Thursday, October 06, 2005

Sarbanes-Oxley not as Good as It Seems

Ostensibly, Sarbanes-Oxley looks like a great opportunity for the Big Four. The cost of compliance is extremely high, with an average price tag of $4.36 million for publicly traded companies in the US. Of course, most of those fees go to the Big Four. What's not to love?

Plenty.

Despite the increase in fees - both through rate increases and larger audit engagements - Sarbanes-Oxley has made the audit business riskier. The risk from litigation exposure is clear, but there is a subtler, more dangerous angle. Clients are becoming less tolerant of complex audit and weary of the excessive fees for which they are responsible.

The fact that auditors are afraid of government prosecution (a legitimate fear as we have seen from KPMG recently) and client litigation (take a look at Equitable's recent suit against E&Y - recently dismissed) has driven them to set the audit bar high. Weaknesses in internal controls that may not be material are often characterized as such. Auditors want to be careful, so they err on the side of control.

The impact has been profound. Many publicly traded companies are now shopping for more "reasonable" auditors than those they have engaged at present. Auditors thus are squeezed by competing pressures. On one side, they are driven to conduct brutal audits that protect them from even the hint of negligence. On the other hand, overzealous audit standards can cause clients to seek counsel elsewhere.

The only market force that balance the Big Four community is the lack of alternatives. The Big Four have equally, though not collectively, driven fees upward along with audit standards and zero tolerance audit policies.

Tom Johansmeyer

6 comments:

Dream Builder said...
This comment has been removed by a blog administrator.
Big4 said...

Thanks!

Anonymous said...

It just strikes me how lack of critical thought leads to absurd solutions. Wal Mart has a turnover of over 256 billion dollars. Even though an audit firm is to spend a year in the organisation, there are quite a number of things that can still pass the eye as the scale of transactions is simply enormous.

The solution is not mindlessly increasing legislation because in the first place, there is no evidence to prove that the tonnes of legalese recently introduced will improve the quality of audits. The issues we face nowadays require both ethics and character.

Berkshire Hathaways chairman, Warren Buffet, has good pointers in that direction.

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