he Sarbanes-Oxley Act, when signed into law a decade ago, caused the most sweeping changes in generations to the accounting profession, including firms in the San Fernando Valley area. And Scott Sachs was in the middle of it all. The small independent firm he worked for created a new practice from scratch specifically for Sarbanes-Oxley work, generating revenue the firm had never seen before. “The sheer volume of work created that much additional focus, opportunities and room for growth for people,” said Sachs, managing partner and head of the Woodland Hills office of national accounting firm CohnReznick LLP. Sachs’s experience was repeated all over Los Angeles as accounting and auditing firms rushed to not only perform the audits required under the new regulations but also consult for public companies to get them up to speed on preparing financial documents. Auditing and accounting firms found themselves with additional work – and the corresponding added revenue stream – but they also had to invest in training and education of their staffs to keep up with the new rules. Today, in many ways, Sarbanes-Oxley has caused a return to a more basic style of accounting by sending accountants to the factory floor so they get to know firsthand how a company operates and make its products. The law requires companies have systems to track and report significant events that might affect its finances. That could include problems in the supply chain or technical issues on the factory floor that slow or stop production. “The thing about public company audits is one of continuous improvement because companies change, personnel changes and regulations change that require auditors to change,” said Cindy Fornelli, executive director at the Center for Audit Quality, a trade organization in Washington, D.C. affiliated with the American Institute of CPAs. Sarbanes-Oxley – named after its two legislative co-sponsors – comprises 11 sections tackling such issues as board of director and corporate management responsibilities, enhanced reporting requirements for financial transactions and a code of conduct for securities analysts. The law was passed following the accounting scandals at Enron Corp., WorldCom Inc., Adelphia Communications Corp. and other companies. The heart of the act, however, and the part that attracted the most attention and most criticism is the requirement for an audit on internal controls – the policies and practices established by a company on recording and tracking the numbers used in creating its financial statements. But accounting professionals are in agreement that the regulations have achieved the goal of restoring confidence in how public companies operate and there is more transparency and completeness in financial reporting. “Management is putting in the effort to get it right and getting the right story in the financial documents,” said Glenn Davis, a CPA and national director of governance, risk and compliance with CohnReznick. Audit focus In the San Fernando Valley region, there are a limited number of firms with partners handling Sarbanes-Oxley work. Stephane Vachon, an audit partner at Encino-based Rose, Snyder & Jacobs LLP, has been in the accounting profession for 25 years. When he started doing SOX-related work there was a learning curve in applying the new rules to financial statements. The act brought more scrutiny to the company executives as well as the accounting staff with the establishment of a quasi-public Public Company Accounting Oversight Board that regulates and inspects accountants with public company clients. “The standards changed,” Vachon said. “The audits used to be under general auditing standards and the (Public Company Accounting Oversight Board) came up with their own standards.” The five-member board sets auditing standards, conducts annual inspections of firms doing 100 or more audits and every three years for firms doing less than 100 audits, and disciplines firms that fail to comply with SOX standards. Vachon finds it “stressful” that his work is being scrutinized every three years. “As an auditor you use professional judgment and sometimes two people can have a different opinion on what is professional judgment,” he said. But Shawn Stewart, business advisory services practice leader for Southern California in the Irvine office of national accounting firm Grant Thornton, said the oversight board has clarified and tweaked the regulations over the years, helping accountants, executives and company board members to better understand them. In the last two years, Grant Thornton has done projects with clients to adjust their SOX internal controls, Stewart said. “Some hadn’t thought through the guidance (on controls) or how technology had evolved to make the controls more automated and efficient,” Stewart said. All this work has meant that some accounting professionals have been able to build careers around Sarbanes-Oxley, said Sachs of CohnReznick. Professionals with experience in corporate governance matters were available to teach younger colleagues. SOX rules required auditing and accounting firms to develop new methodologies that required an investment in training. Even today, the inspections done by the oversight board will result in firms learning from the weaknesses identified in those reports. “They are doing analyses to get to the underlying (problematic) issues and once they do will train on it,” said said Fornelli of the Center for Audit Quality. Davis at CohnReznick said one benefit to the profession from SOX has been that accountants are more confident the financial statements they receive from public company clients are accurate. Still, for many accountants, Sarbanes-Oxley has only minimally shaped their careers. Consider Andy Mintzer, with accounting firm Hemming Morse LLP in Los Angeles. Mintzer scrambled right after SOX was implemented to understand how rigorous the new regulations would be. In the years since, SOX work accounts for only about 10 percent of his practice, largely as a consultant or expert witness for securities litigation involving the internal controls of public companies. “I keep busy with the stuff as it comes,” Mintzer said. “There are some practitioners who focus on this exclusively.” Regulatory burden One big criticism of Sarbanes-Oxley was that the new regulations made audits too expensive and put an undue burden on smaller public companies. Indeed, when restaurant chain parent Grill Concepts Inc. of Woodland Hills decided in 2008 to withdraw its shares from listing on the Nasdaq Capital Market, the company specifically cited the cost and expense of complying with SOX. Grill Concepts anticipated savings of more than $750,000 annually by deregistering, according to a release at the time. Those complaints caused the Securities and Exchange Commission in 2010 to issue a rule that companies with market capitalization of $75 million or less would not have to do the internal controls audit. (See story page 10.) But despite the costs, there have been real benefits. Davis said that in the two decades prior to SOX, auditors had become experts on balance sheets but had lost the understanding of how their business clients actually operated. That focus is what contributed to the accounting scandals at Enron Corp. and WorldCom Inc. where companies misstated their financial performance, he added. “They let the system of internal controls deteriorate and then SOX required 10 years’ worth of remedial work,” Davis said. As implementation of the regulations has settled in, the information from the internal audits can help companies refocus on areas such as corporate strategy or operations, said Grant Thornton’s Stewart. “In most of our discussions with management they already recognize there are other priorities and risks that they need to manage and an internal audit can help,” Stewart added. Also, public company boardrooms have evolved to meet the SOX standards. That has been a positive in that board audit committees have become more empowered and engaged. Also, the auditor examining the financial statements now has a direct voice to the audit committee, said CohnReznick’s Davis. “The audit committee has moved on from ceremonial duties and spending a half hour on the financials,” he said. Peter Gleason, managing director at the National Association of Corporate Directors in Washington, D.C., agrees that audit committees now spend more time on the actual audits. Pre-SOX, it had been on average 150 hours a year the audit committee spent on financials; now that figure is 200 hours to 250 hours on average, he said. The requirement to have a financial expert on audit committees resulted in a run on people with that skillset in the mid-2000s, but the companies that implement the rule have seen a payoff. “There was this wave of seeking retired accountants, CFOs and people with that experience to staff that slot and fortify the entire board’s understanding of the financial aspects,” Gleason said.
Sweating the Maze
