Small, Public, and Under the Gun

“Suppose you have six significant [accounting] processes and five locations; that’s 30 processes you need to document,” says Rich Lehman, a partner with accounting firm Boulay, Heutmaker, Zibell & Company, PLLP, in Eden Prairie. “And often there are 10 or 12 significant processes, not six, even in a small company.”

Like other accountants, Lehman acknowledges that Section 404 imposes huge costs on giant companies. But at least they can spread out the costs and hire or train internal accountants to deal with 404 issues. For small companies, he says, the total cost is lower, but the relative burden is higher.

The Auditors Can’t Tell You How

SOX compliance is arcane stuff, requiring special expertise not possessed by every certified public accountant. The situation is complicated by the fact that independent auditors must approve a company’s financial statements and the control structure behind it—but those same auditors now cannot act as consultants to tell the company how to set up controls and prepare reports that will pass muster. In effect, the auditor can’t say, “Here’s how to do all of this properly,” but only, “No, you did it wrong.”

Accountants don’t argue with the intention behind this rule. To discern Congress’ motivation for ensuring that audits are genuinely independent, one need look no further than the collapse of Arthur Andersen, brought on by the auditing/consulting firm’s alleged collusion in the Enron debacle. And it isn’t as if companies must prepare entire annual reports in the dark and then throw them over a wall to the auditing firm; they can review their procedures with auditors in quarterly meetings, for instance. Still, the independence rule creates a new obstacle for companies that used to rely on their auditing firms as business advisors.

“[SOX] standards are often ambiguous, and chief financial officers want to ground their assumptions with an outside party,” Skie says “They’re not allowed to do that with the auditing firm anymore, so now [the company] often needs relationships with an auditing firm and one or more consulting firms.”

Since Sarbanes went into effect in 2004, accountants say, a number of consulting firms have sprung up that specialize in Section 404 compliance. Smaller companies, especially, are forced to pay for advice from such firms because they are less likely to have 404 experts on staff.

And whether you hire that expertise or rent it from consultants, the price has gone up. “The need for accountants at various levels to do SOX work is tremendous,” says Hainlin, whose firm works only with private companies. “The big national accounting firms are aggressively recruiting people from firms like ours, offering higher wages, and training them in SOX.” The higher costs are passed on to clients, he says. The double-barreled upshot is that “more time is required for accounting procedures at more dollars-per-hour.”

As if these headaches weren’t enough, accountants agree it has gotten tougher for some smaller companies to find auditing firms willing to take them on as clients. This is due to “the overall risk-management environment, not just Sarbanes,” Skie says. “If you’ve had spotty financial results in the past few years, it may be difficult to find an auditing firm—and very difficult to get one of the Big Four.” (The Big Four are Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, and KPMG.)