New Rules Affect Few Arkansas Firms

Accounting firms across the country are gearing up to conform to new rules enacted this year by Congress for auditors of public companies.

On July 30, President Bush signed into law a corporate reform bill known as the Sarbanes-Oxley Act of 2002, aimed at restoring investor confidence in public companies.

The bill largely reflects legislation introduced by Sen. Paul Sarbanes, D-Md., and later amended by Rep. Michael Oxley, R-Ohio. It outlines tough reforms affecting the business practices of public companies, focusing on fraudulent and deceptive management practices. It also establishes criminal penalties for corporate officers who knowingly file false financial reports.

Congress and the U.S. Securities and Exchange Commission began working on the bill after the Enron Corp. scandal and widespread news of other accounting fraud on Wall Street, including WorldCom Corp.’s announcement that it hid $3.8 million in expenses in 2001.

In April, Arthur Andersen — Enron Corp.’s auditor and a member of the “Big Five” national accounting firms — shook the industry when it was slapped with federal obstruction of justice charges for shredding pertinent documents relating to Enron. Clients began dropping Andersen, and many of its branch offices across the country closed.

Andersen, whose major Arkansas public clients included Alltel Corp. and Acxiom Corp., closed its Little Rock office this spring after both companies took their business elsewhere. Acxiom signed on with KPMG, and Alltel went to PricewaterhouseCoopers. Neither of those accounting firms has offices in the state.

The SEC, which has oversight over the stock of publicly traded companies, already had rules in effect governing the auditing of public companies. But the events concerning Enron, WorldCom and Andersen convinced Congress that the accounting industry needed greater controls.

The Sarbanes-Oxley Act, some of which applies immediately but most of which will apply as of April 2003, will affect only a handful of firms operating in Arkansas. (See list of Arkansas’ public company auditors on Page 19). Three firms with offices in the state audit Arkansas public companies: BKD LLP, Ernst & Young and Deloitte & Touche.

The Sarbanes-Oxley Act calls for creation of a private-sector board, the Public Company Accounting Board, that will oversee the accounting industry.

Until now, accounting firms were self-regulated, following guidelines set by the American Institute of Certified Public Accountants.

AICPA uses a peer-review system much like the one hospitals use for oversight of hospital personnel. Every three years, firms working for public companies are required to be audited by an accounting firm of comparable size. The results are made public through SEC filings.

“We don’t see this part of the regulation as having that great an impact on us,” said Bill MaGee, a partner with BKD LLP in Little Rock. “We are already under peer review, where a firm from outside our geographic area comes in and makes sure we are performing our audits to industry standards.”

Even so, Sarbanes-Oxley’s public accountability board is structured to retain independence from the accounting industry and won’t be dependent on the AICPA or traditional peer review.

The board is under the direct supervision of the SEC and has authority to:

• register firms that audit public companies;

• establish auditing, quality control, ethics, independence and other rules;

• conduct inspections;

• perform investigations, conduct disciplinary proceedings and impose sanctions; and

• seek issuance of subpoenas by the SEC.

The law also places restrictions on accounting firms that try to sell other services to their audit clients. These include consulting, bookkeeping, tax services, internal auditing and/or information systems design and implementation.

Many large accounting firms in recent years have increased their revenue sharply by offering one-stop-shopping to their clients. But lawmakers believed auditors offering other services were in danger of losing their objectivity in performing financial audits.

Non-audit fees can provide a lucrative side business to auditors. In Arkansas, four of the state’s top public companies — Acxiom, Alltel, Dillard’s and Tyson Foods — represented more than $11.5 million in non-audit fees paid to auditing firms last year, according to the companies’ SEC filings:

• Acxiom paid Andersen $2.53 million in non-audit fees, compared with $385,000 in audit fees.

• Alltel paid Andersen $4.58 million in non-audit and $2.38 million in audit fees.

• Dillard’s Inc. paid Deloitte & Touche $3.12 million in non-audit fees and $732,538 in audit fees.

• Tyson Foods Inc. paid Ernst & Young $1.32 million in non-audit fees and $2.13 million in audit fees.

As auditors are forced to give up non-audit practices for their public company clients under Sarbanes-Oxley, other accounting firms will be jostling to gain a share of the up-for-grabs business.

“We see this as a huge opportunity for us to do internal audit work for companies that are not our audit clients,” said Greg Flesher, managing partner of Moore Stephens Frost in Little Rock. “We already do internal auditing for several large agricultural companies, so we’re set up to do it.”

Other key provisions in Sarbanes-Oxley include calling for longer prison terms and bigger fines for executives found guilty of fraud and the creation of a federal account to compensate defrauded investors that would use civil fines, payments and assets of corporate wrongdoers.

One issue not addressed by Sarbanes-Oxley is the recent focus on the questionable practice of companies paying executives hugely valuable stock options without having to list any associated expenses on their balance sheets.

Even though Sarbanes-Oxley will have little effect on the operations of most Arkansas accounting firms, some believe it may precipitate a rash of state regulatory proposals in next year’s legislative session.

“Our fear is that state organizations will propose bills that will make us regulation heavy. California, New York and 10 or 12 other states have already reacted this way,” said Barbara Angel, executive director of the Arkansas Society of CPAs.

If the Sarbanes legislation cascades down to state regulatory bodies, it could adversely affect small and medium firms in Arkansas, Angel said.