Academic journal article Journal of Accountancy

Tips for the Sarbanes-Oxley Learning Curve: The Act Has Brought More Complexity to Firm Management; Here's Some Broad-Based Help

Academic journal article Journal of Accountancy

Tips for the Sarbanes-Oxley Learning Curve: The Act Has Brought More Complexity to Firm Management; Here's Some Broad-Based Help

Article excerpt

EXECUTIVE SUMMARY

* THE SARBANES-OXLEY ACT HAS HAD a far-reaching impact on CPA firms, whether large, midsize or small. Firms that audit public companies have been working out strategies for coping successfully in their internal operations as well as in their relations with clients and prospects.

* THE STEPPED-UP INTERNAL AUDIT, documentation and division-of-labor requirements place demands on partners and staff in several ways. To meet the requirement to rotate the lead audit partner and audit review partner every five years, small and midsize firms have to carefully coordinate their growth plans.

* FIRMS NOW VET PROSPECTIVE AUDIT CLIENTS more carefully. To check whether a prospect's industry aligns with the firm's experience, one firm uses a vetting committee to look at whether the prospective client has a strong financial position and a good reputation.

* RECORD RETENTION IS MORE STRINGENT under Sarbanes-Oxley, which requires an auditor to retain for a seven-year period all relevant workpapers, memos, correspondence and records (paper and electronic) that contain conclusions, opinions, analyses or financial data created, sent or received in connection with the audit of a public company.

* THE NEW LAW HAS FORCED auditing firms out of many of the ancillary services they previously had provided public-company clients--who still need those services. Other firms can step in to provide them, and strategic alliances offer an opportunity to develop new business.

* THE ACT INCREASED AUDIT COMMITTEES' oversight role. As a result audit firm partners and staff who had developed working relationships with a client company's management must work more closely with the audit committee to satisfy Sarbanes-Oxley requirements.

Although the Sarbanes-Oxley Act of 2002 was directed at publicly held companies and their auditors, other CPA firms have been affected, too. Midsize and small firms' adjustments to the compliance requirements imposed directly by Sarbanes-Oxley or indirectly by their clients' responses to the act include a spectrum of changes such as heightened monitoring of the regulatory environment, vetting prospective audit clients by committee and meeting staffing needs as workloads intensify. The act even has presented practitioners with a new type of engagement opportunity: the second-CPA-firm role to document and test public companies' internal controls for entities they do not audit. Challenged by Sarbanes-Oxley, firms have been coping successfully in their internal operations as well as in their relations with clients and prospects. This article shares some of their on-the-job practice-management lessons learned.

APPOINT A SARBANES-OXLEY MONITOR

Sarbanes-Oxley and the subsequent standards from the Public Company Accounting Oversight Board (PCAOB) add a new layer of complexity to firm management: Auditors of public companies have new rules to follow while other firms must keep a careful eye on the changing environment. State legislatures may complicate the situation even more by adding restrictions in their own versions of the law--the so-called "cascade effect" (see "Evaluating the Cascade Effect" page 42).

To monitor changes, some firms designate a partner or senior manager to track standards activity and coordinate implementation. Aronson & Co., a Rockville, Maryland, firm that serves about a dozen public companies, has a quality-control partner whose duties include Sarbanes-Oxley oversight. Lisa J. Cines, CPA and managing officer, says, "In our firm, a quality-control partner keeps management and our SEC-company practice informed about Sarbanes-Oxley and the PCAOB work." The accountable partner spends about 10% of his time on matters related to the act and is the "gatekeeper, so to speak, who has the responsibility for tracking changes," Cines says.

George I. Victor, CPA, manages the quality-control function for Reminick, Aarons & Co. …

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