CONFERENCE CALL: SEC curb on conflicts could snare small CPAs

Small accounting firms could be hit just as hard as their bigger brethren if the SEC adopts a proposal to eliminate conflicts of interest between auditors and the firms they oversee.

At an SEC hearing late last month, Harold Monk, chairman of the American Institute of Certified Public Accountants’ Partnering for CPA Practice Success, warned that the 6,800 local and regional firms in his alliance also would be covered by the proposal.

That’s because state accounting boards, banking regulators and the Department of Labor would probably adopt it as well, said Mr. Monk, managing partner of Davis Monk & Co. in Gainesville, Fla.

The Big Five accounting firms are generally considered to be the targets of the new rule. But he said the Securities and Exchange Commission’s proposal defines “affiliates” of accounting firms so broadly that alliance firms would be prohibited from working for the audit client of any other member.

“This is simply unworkable,” Mr. Monk said. The rule would create “an insurmountable hurdle to those of us in smaller firms seeking to complete against the larger firms by coming together in various alliances.”

The AICPA vigorously opposes the SEC measure, but two of the Big Five firms, Ernst & Young LLP and PricewaterhouseCoopers LLP, voiced continued support for a compromise with the SEC.

“I do not agree with the approach taken by others in the profession, including the American Institute of Certified Public Accountants, in making harsh attacks against the commission and in trying to stonewall the commission’s efforts,” said Philip Laskawy, chairman of Ernst & Young.

Mr. Laskawy said the AICPA’s opposition “can only weaken public confidence in the accounting profession.”

The SEC proposal would restrict CPA firms that audit companies from providing non-audit services. Many CPA firms are trying to enhance their profitability by offering investment advice, human resource consulting and systems consulting, among other services.

practice was sold

To avoid the potential for conflicts, Ernst & Young recently sold its management consulting practice.

Mr. Laskawy said the move has not harmed Ernst & Young’s ability to audit companies effectively.

SEC Chairman Arthur Levitt mentioned the possibility of the commission’s holding more hearings throughout the country to give small firms a chance to testify.

But Mr. Levitt rejected calls from the industry to delay new rules, saying that the issue of audit firm independence has been festering for 25 years.

“This issue will never be satisfactorily put to bed,” he said.

AICPA officials maintain that audits would be impaired if accounting companies could not continue to offer consulting services.

“We have found the opposite to be true,” Mr. Laskawy countered. “Without a large consulting practice to manage, we are now more targeted and more focused on our core audit and tax business.”

In the last six months, the firm has signed four new Fortune 500 clients, he said.

“We acknowledge that we have a unique relationship to public investors, who rely on us as vital gatekeepers to the public securities markets and count on us to perform our audits well and effectively,” Mr. Laskawy said.

But he added that the SEC should not prohibit internal audit outsourcing, such as computer auditing or work at a company’s foreign location.

Just as partnerships, joint ventures, minority investments, cross-licensing and other cooperative arrangements are key for other companies’ success in a global market, “it is important that we, too, be able to have such relationships,” he said.

Ernst & Young and PricewaterhouseCoopers have developed their own proposal, Mr. Laskawy said, which would restrict accounting firms from providing information systems consulting or doing internal audits.

Mr. Monk expressed concern that the efforts of his group to provide cross-referrals and share marketing services would be barred.

Mr. Monk said his 35-employee firm was able to expand its geographic reach through the alliance and to gain more expertise by sharing specialists that he otherwise could not afford.