Sarbanes-Oxley Makes Opportunities for Smaller Firms

By Simon Eskow

The post–Sarbanes-Oxley era is making opportunities for firms to pick up non–audit services work from auditors of public companies.

“Firms are taking the overhanging fruit from the Big Four,” said Lawrence Gray, a speaker at the New York CPA, Business & Technology Show & Conference. Medium-sized firms, Gray said, are also sharing work with smaller firms that aren’t large enough to take on work alone in the Sarbanes-Oxley trickle-down effect.

Gray’s comments came prior to his presentation, “Sarbanes-Oxley: Not Just for Larger-Sized CPA Firms.” Gray, a partner with Amper Politziner and Mattia in New Jersey, discussed how prohibitions against firms providing nonaudit services to their audit clients, and increased responsibilities for public company audit committees, has created opportunities for small and medium-size firms.

The Sarbanes-Oxley Act, passed in the summer of 2002, prohibited auditors from providing nine services to their audit clients, including bookkeeping, financial information systems design and implementation, valuation services, internal audit outsourcing, management functions or human resources, broker or dealer, legal services, or any other services denied by the Public Company Accounting Oversight Board.

During his July 20 presentation, Gray gave a brief history to the audience of events leading to the passage of Sarbanes-Oxley.

“Firm consulting business boomed in the 1990s,” he said. Arthur Andersen, for example, made $54 million in nonaudit fees, but only $2 million in audit fees from its client Enron.

That corporation, which used special purpose entities to hide liabilities, along with WorldCom, which capitalized expenses for two years, Gray said, were the major catalysts for Sarbanes-Oxley.

Gray pointed to two main areas where firms stand to make more money. The law puts more onus on a company’s audit committee, which in the past had been a kind of sinecure for shareholders with relatively little financial knowledge. Public companies are now recruiting CPAs to sit on their audit committees for consultation.

And because auditors cannot advise their clients on internal control systems, Gray calls this a “golden market” for smaller firms to step in to do internal control work.

“Can a sole practitioner do this for a public company?” Gray said. “They can, but they have to work at it full time. But the fees are really good.”