Industry Experiences Realignment By SHELLY GARCIA Senior Reporter The Sarbanes-Oxley Act is turning out to be a windfall for accounting firms of all sizes. SOX, as it is known in the trade, is requiring so much additional work that accounting firms are seeing their billable hours rise at a rapid clip. Unable to keep up with the additional work involved, firms have had to drop some of their clients, and others are picking up the slack, in some cases opening new practices to handle these clients. The newness of the legislation has made it difficult to plan staffing and manpower needs. At the same time, much of the burden of the new responsibilities is falling on the partners at these firms because there is not yet any established framework to handle the new requirements. “I and my compadres have been working harder this year than we have in years and years,” said Bob Pearlman, a partner at BDO Seidman LLP, “which is great from a fee standpoint, (but) what we’re finding is we’re stretched to the limit in terms of capacity because of the additional work, particularly Section 404.” SOX, put into place following the revelations of fraud at Enron and other corporations, was designed to place tighter controls on organizations and reduce the likelihood that such transgressions would recur. Section 404, in particular, requires public companies to document each of their processes, from payroll to purchasing, and implement testing procedures to be certain that the process does, in fact, follow those steps. That way, the thinking goes, the information that flows into financial statements will be accurate and complete. Passed about two years ago, Sarbanes-Oxley set a deadline requiring large companies to comply by year end and smaller companies to come online by the end of 2005. Although companies began ramping up a year ago, the bulk of the effort has come in the past six months, and the cost to implement these procedures is mounting far higher than initially expected. According to a survey of 224 public companies conducted in July by Financial Executives International, a trade group for the industry, the total cost for a company to comply with Section 404 is now estimated at more than $3.1 million, up 62 percent from previous estimates of $1.9 projected in January. The companies said they now expect to pay their auditors $832,200 in fees over and above their annual audit fees, up from earlier estimates of $590,100. “When we conducted our January survey, audit firms had not yet provided their clients with complete estimates for Section 404 work because the auditing standards had not been finalized,” said Colleen Sayther, president and CEO of FEI. “Now that the standards are finalized and implementation efforts are further along, compliance costs can be more accurately determined.” Grabbing resources The FEI companies surveyed averaged $2.5 billion in revenues, but even smaller companies can easily be looking at $500,000 in added fees to set up and test these new controls, accounting professionals said. “Even in the smallest of companies, you probably measure thousands of hours (of audit and accounting services) as opposed to hundreds,” said Dan Benson, a partner in the technology, media, telecommunications practice at Deloitte in Woodland Hills. “So it’s a huge impact on companies and even on business decisions because they’re using resources to prepare for 404 that can’t be used on other projects.” Particularly among the Big 4 accounting firms, which have established audit practices, many including very large clients, there simply has not been enough capacity to handle the added workload. These firms all said they have had to drop some of their clients in order to provide appropriate levels of service. “Each year we go through a client re-acceptance process,” said Mark Nelson, managing partner at Ernst & Young in Woodland Hills. “You’re looking at risk profiles, the economics of the situation, the interaction and the relationship, but you always have to address that in terms of supply and demand, so we have looked much harder in light of our scarce resources. We have exited quite a number of clients.” Most companies for years followed well-established procedures to manage their operations. What’s different now is that SOX requires that those processes be documented in detail, something many companies never did before. And, once documented, companies must test the process to be certain it is occurring as recorded. It is not just that SOX has added a number of steps to the audit process. It is also that much of this is uncharted territory, and accountants say they are learning as they go. “Particularly in the first year since it’s new to the company and what they do, there is a lot of learning curve in the process,” Nelson said. “Also the rules have been evolving in coming out throughout the year. It’s not like you knew all the rules on day one, so that’s made it harder.” Going to class Even the most seasoned auditors say they have spent a lot of extra time in training to get up to speed on requirements. Most have accumulated at least several weeks of classroom time over the past year. “One of the things keeping us so darn busy is we’re all going through so much training so we can be up to speed,” said Pearlman. “I have to be in Chicago for two or three days next week for the latest round of training.” But if SOX has generated a lot more work, it is also resulting in a lot more income for accounting firms because of the additional hours required to help existing clients comply and because the added demand has distributed public company audit work across a much broader base of accounting firms. Work that Big 4 firms are unable to handle, either because of the workload or because under the new regulations auditors cannot also set up the controls for those firms they will eventually audit, is filtering down to the second tier firms and even regional firms. Some accounting firms that did not previously do work with public companies have even opened new practices to take advantage of the increased opportunities. Pearlman said his firm has picked up more than a dozen new accounts in the L.A. area alone. Good Swartz Brown & Berns LLP in Sherman Oaks has started a consulting practice devoted to SOX compliance that now includes about a dozen clients and should yield more than $2 million in additional fees in the first year. “We’ve got proposals and a lot of potential work ahead that is not included in those 12 clients,” said Scott Sachs, partner in charge of the company’s SOX Section 404 Readiness Consulting Practice. “There’s just a lot of opportunity out there if you’ve got the skill set and you’re good at what you do.”