Audit expectations

The Sarbanes-Oxley Act, introduced in
2002, has had a significant impact on
the auditing process. Over the past several years, heightened regulation has
increased the amount of audit evidence
that must be obtained and led to more
stringent documentation requirements.
Against this landscape, it is more important
than ever to employ the services of a quality independent auditor.

Exceptional client service is the hallmark
of an effective auditor, says Sheldon
Ausman, principal and managing director of
client services for Gumbiner Savett Inc.

“Independent auditors should be evaluated on the quality of the service they provide
their clients,” he explains. “A company has
the right to expect exceptional quality of
service as described in the accounting firm’s
engagement letter.”

Smart Business spoke with Ausman
about finding the right independent auditor
and issues that audit committees are currently facing.

How can companies locate an independent
auditor that recognizes their needs?

If I had a company with 25 to 35 employees, I would try to find an accounting firm
that was organized in a manner to accommodate and understand the needs of a company our size. The chemistry between the
independent accountant and the company
is related to the size of both institutions.
There will be a difference in approach
between one of the major accounting firms
compared to a smaller accounting firm in
recognizing what your needs are. For example, when I was with Arthur Andersen,
because of our size, scope of practice and
the organization of our firm, we found that
many companies were too small for us to
provide the equivalent service of a smaller
firm. Not only because of size but because
we were structured to provide service
focused on larger entities.

Why is it important for companies to hire
auditors and accountants with experience in
their industry?

The bottom line is the ability to communicate. There are terms and procedures that are unique to one industry that aren’t typical
of another. For example, if you are a health
care institution, you wouldn’t want to hire a
company that focuses its practice on the
gaming industry. It is easier and more effective to communicate when you are speaking
the same language. Also, there are certain
accounting rules that apply to certain industries that differ from the typical manufacturing company.

In what ways has the Sarbanes-Oxley Act
affected the auditing process?

Because of the limited amount of time that
large publicly traded companies had to
comply with the Sarbanes-Oxley Act, the
cost the first year was horrendous. Much of
it was inexperience by the government,
accounting firms and the private sector in
understanding the legislation and its implications. There is no question of my support
for the intent of the bill, but I also understand and sympathize with those who
incurred the high cost. How can one argue
against quality of reporting? I recently read
in the Wall Street Journal that the chairman
of the SEC is asking for a postponement for the implementation of Sarbanes-Oxley for
smaller companies. This indicates a recognition that there is a difference between
large companies and mid-cap companies
and the procedures necessary to achieve
the objectives intended in the passage of
Sarbanes-Oxley. Cost needs to be judged in
relationship to objectives.

What are some other issues that board members/audit committees are currently facing?

In addition to the Sarbanes-Oxley Act,
another change that is costing a significant amount of money is the implementation of FIN 48, an initiative that focuses on income taxes. Auditors and clients
alike have spent a considerable amount
of time in understanding the rule’s applications and principles. Both sides are
learning, but it is becoming a very costly
learning experience.

Another issue is stock options. This
doesn’t affect as many companies as the
Sarbanes-Oxley Act, but it is unfortunate
that the matter is being applied to too
many companies without considering
materiality and intent. In many cases,
stock option pricing was innocently
applied retroactively.

What type of discussions should a company
expect from its independent auditor?

I believe that when communicating with
your clients it is best to err in providing too
much information rather than too little.
Management likes to know what is happening on a timely basis and, where appropriate, well in advance of the issue, so that
the client can minimize the cost of correction or adjustment by using internal personnel and skills. It is important for the
auditor and accountants to have regularly
scheduled meetings with appropriate levels of management personnel. Certainly
where audit committees are involved, the
same effort applies if only with the chairman of the audit committee.

SHELDON AUSMAN is principal and managing director of client services for Gumbiner Savett Inc. Reach him at (310) 828-9798 or
[email protected].