The Formal Ties That Bind

The Formal Ties That Bind
Sarbanes-Oxley Changes the Auditor-Client Relationship

By Simon Eskow

Continued from the Home Page

This noted effect of the Sarbanes-Oxley Act, according to some members of the New York State Society of CPAs, has engendered a cautious atmosphere that has washed over to smaller corporations and even trickled down to private entities that aren’t subject to the same requirements as public companies.

“I would say that everyone is being more formal in their communications,” said Paul C. White, a CFO with Deltathree Inc. and a member of the Society’s Chief Financial Officers Committee. “What used to be done on the phone is now either started by e-mail, or summarized by e-mail. This is a natural reaction to the current environment, and does have some positive aspects to it, as the communications may in fact be clearer.”

The Sarbanes-Oxley Act’s mandate for public companies to form audit committees to oversee auditors has changed the role of the CFO, according to some recent media reports, to a kind of mediator between the committee and the auditor. This close relationship means that decisions about audits and services that CFOs once made informally are now closely scrutinized. Society members say that this kind of formal relationship has spread to all companies, whether public or private, and has changed the demeanor of the relationship as well.

“This shift to the audit committee has changed the landscape,” said Joel Quall, an accounting manager for MarketAxess, a business technology services company. “There are more protocols to follow with the audit committee; now the CFO has really become an intermediary between the audit committee and the auditor.”

Additionally, the auditors look upon their clients with more professional skepticism “than ever before,” Quall said, noting that the scope of the audits have increased along with the associated documentation.

Anthony Cassella, chairman of the Society’s Chief Financial Officers Committee, said that this kind of scrutiny has washed over into the private world. Cassella said that the private company he works for is implementing Sarbanes-Oxley–inspired internal controls, and he is finding a kind of formal relationship with his auditor similar to those experienced by CFOs of public companies.

For public companies, according to some CFOs, the biggest shift has been in setting the auditor’s fees and the timing of communication.

“Now all of the Ts need to be crossed and the Is dotted before anything is done,” White said. “In the past, a handshake or phone agreement would suffice until the paperwork was actually needed. I think this is driven more by concerns at the auditor’s side than anything else, and rightly so.”

White added that audit committee members are making a greater effort to be more “in tune” with the business and not just the numbers, so meetings now include more dialogue, covering a wider discussion of the actions and forces driving those numbers than just a review or analysis.