulations, known colloquially as "Sox." The act requires corporations to change signing partners - but not firms - at least once every five years. Managing the partner shifts and new rules spiked accounting fees during the past decade.

"It has dramatically changed auditing in the last 10 years," said Jake Leon, deputy director of communications at the Center for Audit Quality. Leon said Sox also led to the creation of the Public Company Accounting Oversight Board, a nonprofit group that oversees accounting firms.

"They investigate and bring disciplinary action against accounting firms that do not comply with Sox," Leon said. "That ended what was, at that time, self-regulation."

Sox also prohibits firms from providing non-audit services to audit clients and requires companies with more than $75 million in market capitalization to be audited for effectiveness and internal financial reporting controls.

Switching Firms

Accounting firms often stay with their public company clients for decades. E&Y, for example, has audited Wal-Mart since before the retailer went public in the 1970s.

When changes of firms do occur, the firm sometimes explains the reasoning and sometimes doesn't. Deloitte & Touch LLP, the fourth of the "big four," parted ways with First Federal Bancshares of Harrison at the end of fiscal 2010. The bank's proxy statement says that Deloitte had "no disagreements" with First Federal save for some 2010 uncertainty about the bank's ability to continue as a "going concern." After a recapitalization last year, First Federal Bancshares replaced Deloitte with BKD.

Dillard's parted ways with PwC at the end of fiscal 2011 and is switching to KPMG. The latest Dillard's proxy statement says PwC didn't depart out of ill will: "There were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of PwC, would have caused PwC to make reference to the subject matter of the disagreement in connection with its report, except as discussed below."

Instead, according to the proxy, Dillard's and PwC disagreed over a real estate investment trust into which Dillard's had transferred some properties.

"At the time, the company believed that a tax election might be available to the company that would result in a taxable gain on the transfer of these properties to the REIT," the proxy states. "The company and PwC had different views on the financial reporting impact of this tax election."



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