New Audit Standards Pricey for Clients

Not only do companies have to endure the stress of being audited. The cost of audits is ballooning. Many businesses won’t be aware of the up charge until they get their bill next year. And after digging deeper into their wallets, companies won’t see additional return. Pay more for nothing more? Auditing firms are trying to break it to their clients gently. Companies being audited this year and beyond can expect a 20 percent increase in accounting fees, said David Swartz, president of the California Board of Accountancy. New federal regulations for audits ended Dec. 31. 2007, are forcing accountants to document their work to a greater degree. Yet for clients paying the extra billing hours, it all seems like a money pit. “We now have to do a lot more to document our planning and work,” said Jonathan Jacobs of the accounting firm Rose, Snyder & Jacobs in Encino, “and clients get no benefit. They can’t understand why they have to pay more.” The prickly situation, sometimes causing tense talks between auditing firms and clients, is part of the ongoing controversy that for several years has roiled the white-collar accounting world. Eight new standards Ever since the double whammy of the 2001 Enron collapse, brought about by Enron execs faking accounting books that lead to the loss of billions of investor dollars, and the 2002 bankruptcy of Worldcom, auditing services have dealt with a host of accounting regulations enacted to try to catch fraudulent accounting and other misdeeds by executives. Several years ago, the Sarbanes-Oxley Act established stringent standards on corporate executives, board of directors and public-company accounting firms. Rising out of the Act was the Public Company Accounting Oversight Board (PCAOB), which oversees public-company accountants. The latest auditing regulations are eight Statements on Auditing Standards (SAS 104-111) that address the arcane realm of assessing the risk of company fraud. The standards, which apply to both private and public companies, are effective for clients’ fiscal year after Dec. 15, 2006. Swartz believes the new standards are an attempt to apply regulations imposed on public companies to private ones. “The PCAOB learned a lot about risk assessment in public companies,” he said. “I think SAS is in some measure an attempt to apply those standards to private companies.” Besides requiring more auditing documentation, the new standards mean auditors must perform “internal control testing,” said Scott Sachs, managing partner of the accounting firm Good, Swartz, Brown and Berns in Sherman Oaks. When scrutinizing a wire transfer, for example, auditors must not only follow the transfer’s paper trail, typical auditing work, but also determine if the person making the transfer is the same one approving it. If the person did both, that’s bad. If the person made a transfer approved by a company head, that’s good the company’s internal control is working. “Under the old way there were fewer requirements to test those controls,” Sachs said. “The new way requires auditors to do more testing. It’s changed the audit methodology.” The new way is also not so cut-and-dried, Sachs said. “Understanding debits and credits is easy,” he said, “but understanding what is a real risk in a company is harder. You didn’t study that in school.” Client pays the price Garry A. Jones, an auditor in the 1970s, is doubtful about the standards’ effectiveness. He said the “new” risk assessment was being used 30 years ago. Moreover, even with greater pressure since Enron to detect fraud, finding it has not increased. “If one or more parties are in a conspiracy plan, fraud is hard to detect,” said Jones, who heads a Westlake Village accounting firm and is an accounting instructor at Cal State Northridge. “We can’t detect a conspiracy.” There’s good in the new standards, most auditors say. SAS can help uncover accounting fraud and deter shady executives from faking books. Still, SAS slows down the process and hinders the auditor-client relationship. “The client is going to see the same product at the end, a one-page report,” said Stephane Vachon, partner at Rose, Snyder & Jacobs. “But now we have to detail more of the work we do. We have to show the evidence we relied on to come up with our opinion.” And the client bears the cost. “We have to explain to them that the rules have changed,” Vachon said. “We have to raise our prices.”