Accountants Need More Staff as New Rules Take Effect By JACQUELINE FOX Staff Reporter In coming days a handful of the new rules detailing how publicly-held companies compile their financial data will go into effect, officially marking the start of a new year for the accounting firms that represent them. By direction of Congress, the Securities and Exchange Commission was ordered last fall to craft sweeping accounting practice reforms under the Sarbanes-Oxley Act of 2002 following the financial scandals at Enron, WorldCom and others. The new regulations tie into one big change for the auditors. Before a 10K or quarterly report is issued, publicly-held firms must put together what’s being called an internal control report, a statement by corporate officers outlining how the company compiled its financials. Nothing new, actually. Many public companies already put together such reports and will likely continue to use their same formula for doing so in the future. But what is new, and what some auditors say represents the biggest and most immediate challenge for their firms and the clients they represent, is that the auditors themselves must now sign off on those reports. Previously, auditors were only required to certify the final reports. “In other words, what companies have always done must now be put on the public record and we, as auditors, must approve it,” said Mark Nelson, managing partner at the Woodland Hills office of Ernst & Young, one of the nation’s Big Four auditing firms. “That means we are being asked to attest to the practices or internal plan for reporting, which is a very new thing and carries all kinds of new implications.” Although it’s too soon to site actual numbers, Nelson said his and other firms will need more resources and time to assist clients in navigating the new rules outlining the process for compiling these reports. “That’s a major undertaking, because we have had to assimilate all the new rules and structures as they come out, and as they continue to be added and refined,” Nelson said. “That takes resources for educational purposes for our staff and resources for serving our clients.” System control reports are due Dec. 31, so it remains a top priority just because of the time factor. “If they don’t get their reports in, they risk being reported and that doesn’t help them look good in the eyes of investors,” said David Thompson, deputy managing partner for the Pacific Southwest region in the Woodland Hills office of Deloitte & Touche LLP. Thompson said his firm would likely have to hire more staff down the road to assist clients new and old in preparing these reports. Inside auditing, as he called it, requires assessing the effectiveness of a company’s internal practices and how they square with any new reporting changes under the law. By and large, company executives view the new requirements for certifying internal control systems as positive. “This is a no-brainer, as are some of the other new requirements, because it’s something we’ve always done anyway and should be expected to,” said Jeff Ornstein, chief financial officer for Van Nuys-based Superior Industries International, Inc. “But it’s a good thing, because it says to the public, ‘here’s how our figures have been reported and how the system works from the inside, and here’s our auditor’s stamp of approval.’ ” Hal Schultz, co-chair of the California Society of CPA’s government relations committee and a CPA at Pricewaterhousecoopers LLP, agreed that auditors now face new challenges in having to concern themselves with a client’s internal operations but suggests that the task is not as daunting as it seems. “These new reports now put the focus on internal controls, whereas the focus for us before was on financials, Schultz said. The good news, according to Schultz, is that the internal reports will likely be only a few pages in length and consist of a brief narrative by management that the company’s system of internal controls is an effective one. The point, says Schultz, isn’t as much about giving shareholders or the feds more paperwork to plow through, as it is about creating a publicly documented statement of accountability before financials come out. “Just by getting this report on the record is a very significant matter for managers,” said Schultz. “The fact that they will be getting this kind of attention means companies will begin taking their systems of control much more seriously and looking more deeply into how they operate from within.” Many of the changes coming as a result of Sarbanes-Oxley have yet to be formalized, and the timeline for a complete list stretches well into summer. In addition, the five-member Public Company Accounting Oversight Board, also established by Congress last year, has announced an “aggressive” game plan for auditing the auditors, but that panel won’t actually begin operations until late April. Among the other immediate changes required, companies must create an in-house audit committee and code of ethics for filing practices. Other new requirements taking effect this week include: – The barring of corporate executives from selling company stock during blackout periods. – Corporate attorneys must report evidence of any breach of fiduciary duty. – New requirements calling for more information on off-balance sheet activity. – Disclosure of the names of officers serving on a company’s internal audit committee.