LOGIN MAIL

• PRESS ROOMRESOURCES
• STUDENTSCANDIDATES
• CONTACT USNEED A CPA?
• HELPADVERTISE/
  PLACE AD
  
• SEARCH

• January / February
• March / April
  • The internal value of peer review
  • Stories from the reform front
  • Planning for age and / or incapacity, part 2: Creating solutions
  • State Tax Committee meets with state Office of Unemployment, Department of Assessments and Taxation
  • Unrelated business income tax
  • Groundbreaking MACPA program provides new CPAs with 'Orientation to the Profession'
  • CPAs make sure all's well for Maryland well owners
  • Financial planning: Signs that your client needs help
  • The payoff from voice over IP
  • Scores of MACPA members turn out in 2003 for largest CPA Day to date
• May / June
• July / August
• September / October
• November / December

Stories from the reform front

By Bill Sheridan
Statement Editor

ANNAPOLIS — Art Flach's small, publicly traded clients are concerned, wondering whether they can afford to stay public.

Lynne Lochte represents a large non-profit organization that is proactively making changes it isn't required to make — and is debating whether to make more.

Melanie Lundquist's company had a head start on implementing new reforms, but there is much more work to do.

Bill Oliver's firm is prohibited from offering services it once provided to clients, who are struggling to meet their accounting needs as a result.

And though his firm is investing large amounts of additional time and money in reform-related endeavors, Barry Benjamin says the profession faces a long road of hard work before its public confidence will be restored.

These are but a few of the issues Maryland CPAs are dealing with in the wake of the Sarbanes-Oxley Act of 2002. The challenges are daunting, but many opportunities exist as well. Each shared time at center stage during CPA Day in Annapolis, where Flach, Lochte, Lundquist, Oliver and Benjamin outlined the impact Sarbanes-Oxley has had on their professional lives.

Decisions, decisions

Flach, the managing partner of Grant Thornton's Baltimore office, sees a bright side to the Sarbanes-Oxley Act. Many of the firm's middle-market closely held clients are embracing some of the reforms set forth in the act and are instituting these best practices for their privately held businesses.

An example is the Audit Committee at one of Grant Thornton's clients. The committee now wants the firm's CEO and CFO to attest to the company's financial statements — an aspect of Sarbanes-Oxley that committee members considered to be a best practice.

"In every Audit Committee meeting I attend for our middle market clients, the same question comes up: 'What should we be taking from Sarbanes-Oxley and what should we be embracing and making a part of our business?'" Flach said. "We've learned there are certain circumstances where we need to embrace the proper aspects of Sarbanes-Oxley as it relates to middle-market companies."

The story is different for Grant Thornton's small, public clients, many of whom are wondering whether they can afford to remain public. The costs of complying with the new reforms are high and many of these smaller companies don't have the resources to keep up. "They're really grappling with the internal controls issue," Flach said.

And Grant Thornton itself? Flach said the biggest impact has been on the firm's tax practice. The firm is reviewing its relationship with its public clients to determine for whom it can provide both tax and assurance services, and what tax services can be offered that will not run afoul of the restrictions contained within the Sarbanes-Oxley Act.

Another issue is partner rotation. The firm's Baltimore office has only two SEC partners; one serves as the engagement partner for public clients, the other as the concurring partner. As rotation takes effect, the firm might have to seek help from its other offices to properly serve its clients and comply with the rotation requirements of the act.

Going the extra mile

Like Flach's middle-market clients, some Maryland groups are implementing Sarbanes-Oxley reforms even though they don't have to adopt the legislation.

A case in point is Johns Hopkins University. Lynne Lochte, JHU's director of accounting, said there are some practical reasons why a large non-profit like Johns Hopkins would implement the reforms:

• "We feel we have a fiduciary responsibility to those we serve and those who serve us," said Lochte. "Voluntary adoption of this legislation serves everyone's best interests."
• The university receives a large amount of local, state, private and federal funding, and university officials believe it is fiscally responsible to comply with all applicable laws and regulations.
• When reporting to rating agencies, Johns Hopkins, in many respects, is held to the same standards as a public company.

More important, though, Lochte believes it is important for the university to be proactive when it came to reform.

"We want to make sure we are complying with all legislation that exists; we've always done that," she said. "We're also taking advantage of this opportunity to self-regulate ourselves, to make sure we are implementing regulations that make sense for our organization without hindering our operations."

In fact, the university had many procedures similar to the Sarbanes-Oxley reforms in place before the act was signed into law, including the following:

• The university accepts bids on its audit no less than every seven years.
• Representation letters are signed by the university's president, senior vice president of finance and controller.
• An intermediate sanctions group reviews all dealings with interested parties to prevent any audit conflicts.
• JHU's financial statements fully disclose relationships with related parties, and the university opens its books to the public via its 990 tax reporting.
• A whistleblower hotline was established several years ago to allow concerns to be voiced anonymously.

Other Sarbanes-Oxley reforms — prohibited activities related to public advocacy in the (international) tax arena, internal control reports from management, and certain electronic document retention guidelines, among others — have not been implemented or are still being studied. In these areas, Lochte said, Johns Hopkins is "trying to identify alternatives that would satisfy the intentions of Sarbanes-Oxley without negatively impacting university operations."

Walking the talk

In the end, though, a company's ability to help restore faith in corporate America might depend as much on the company's culture as its adherence to rules and regulations.

Melanie Lundquist works as CFO of The Rouse Company, where she says the ethical tone is set by the people at the very top. "I feel very privileged to work with people who are of the highest quality and integrity and who work to do the right thing," she said. "We've never been put into a situation where we feel uncomfortable or have been asked to do something that would violate our own ethics and integrity."

