Higher cost, more work, more fees: Sarbox opens new doors for accountants

Despite the initial cynicism over Sarbox, Michelle Perry discovers how the profession is now reaping the rewards through an unexpected source of work and fee income

Initial outraged cries over the introduction of the now infamous Sarbanes-Oxley (Sarbox) rules have faded to more of a whimper in recent months.

There are several reasons for this, but two particularly stand out.

First, company directors seen to criticise improved governance standards will raise eyebrows within the investor and analyst communities, who vehemently uphold attempts to stamp out the potential for corporate fraud and 'creative' accounting.

Secondly, accountancy firms soon wised up to the fact that Sarbox, rather than putting them in a straitjacket, actually opened up new opportunities. What Sarbox has inadvertently achieved is to provide accountancy firms with a new source of income.

The earlier compliance deadline of November 2004 for US companies has meant that much of the initial gains have been taken by US accountancy firms. But with the deadline - 15 July 2005 - for foreign registrants with dual listings fast approaching, British and other European firms are also seeing income rises.

David Anderson, partner at BDO UK, says: 'US firms have been the best recipients so far. But the shift in the balance of work will soon move from the US to Europe. Because of that there will be a continuing need among larger organisations in the UK to recruit.'

The most up to date international estimates have put the total cost to US public companies complying with section 404 of the Sarbox Act at $3.14m (£1.6m).

That's a phenomenal 62% more than the $1.93m estimate identified in a January 2004 study by Financial Executives International.

Assuming FEI's average cost-of-compliance estimate for US companies at $2m, the 113 UK companies with dual listing will have to pay out around $226m (£122m) to be compliant; and that's just section 404 compliant. There's a whole lot more to Sarbox than just section 404.

In terms of man-hours needed to be section 404 compliant, US public companies expect to spend an average of 25,667 internal hours - compared with 12,265 estimated a year ago - and 5,037 external hours. Companies also expect to spend an additional $1,037,100 on software and IT consulting, according to FEI.

The recruitment frenzy that has taken hold of US public companies and their accountants has been paralleled in the UK. The dearth of qualified accountants in the UK however has forced firms to look elsewhere to recruit.

Keith Dugdale, head of recruitment at KPMG, says: 'It's absolutely right that there's a big demand for [Sarbox] qualified staff; and that goes alongside a sub-shortage in qualified staff. We are finding it difficult to recruit people with the qualifications, so we are tapping into our qualified staff in our international network in Eastern Europe and Asia.

'We have a group of qualifieds from India who will come over for a six-month project. There's about 25-30 people coming over.'

Stephan Rolls, national director of resourcing at Ernst & Young, says the UK firm has taken on between 60 and 100 'dedicated' staff to deal with Sarbox work. But he emphasises the word 'dedicated', as 'we also have people moving off other projects to work part or full time on Sarbox. The overall effect is much greater than it would appear. It's certainly a significant factor in how busy we are'.

What the new US laws have also unintentionally precipitated is to spread out more evenly the work among large and medium-sized firms. Where most audits of the largest public companies are carried out by the Big Four firms, the mid-tier firms have been able to pick up a great deal of the work, too.

BDO UK, one of the UK's top 10 firms, provides proof of this. In December the mid-tier firm announced fee income growth of 11% to £187.9m from £164.4m in 2003.

Jeremy Newman, BDO UK managing partner, credited much of the growth to the Sarbox work the firm has picked up: 'In the UK, as in the US, we have seen an increase in companies turning to us for specialist advice in areas such as tax, internal risk and forensics. Businesses are recognising that we can deliver on an international scale.'

The new regime has also precipitated a shake-up in the audit market. Some firms have resigned the annual audit work to cash in on more advisory services. Where firms have retained the audit they haven't been able to carry out other services.

'The Big Four are resourced constraint because of the volume of 404 work. They can't service the client and are resigning the audits,' says David Anderson.

Nevertheless, Ernst & Young UK also recorded a rise in fees thanks to Sarbox. More than 50% of the company's revenues now come from non-audit clients, according to the firm's annual results. The company saw a 15% rise in fees from non-audit clients.

Chairman Nick Land attributes this to businesses seeking outside help to comply with governance and regulatory measures, including international financial reporting standards and Sarbox.

'Perceptions of audit independence have significantly reduced the non-audit services that companies buy from their audit firm,' he says. 'This shift means that 53% of our fees now come from other firms' audit clients.'

PwC in the UK reported a 16% increase in revenues from services to non-audit clients, while its global network also grew comfortably.

Samuel DiPiazza, PwC CEO, says: 'We experienced strong performance across all of our businesses' as well as our success in refocusing our business strategy to adapt to changing client buying patterns and regulatory developments.

'Our assurance practices are performing very well, and our market share of services to non-audit clients is growing.'

Rising fees

Audit fees have however also risen, partly to cover the cost of the extra work auditors now have to do, but also to cover the costs that firms have had to spend on training and recruiting staff to carry out the compliance work.

According to the latest FEI study, the 224 listed companies polled - with average revenues of $2.5bn - expect to pay their auditors $823,200 in fees for attestation of the internal controls, on top of the annual audit fees.

The findings are in contrast to the $590,100 estimate that auditors would charge for attestation a year ago.

'When we conducted our January [2004] survey, audit firms hadn't yet provided their clients with complete estimates for section 404 work because the auditing standards had not been finalised. Now that the standards are finalised and implementation efforts are further along, compliance costs can be more accurately determined,' says Colleen Sayther, President and chief executive of FEI.

The latest research in the UK shows that Sarbox has pushed up the price of an audit; the average FTSE100 audit fee is now 12% higher than it was a year ago.

The overall winners are undoubtedly accountancy firms and, of course, financial recruitment houses. Sarbox has provided firms with the perfect opportunity to regain some of the confidence in firms the public, investors and analysts lost in the wake of the catalogue of corporate scandals at the turn of the millennium.

But what firms must be careful of, as FEI's CEO Colleen Sayther points out, is to 'exercise care and judgement' in charging clients for work in uncharted waters, as they have 'latitude in terms of the scope and depth of their work'.

Michelle Perry is a freelance journalist specialising in financial and business issues.