Audit Firms Needed Restructuring

ceocomLegislated restriction of non-audit services would seriously impact not only small accounting firms but small and midsized businesses across America, according to testimony presented to the U.S. Senate by William Balhoff, CPA, and the chair of PCPS, a membership division within the American Institute of CPAs that represents the interests of over 6,100 local and regional CPA firms.

In response to the debacle of the Enron Corp., both the Senate and the House of Representatives are working on bills that would attempt to prevent corporate financial disasters that are caused by questionable accounting. The House bill seems to be following the service restrictions that the nation’s biggest accounting firms have already committed to.

It would require firms to abstain from providing internal audits and technology implementation services to the public companies that they audit. The Senate may produce a bill that would establish even greater independence by preventing any non-audit services to audit clients. Speaking before the Senate Committee on Banking, Housing and Urban Affairs, Balhoff, a partner with Postlethwaite & Netterville, of Baton Rouge, La., warned that any new rules aimed at restricting consulting services would make it harder for small firms to help their clients, for clients to access the qualified advice their need to make smart business decisions and for firms to find the personnel that they need to stay in business.

Even if federal legislation applies only to the biggest firms or to the services that are offered to public companies, the effects could cascade down to the smallest mom and pop practitioners–even those that do not audit public companies.

“I believe that it would be a grave mistake for the members of this committee to believe that it is possible to impose restrictions only on the largest of firms,” Balhoff told the committee. “History shows that new legislation by Congress is highly likely to become the template for parallel legislative or rule changes at the federal and state levels that would directly affect small CPA firms and the small business clients we serve.”

Balhoff cited the Securities and Exchange Commission’s new rules on auditor independence that were issued in 2000. Early in 2002, the Governmental Accounting Office followed suit with similar independence standards. The standards not only duplicate but exceed the new SEC restrictions on non-audit services by broadening the scope of services that are prohibited and CPA firms that are affected.

In one case, Balhoff said, the GAO rules required a sole practitioner in Maryland to assign “other personnel” to perform non-audit work. The firm had no such “other personnel.” His only alternatives were to give up his practice and join a larger firm, or direct his client to hire another firm for non-audit services.

The most serious impact of restricted services would fall on the country’s small companies, which would be deprived of invaluable consultation. “Successful small businesses are a cornerstone of Main Street America,” Balhoff told the committee. “If the CPA does not have the ability to act as the ‘trusted advisor’ to his or her clients, many small businesses will simply not seek the input of other third-party professionals. It is vital, both for the small business person and for the survival of many thousands of small accounting firms, that current laws not be changed in a manner that is insensitive to these concerns.”

Balhoff sees no inherent conflict between consultation and independence as long as the consultation does not reach the point of making management decisions. As long as the auditor is only providing objective information, he would consider such consultations to be in the public interest because creditors and shareholders benefit from the auditor’s professional expertise.

If the federal government insists on putting limits on audit firms’ scope of service, the AICPA would like to see the limits restricted to audits of public companies. According to the institute, however, the problem isn’t an extant threat to independence as much as a public misperception of such a threat.

Generally, Balhoff said, CPA firms do not see any such threat to independence or any need for restrictions on the scope of their services. “Most firms, large and small, agree with the Big Five [on] what restrictions should be applied to the scope of services offered by auditors,” he said. “They generally agree that Congress should not [be] telling us what determines independence and what doesn’t.”

Though he did not say so in his testimony, Balhoff himself would like to see the congress focus more on disciplining auditors and companies that fail to apply accounting standards diligently.

Balhoff told the committee that restrictions on auditor services would also worsen an already-difficult human resources problem. The profession, as a whole, is having a hard time finding qualified professionals. From 1995 to 2000, the number of students who entered accounting programs and took the CPA exam declined by 33 percent.

Studies indicate that young people are less interested in the profession because it is seen as too narrow and too focused on historical numbers rather than ongoing business decisions. If accounting services are narrowed even more, Balhoff said, fewer students will enter accounting programs, and the profession could reach a real human resources crisis.

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