That type of environment meant The Rouse Company already had a number of Sarbanes-Oxley safeguards in place before the act was signed into law. For instance:

• All middle managers must attest that they have read, understand and not violated the company's long-standing business conduct and ethics policy.
• All of the company's directors are independent with the exception of the chair — CEO Anthony W. Deering.
• The backgrounds of the Audit Committee members fit nicely within Sarbanes-Oxley's definitions of "financial expertise." And the Audit Committee's activities are reviewed as well.

Moreover, before any financial information is made public, the company conducts what it calls quarterly business reviews. Information about the company — finances, prospective transactions, new business activities — is reviewed by a number of internal departments, including tax, legal and finance personnel, auditors and business heads.

"We're proud of what we already had in place," Lundquist said. "It's a function of being a public company for more than 40 years."

Still, Lundquist said more needs to be done. Certain financial reporting requirements must be documented, the Audit Committee charter needs to be revised and new charters must be drafted for the Corporate Governance and Personnel committees, and a separate business conduct and ethics policy will be drafted for the company's senior financial executives and directors. Lundquist said the goal is to have most of the requirements in place before the end of 2003.

And it won't be cheap. Lundquist estimates that retooling the company to comply with Sarbanes-Oxley will cost nearly $1 million initially and about $300,000 to $400,000 in "ongoing costs" once everything is put into place.

"It's going to be expensive," she said, "but it's something that we are ready to do."

... and more decisions

New rules issued by the General Accounting Office — rules that went beyond Sarbanes-Oxley's requirements, in some cases — have had as big an impact on some firms as Sarbanes-Oxley itself.

According to Clifton Gunderson Partner Bill Oliver, the new GAO rules focus primarily on non-audit services for attest clients. And since many of Clifton Gunderson's clients — small local governments and not-for-profits, for instance — rely heavily on the firm for services beyond the audit, the rules' impact extends well beyond the firm.

Specifically, Oliver identified three areas that have felt the greatest impact from the GAO's rules:

• Technology consulting services: In the past, Clifton Gunderson has done a number of accounting system installations (along with the training and advising these systems require) for governments and not-for-profits. The new rule of thumb is that a firm can offer technology advice, but it can no longer install general ledger systems, manage networks and so forth. And the impact goes well beyond the current year. "As long as the accounting system we installed is being used by a client, we would not be independent in relation to that client," Oliver said.
• GASB 34 services: "You can't do extensive evaluation services for a GASB 34 client," Oliver said. "You can't do the (management discussion and analysis)." Moveover, with local governments now required to convert to GASB 34 standards, Oliver said, "We're looking at each case on an individual basis to determine if we are really consulting or if we're providing a service that violates our independence."
• Accounting services: For clients that it audits, Clifton Gunderson can no longer provide such services as general ledger processing, monthly or quarterly statements, payroll processing and the like. "We've had to resign either on the audit side or the accounting services side for a number of our smaller not-for-profit clients, and even some of our smaller governmental clients," Oliver said. "It's a hit to our firm, but it's also a hit to the clients, because they now have to engage two firms."

And since so many of the federal rules already are impacting Clifton Gunderson's clients, Oliver said the firm is extremely concerned about the "cascade effect" — the possibility that state legislatures might use the Sarbanes-Oxley Act as a blueprint for their own local reforms. That would add one more layer of regulation for firms and their clients to wade through.

"If it cascades down to our small business clients through state legislation or regulation, we think it could have a significant impact — to the detriment of our practice and our clients as well," Oliver said.

To be continued ...

Like Oliver, Barry Benjamin, a managing partner in PricewaterhouseCoopers' Baltimore office, said his firm is faced with the need to transition long-standing relationships between partners and clients in order to comply with new regulations. PwC is spending significant time on what Benjamin calls "risk management" — talking with clients to determine what their needs are. Do they need an audit? What are the requirements they will need to address as part of the audit? Are they capable or willing to meet these requirements? If the answers to those questions are "yes," the firm lays out the ground rules in advance.

"Unfortunately, that is leading us to the conclusion that we are going to have to terminate relationships with some of our clients," Benjamin said. "I suspect that's going to happen at a lot of other firms as well."

That's not all. Insurance costs have skyrocketed, and while the firm is bearing its share of the burden, some of those costs inevitably will be passed on to clients. And the new Statement on Accounting Standards No. 99, titled Consideration of Fraud in a Financial Statement Audit, is placing new, significant time requirements on the firm. Under SAS 99, engagement teams are now expected to more broadly probe with clients the risks of fraud, how they address these risks and whether they are aware of any frauds. Those conversations also must be documented in the audit workpapers.

"I don't think we're adding a lot to the value equation, nor am I sure we will be doing 'better' audits because we're having these conversations," Benjamin said. "In some cases we've learned some things, and the hope is this will enable us to better focus our risk assessments, but so far in the vast majority of cases people are telling us what we already knew. Unfortunately, (CPAs) don't get a lot of credit in today's world for what we already knew."

Benjamin said PwC is taking the lead with a number of key messages, including:

• the importance for CPAs of doing the right thing;
• the role others — management, boards of directors and analysts, among others — play in the financial reporting process;
• the firm's dedication to training and educating its staff.

Still, he said it will be a while before the profession fully recovers.

"Make no mistake: We are in a mess, and it's not going to go away soon," Benjamin said. "We're not at a point where all we have to do is implement the rules and everything will go away in a couple of years. We have a lot of work to do before that happens."