Audit expectations Featured

7:00pm EDT January 29, 2008

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