Can't Find an Accountant?

You're not alone. Sarbanes-Oxley has so overwhelmed accountants that companies are having trouble getting their books audited.

Early last year, Bob Brannon called KPMG, his accounting firm, to schedule an external review. Brannon, the co-CEO of Associated Packaging in Gallatin, Tenn., thought he had a great relationship with his auditors. KPMG had signed off on the company’s books for the past 20 years, and Brannon himself had worked at one point for Peat Marwick, one of KPMG’s predecessor companies.

So the response Brannon received shocked him. “They said to me, ‘Do you really need us?’” he recalls. “I said to them, ‘You are firing us?’”

Brannon’s company is hardly the only private company to be dumped by an accountant lately. The Sarbanes-Oxley Act—specifically, SOX’s Regulation 404, which requires a slew of new internal controls for public companies—is to blame. The new law is adding dramatically to the length and complexity of the standard corporate audit, creating a mountain of new work for accountants and prompting a manpower shortage for the entire industry. Public companies with $25 million or less in revenue expect outside consultants such as auditors to bill them for 846 labor hours, on average, in order to comply with SOX, according to Financial Executives International, a trade organization based in Florham Park, N.J. (See “The Curse of SOX,” below.) Although the law applies only to public companies, a recent survey by PricewaterhouseCoopers shows that some 30% of growing private companies are implementing parts of the new regulations, as well.

The resulting staffing woes are widespread, from large markets on the East and West Coast to smaller markets like Tennessee, where Brannon’s company, which sells packaging equipment such as shrink-wrap machinery, is based. But the problem is particularly acute at the Big Four accounting firms. Earlier this year, PricewaterhouseCoopers imported 1,000 auditors from abroad.

The surge in auditing business has led accounting firms to raise prices. It has also led them to purge companies from their client lists. Private companies are dumped in favor of public companies, and firms that end their fiscal year on December 31 find that their CPAs are especially discriminating.

“In many cases, it is simply a question of resources,” says Chuck Landes, vice president of the professional standards group at the American Institute of Certified Public Accountants, the national group that sets professional standards for CPAs. “Firms have to step back and say, ‘We can’t do all of the work, we can’t get to everything.’”

Ignored by the Big Four

Last fall, when the Securities and Exchange Commission convened a roundtable discussion on the effects of new auditing rules on smaller public companies, the accountant shortage dominated the conversation. William Balhoff, a Baton Rouge accountant, recalls that the executives, accountants, and policymakers who were present all agreed that, in his words, “the Big Four are essentially pricing themselves in a way that they don’t want to do” private-company work. Seeing an opportunity, Balhoff’s firm, Postlethwaite & Netterville, now audits only privately held companies.

The Big Four—Deloitte, Ernst & Young, KPMG, and PwC—are the surviving half of the Big Eight that existed in the 1980s. When consolidation first swept through the industry in the mid-1990s, no one worried. But when Arthur Andersen collapsed following its Enron-related indictment in March 2002, some people in and around the accounting world began to think that there were too few firms left. When The Wall Street Journal reported this June that KPMG might be indicted over illegal tax shelters, the prospect of having just three major firms shook the industry. (A KPMG indictment now seems unlikely.)

As the number of firms has shrunk and the workload has increased dramatically, the Big Four have happily jacked up their rates. Fees charged by external auditors to public companies have jumped 58% over the last year, according to Financial Executives International. In dollar terms, public companies with less than $25 million in revenue were spending an average of $863,120 on Section 404 compliance, the survey found.

Companies that face an important transition like an impending IPO often pay even more. Zach Nelson, CEO of the San Mateo, Calif.-based business software maker NetSuite, has seen his accounting bill from Deloitte increase tenfold, from $100,000 last year to $1 million this year. NetSuite had $33 million in sales in 2004. “We had heard the horror stories so we were prepared,” Nelson says. “It is the cost of doing business now.”

For some, that cost is simply too high. “We have had companies that were talking about going public,” says Balhoff, “but they don’t talk about it as much anymore because of the cost.”

 1 | 2  NEXT