Accounting woes come home to roost
The accounting profession, lashed for its complicity in some of the most infamous corporate scandals in U.S. history, is thriving thanks to legislation intended to prevent more such disasters.
Publicly traded companies that cannot meet more stringent audit requirements in filings with the U.S. Securities and Exchange Commission risk harsh backlash from investors grown weary of numbers games. Executives who must sign off on the books fear inaccuracies for which they could be held to account.
Universities trying to graduate more accountants cannot keep up with the new demand, in part because professors have been hired away by industry or other schools.
For accounting firms, the billings are golden.
Avista Corp. Chief Financial Officer Malyn Malquist predicts the Spokane energy company will pay its auditor, Deloitte & Touche, as much as 50 percent more in 2004 than it did in 2003, when the bill was $1.2 million. Internally, the company has hired two more accountants and reassigned others to comply with the new auditing requirements.
“It’s taken an inordinate amount of our accountants’ time,” Malquist says.
The “it” is the Sarbanes-Oxley securities reform law enacted in 2002 to prevent the kind of accounting that turned liabilities into assets at companies like Enron Corp. SOX, as it has come to be known in the industry, set new standards that threaten to overwhelm the industry’s ability to assist every client that needs help. For example, the accounting firm that checks a client’s internal documentation cannot also do the final audit.
Company internal controls help prevent problems like embezzlement, or supplier kickbacks.
Informal telephone calls to discuss with an auditor how best to account for an item are forbidden, Malquist says. “There’s a bit more of ‘Hey, you’re on your own.’”
Mike Thronson, head of the SEC audit department in the Moss Adams LLP office in Spokane, says SOX has almost forced auditing to reinvent itself. Early on, he underestimated the time that might be involved reviewing client documentation and controls. Clients waxed unhappy until they realized they were having the same problem themselves.
Seattle-based Moss Adams in June put a moratorium — since lifted — on taking new SEC auditing clients because of the demand. “We were out of resources,” Thronson says.
He says hours billed by the Spokane office have grown about 10 percent so far compared with 2003. The increase is in line with the rest of the firm’s experience with SEC accounts.
Meanwhile, the chairman of Washington State University’s accounting program says the school cannot accommodate all the qualified students who want to get into the profession.
Prof. Robert Greenberg says there are 150 accounting majors on the Pullman campus, and half again as many at the Tri-Cities and Vancouver campuses combined. Another 20 students are pursing a master’s degree, and seven a Ph.D.
His faculty, normally at 10, has been stretched thin, he notes, by the departure of one colleague who took a position at another university that offered a $30,000 salary increase.
“The market is very tight,” says Greenberg, who adds that the school added a new class to address SOX-related issues.
“This has been the biggest change in accounting in my lifetime,” he says. “It’s had a huge impact and I think the right impact.”
At Wheatland Bank, President Susan Pittman Horton says she’s not so sure.
Directors had considered taking the Spokane-based bank public, but backed off when the costs of additional compliance measures were totaled up. Whatever increased liquidity shareholders might enjoy with Wheatland stock traded publicly did not appear to offset auditing bills on the order of $500,000.
“It’s a huge, huge burden,” says Pittman Horton, who is herself a Certified Public Accountant. “I don’t think the benefit is worth the cost of it all.”
She says Wheatland had already complied with many of the safeguards regulators had suggested banks adopt from SOX. “It’s just good practice,” she says.
At Avista, officials do not expect SOX compliance to result in any significant changes in the company’s 2004 financial report. Auditors have never questioned the accuracy of past Avista SEC filings.
SOX may be a long overdue updating of practices that will enable companies to keep up with the increasing complexities of business in the 21st century, but there’s irony in the profits befalling some who shirked their duty in the 20th.