The Value of Audits

Author

The Value of Audits: Costs, Benefits and Changes
By S. Ridgway Kennedy, NJSCPA Media Relations Specialist

May 2004 (NJSCPA) — The boring old world of audits isn't quite so boring any more. The regulatory changes spawned by the accounting-related scandals at Enron and WorldCom have shaken up auditing. And with the new regulations, the audit is gaining new significance.

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A Work in Progress
The Sarbanes-Oxley Act of 2002 has gotten the biggest headlines. However, it is the Public Company Accounting Oversight Board (PCAOB) that it created that is developing the audit inspection processes.

In the face of the new changes, it's no surprise that some firms no longer perform SEC audits.

"We have one major SEC audit client," says Stanley J. Morin, CPA, of Stanley J. Morin & Associates, P.C., in Cedar Knolls. "After discussing the situation with the client, including the potential added audit costs, the client was in a position to de-list from SEC registration and that is exactly what the company did."

But not all small firms are getting out of the SEC business.

"We thought about giving up our SEC work," says Frank R. Boutillette, CPA, of Mendlowitz Weitsen, LLP, CPAs, in East Brunswick. "We had two SEC audits, and one had a spin-off, so that made three. It's going to be a lot more work, but we're going to do it this year and see what happens. We'll look for business from people who are dropping SEC work. It might be an opportunity for us."

SAS 99 and Pricing
Having an even wider effect than Sarbanes-Oxley and the PCAOB and affecting private companies too is SAS 99, "Consideration of Fraud in a Financial Statement Audit," the first audit standard to be released by the American Institute of CPAs since Sarbanes-Oxley. The issue is price.

Simply put, the brainstorming, interviewing, additional testing and documentation required by SAS 99 are going to make audits more time-consuming and expensive.

Morin believes there will be a 20- to 30-percent increase in cost. Andrew M. Chavkin, CPA, of Ehrenkrantz, Sterling & Co. LLC in Livingston is predicting a 15- to 25-percent increase, while Susan T. White, CPA, of McKinley White & Co. in Paramus estimates 25 percent.

White, who primarily performs government audits for school districts and private schools for the disabled, believes that higher prices may force clients to go shopping for proposals.

"Justifying rate increases is always tough," notes Tod A. Christianson, CPA, of RD Hunter & Company LLC in Fair Lawn.

But there are also benefits to be gained by audit clients as a result of the new standards.

The Net Effects
The additional costs associated with SAS 99 largely are the result of requiring auditors to approach each audit with an eye for fraud. If management has concerns about possible fraud, ample opportunity also is provided to discuss that with auditors. Under SAS 99, auditors are required to raise questions about fraud and investigate any suspicions. Clients can gain value that way. It can help them tighten controls and achieve efficiencies, says Boutillette.

One concern that has been raised is whether SAS 99 will prompt bankers to require audits as part of their lending requirements.

Cynthia L. Course, CPA, of Wrightstown, who has extensive experience working with financial institutions, does not think it will. She notes that 10 to 15 percent of community bank commercial clients already present audited financial statements with their credit applications. The percentages increase to 25 to 30 percent for commercial customers at regional banks. The remaining customers have reviews or compilations instead of audits.

"Most banks have built-in flexibility in their lending policies, particularly for small to mid-dollar loans," Course says. "SAS 99 isn't going to change that."

And while businesses may complain about the price increases and burdens of the audit process, the good news is that the changes actually can help to improve their operations.

"We're adding more substance to the audit process," says Maria Plucinsky, CPA, Audit Manager at RD Hunter. "We're going to be talking to people, interviewing them and going into the bowels of the company."

The result of this investigating is that auditors now should be able to uncover areas and processes where companies can implement new efficiencies and build in better internal controls.

For example, one of the effects of the new regulations is that nonprofits will need an audit committee. As a result, auditors of nonprofits will report directly to the audit committee rather than to the executive director. "That puts the burden back on the officers to see that recommendations are implemented," Morin says.

The net effect of regulatory reform will be higher audit costs. But the requirements of SAS 99 do add a new investigative element. In most respects, it appears that regulatory reform has accomplished one objective: shaking up the auditing process and focusing more attention on the potential for fraud. The fulfillment of the reforms' mission now is in the hands of the nation's CPAs.

10/2/2006

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