'02 Law Driving Costs of Auditing

They say money talks, and if that's true, companies pay their accountants millions to listen.

Wal-Mart Stores Inc., for example, handed $17.4 million over to Ernst & Young for auditing services in fiscal year 2011, and $16.5 million the year before.

(Click here for a PDF table of fees Arkansas' public companies paid their accounting firms in the most recent fiscal years.)

Of Arkansas' 18 publicly traded companies, seven spent at least $1 million on their auditors in the most recent fiscal year. And most of the prices are only going up.

Twelve of the companies paid more to their firm this year than the previous. Some of that increase, according to Gary Peters, assistant professor of accounting at the University of Arkansas' Sam M. Walton College of Business, can still be blamed on the 2002 federal accounting reform law called Sarbanes-Oxley.

"In recent history, it's attributable to the learning curve associated with the additional requirements of the Sarbanes-Oxley," Peters said. "Right after Sarbanes-Oxley kicked in, audit fees went way up. They almost doubled."

The act was written and approved to avoid repeats of the early 2000s-era scandals at Enron, Tyco International and other corporations where longstanding accounting partners were acting as enablers for corporate misdeeds.

The new rules require corporations to change their signing partners every five years.

"It took a tremendous amount of effort to get all the required documentation and testing associated with Sarbanes-Oxley," said Windstream Corp. CFO Tony Thomas.

Once the act's infrastructure was set up, Thomas said, the law became less burdensome and prices declined. But companies still have to deal with finding new partners every half-decade, a process the Little Rock telecom recently underwent.

"It does require some work," Thomas said. "The new audit partner has to have a relationship with me, the CFO, and, really, all members of management. It simply takes some time getting up to speed and the learning complexities associated with a large public company."

Thomas' said Windstream's new auditing partner, Tom Leonard of PwC, formerly known as PricewaterhouseCoopers, was a former auditing partner for other telecoms, including Alltel Corp., of which Windstream is a spinoff.

The difficulty doesn't fall entirely on the corporations, either. For a firm like PwC, Sarbanes-Oxley can cause confusion for partners, who are required to be in the same physical location as their client.

"That requires some planning for the firms because five years as a signing partner can go pretty quickly," said Martin Fiscus, managing partner for PwC in Springdale. "I have spent a good bit of my career in [Tulsa], moved to Austin, Texas, for five years, then went back to Oklahoma to pick up an engagement partner role with Chesapeake Energy, did my five years there. Then an opportunity presented itself, and I moved back to northwest Arkansas."

Managing where and when their partners go is a big part of the difficulty firms face, Fiscus said.

"It does create these issues around how you manage your firm, and how we make sure we manage that transition process."

PwC handles the multimillion-dollar auditing responsibilities for Windstream, Tyson Foods Inc. of Springdale and Dillard's Inc. of Little Rock.

 

Potential Problems

Fiscus mentioned another issue looming in the distance.

The Public Company Accounting Oversight Board, a non-profit corporation created by the Sarbanes-Oxley Act, has been tossing around the idea of making companies switch to an entirely new accounting firm every five years.

Some companies have had very long relationships with their accountants; Wal-Mart, for example has used Ernst & Young for more than 40 years. Switching after such a long time would present obvious problems.

"There's a lot of knowledge that gets accumulated through the audit process," Fiscus said. "It certainly is easier to transfer that knowledge in a partner rotation than it is when changing out an entire auditing team."

Fiscus estimated such a rule change would propel auditing costs into the stratosphere.

"Any time you take on a new client, there is a tremendous effort and a learning process that takes place," Fiscus said. And he would know, as his firm, PwC, took on Tyson Foods Inc. as a client in 2010 after the meat producer left Ernst & Young.

"PricewaterhouseCoopers had clients in Arkansas prior to our relationship," said Craig Hart, senior vice president and controller at Tyson. "Management and the audit committee believed that a local office in northwest Arkansas would be a plus in having an efficient and effective audit."

Peters, at the University of Arkansas, said the firm-switching idea has been discussed since the Sarbanes-Oxley Act came about.

"The concern was, if you're an auditor with the same client for an extended period of time, do you lose objectivity, and become financially tied to the client?" he said. "That causes problems."

But Peters said it's normal for big companies to keep their accounting firms for decades, and research has shown that relationship to be positive. Moreover, issues get thicker the larger companies become.

"If they have to rotate auditors every five years, there's some concern whether or not auditors are available that could adequately serve their clients," Peters said. "If it's a large client, we really need the resources of the Big Four firms. If we have one that's providing consulting services, that firm isn't independent of the client, and couldn't be considered as an auditor. Then the third firm may not be appropriate because of its geographical location or lack of expertise locally. That basically leaves the fourth firm."

Peters is not even sure if the benefits of Sarbanes-Oxley have been worth the costs.

"I think, initially, it's cost more than anyone ever thought it would," he said.

But he noted the act has done some good.

"I think there's a renewed confidence in financial statements companies are providing, which are, fundamentally, one of the most important things in the whole auditing process," he said.

He also felt financial statements were of a higher quality than 10 years ago.

 

Fluctuations

Government regulations aren't the only reason audit costs can fluctuate. Windstream, for example, paid out $600,000 more in 2010 audit fees than it did in 2009.

"Typically, when you see fluctuation specific to Windstream, it's acquisition-related or capital-markets work," CFO Tony Thomas said. "When we go to bond and refinance our debt, it requires us to file registration statements with the SEC and drives up incremental work on [the auditors'] part."

Acxiom Inc. of Little Rock's bill went up $700,000 in fiscal 2011, and the company identified an audit of its employee benefit plans as the source of the additional cost.

Home BancShares Inc. of Conway cited $177,000 of its auditing fee as coming from acquiring four failed Florida banks last year.

A few companies also changed firms in the last fiscal year. Tyson, as mentioned, parted with Ernst & Young and switched to PwC. First Federal BancShares of Arkansas Inc. in Harrison switched from Big Four firm Deloitte & Touche LLP to BKD LLP, currently Arkansas' largest firm. ThermoEnergy Corp., which has been moving its management from Little Rock to Rochester, N.Y., dropped Kemp & Co. and picked up CCR LLP.

The companies, in their annual proxy statements, made sure to point out these changes weren't made over disputes with the auditors.

"A lot of times, when you see that 'no disagreement' message, it means it was an economic decision, or there was something about the client that's changed, or the client needed a different auditor to serve them appropriately," the UA's Peters said. "But it could always be the case that there was something like a fallout between the client and auditor."

In First Federal's report, for example, Deloitte & Touche, in its parting remarks, noted "uncertainty about [First Federal's] ability to continue as a growing concern."

Earlier this year, First Federal underwent a $46.3 million recapitalization by Bear State Financial Holdings LLC. The ailing Harrison bank posted losses of $46.2 million in 2009 and $4.9 million in 2010.