The New Finance-Auditor Dynamic

Sarbanes-Oxley has dramatically changed the way external auditors, the audit committee and company management interact. CFOs can use the latest PCAOB guidance to ease tensions in these relationships.

The relationship between external auditors and the finance functions of public companies has undergone a sea change since the passage of the Sarbanes-Oxley Act three years ago, the accompanying formation of the Public Company Accounting Oversight Board (PCAOB) and the transfer of auditing oversight from management to the board's audit committee. Auditors have adopted an ultracautious stance in their communication with CFOs, closing off many areas of formerly fruitful contact. And the increased intensity and rocketing cost of audits have contributed to a frostier relationship. But while the auditor-client landscape will likely remain wintry for years to come, there may be signs of a thaw, at least in the near term. CFOs can use new PCAOB guidance to ease tensions. And some observers think auditors may become -- if not less rigorous -- at least more efficient and cheaper.

Frozen Communication

The new dynamic was a natural reaction to the passage of Sarbanes-Oxley. Lacking detailed guidance, audit providers tended to be rigid in their interpretation of the new legislation. External auditors were determined to maintain their independence, so most adopted an arm's-length relationship with finance managers. They either limited themselves to a minimal advisory role or declined to perform in that capacity.

"Five to 10 years ago it was very common for senior financial executives to have an open, candid, direct relationship with the senior partners of their Big Four auditing firm," recalls Eric Keller, CEO of Movaris, a provider of financial controls management software in Cupertino, Calif. "If I were a CFO, I could explain some of the concerns I had about the current quarter and some potential areas of accounting exposure and other business exposure. I could tell the auditor that we were looking at a specific transaction, considering alternative accounting treatments and trying to figure out which one was most appropriate."

After Sarbanes-Oxley, CFOs learned to hold their tongues because accounting firms became reluctant to engage in those sorts of discussion. "The best answer that finance executives who asked those questions received from their auditors was, 'I cannot give you that kind of advice because to do so would compromise my independence by causing me to audit my own work,' " explains Nils Okeson, a partner with law firm Alston & Bird LLP in Atlanta and a board member at the Weinberg Center for Corporate Governance. Okeson participated in the Enron investigation. "The worst-case answer was, 'And moreover, the fact that you don't know the answer to this question yourself is an indication to me that there may be a deficiency in your system of internal controls because you don't have sufficient depth of technical accounting expertise.' "

External auditors were not alone in their overly cautious response to the new law. Some audit committees prohibited CFOs and other executives from discussing nonauditing matters with their auditing partners for fear of running afoul of the law's auditor independence mandate. "I think audit committees actually take on more risk by saying that," warns Joseph Carcello, director of research for the corporate governance center at the University of Tennessee in Knoxville. "If you're going to say that, you better make sure your accounting function is quite strong and contains sufficiently deep technical accounting expertise."