Sarbanes-Oxley: The Future of Audit
Author:
Brian Walsh
[Fulltext] It may seem absurd, but influential people in the accountancy profession in the United States are now saying that it is only a matter of time before a listed company is unable to obtain the services of an audit firm because the level of risk in carrying out the audit is unacceptably high. Another view emanating from the same part of the world is that second-tier firms have no appetite for merging to create a new fifth or sixth large firm, as they do not wish to take on the additional risks of operating at that level. A number of things have brought about that situation, including the demise of Andersen, the ever increasing size and complexity of some corporations, September 11th and its affect on the insurance market, Enron and other major corporate scandals, and, most recently, the passing into legislation in the United States of the Sarbanes-Oxley Act 2002.
Most of the publicity surrounding that Act has been centred on its requirement that the Chief Executive Officer and the Chief Financial Officer personally certify the "fairness" of each annual and quarterly report which is filed. However, a further key feature of the Act is that it has extra territorial reach with implications for the accountancy profession here and elsewhere. In summary, it requires any accounting firm outside the United States, which issues an opinion, or otherwise performs material services on which a US auditor relies in furnishing an audit report on a US listed company, to be subject to the Act and the jurisdiction of the Federal or State Courts in the United States. The Act allows for certain exemptions to be given if deemed "necessary or appropriate in the public interest", but the information coming from the United States is that the Securities & Exchange Commission (SEC) is in no mood to grant any exemptions whatsoever. Its attitude is that if a company wishes to raise funds in the capital markets in the United States, then they and their auditors must be prepared to submit to US legislation. While one can appreciate the desire amongst US legislators to adapt new regulatory structures in the light of recent events in that country, the extra-territorial elements of this legislation totally ignore the EU Single Capital Market Programme and efforts to build Mutual Recognition between the EU and US of each other's capital market regimes. It will, undoubtedly, add to the pressure on auditors in a variety of ways, not least the scope for much increased liability exposure and could lead to auditing becoming unviable. This is not in the public interest and will be detrimental to capital markets everywhere.
To avoid this happening, Governments must bite the bullet and tackle the age-old question of proportionality. It is illogical and totally unfair that the total cost of a business failure can fall upon an audit firm simply because it has insurance and its liability is unlimited. In New South Wales, Australia, an auditor's liability is capped to ten times the fee up to a maximum of AUS$20 million. In the same State they are now planning to introduce proportional liability legislation. In Ireland, we have requested the government to introduce Limited Liability Partnership legislation similar to that which already exists in the UK and other parts of the world. Our submission has been referred to the Company Law Reform Group and we will be urging that group to deal with it as soon as possible.
This is not just a Big 4 or large firm problem. As every practitioner will know, the calculation of professional indemnity insurance premiums is by no means an exact science. An event in one sector can impact on others who were not remotely connected to either the event or the underlying problem. It has also become politically popular in all the developed countries to "get tough" with business. While this is understandable in the present climate, there must be balance. In February 2002, the Government produced a comprehensive Consultation Paper on Better Regulation, one of the aims of which was to ensure that Regulation is "not overly burdensome and is properly enforced". This should not be forgotten.
Accountancy Ireland Vol 34 No 5 October 2002