The new rock stars

By Peter Morton
Photography: Edward Gajdel

More and more accountants are discovering the freedom of being professionals-for-hire. And the once-feared SOX and 52-109 just may be the right tickets to this freedom

Mike Tevlin is sitting in a park on the cornerof Charles and Church streets in downtown Toronto, doing something he has not done for years — taking a break. “I used to work 60 to 70 hours a week,” says the former CFO for Bank of Montreal’s e-commerce subsidiary Cebra Inc., “and then I happened upon this.”

After BMO shut down Cebra, Tevlin joined thousands of other accountants who are riding the crest of the now four-year-old corporate governance rules called the Sarbanes-Oxley Act and their new Canadian counterpart, an enhanced rule 52-109 (which will replace the more controversial Multilateral In-strument 52-111) to be adopted by Canadian securities commissions next year.

Born in the era of the Enron and World-Com financial scandals, SOX was designed to bring back investor confidence to publicly traded companies in the US. Canada, Britain and other European countries adopted similar regulations. But in addition to huge implementation costs being borne by publicly traded companies, SOX has spawned something quite unexpected — a boom for the accounting industry on both sides of the border.

In Tevlin’s case, he has signed on as an accounting freelancer with outplacement firm Resources Global Professionals. In essence he is a hired gun brought in by any one of some 300 Canadian companies, which, if they trade publicly in the US, must meet SOX reporting requirements. “This job gives me reasonable flexibility and maybe even the summer off,” Tevlin says.

That is because Tevlin is helping people like Mark Walker, CFO for Calgary’s Provident Energy Trust, who must comply with SOX by the end of the year and to do so are bringing in consultants to help with the complex new rules. “This has created a whole new level of accounting practice,” Walker says. “And much is coming from outside consultants both from Canada and the US, and as far away as Europe and India.”

The accounting profession is starting to see itself in a new light too. At a recent auditing conference in Baltimore, it dubbed itself “the new rock stars,” as accountants and auditors with the skill set to comply with SOX are in huge demand in the US and around the world. So much so that enrollment in accounting courses is up and a new level of accountancy — consultants — is being created. While there are no definitive figures on the impact on the number of accounting students graduating in Canada, says Paul Granatstein, executive director of the Canadian Academic Accounting Association in Toronto, generally speaking there has been an increased interest from students following the Enron/WorldCom scandals and the new world of SOX. “These scandals have made accounting sexy,” he says.

Bea Sanders of the American Institute of Certified Public Accountants says that “generally students move into more risky areas during economic booms, then when things start to retrench they go back to safe and secure areas like accounting.”

“It’s a good time to be in the risk and internal audit consulting profession,” Tom Beirne, director of internal audit with risk consulting firm Protiviti, told the Baltimore Business Journal in June. “There are literally not enough people out there.”

“SOX drove many companies to outside consultants,” says Barbara Valentine, senior director, SOX, enabling and administration at Pfizer Inc. in New York. “Companies had so little time to get their heads around it.”

A recent study of this latest wave of outsourcing — called project professionals in industry-speak — found it is virtually all being driven by SOX. “Increasing regulatory requirements are identified as a significant driver of project professional use in both Canada and the US,” says the study analysis done by California-based Resources Global Professionals (see “Looking outside,” on p. 28).

There are a number of reasons why companies are increasingly turning to hired guns to do their auditing work in this new SOX world, says Resources Global’s chairman and CEO, Don Murray. One is obvious. In a period when companies are downsizing, there are simply not enough human resources available to do these complex tasks that often require hundreds of checks and cross-checks.

A second reason, he says, is that the required skill sets within a company are simply not available, as staff time has been absorbed doing the routine day-to-day accounting work. More interestingly, however, is that the reason professionals become hired guns is because of a change in corporate culture. In the past, he says, an executive with an accounting background would agree to do the mundane internal auditing work but only as a stepping stone to a higher plateau in the corporate structure. “They would agree to do this if it meant heading to the chair or the CEO or chief operating officer,” Murray says, from his office in Orange County, south of Los Angeles. “After all, no one really wants a career as an internal auditor.”

But that is no longer the case. Now many of these former internal auditors can freelance — work for an intense period, maybe a few months, for much higher pay and be free to do whatever else they choose afterward. And since many of these experienced professionals have the expertise to handle complex auditing issues, the job can be done relatively quickly, Murray says. “The job has a finite life to it; companies want to see these issues fixed and go away.”

There are few in the accounting industry who have not yet gone through the paces of SOX and the OSC’s 52-109, which will soon be in the comment phase.

John Carchrae, chief accountant at the OSC, says Canadian securities regulators responded to many of the concerns from Canadian companies worried about complying with the Canadian rules, a near mirror of SOX’s controversial Section 404. In March, the Canadian securities administrators formally shelved plans to introduce the controversial Multilateral Instrument 52-111, “in view of the delays and debate underway in the US.” Instead, Carchrae says the administrators decided to expand the existing 52-109 that 52-111 was to have replaced. “A lot of people had concerns related to the costs and the benefits of 52-111,” he says.

At the same time, Carchrae says, the Canadian regulators expanded 52-109 to insist that a CEO or CFO certify that there are effective internal finance controls and eliminate the requirement that outside auditors give an opinion concerning “management’s assessment of the effectiveness of internal control over financial reporting.” Instead, regulators will leave it up to a company’s board of directors and its audit committee to decide whether they need the help of an auditor. The expanded 52-109 would apply to all reporting issuers — firms that trade publicly except investment funds — in all Canadian jurisdictions.

“We’re looking for more public comment this fall and hope to have the new rules in effect for year ends on or after December 31, 2007,” Carchrae says.

As for SOX, Section 404 imposes somewhat onerous internal checks and balances based on a complex checklist. “It’s a painful exercise,” says Brian Staffen, assistant vice-president of accounting policies and projects at Manulife in Toronto. “It’s a significant time consumer.”

US companies with a market cap greater than US$75 million have already gone through the exercise. The next wave — smaller companies and any foreign companies listed in the US — must go through the exercise by the end of 2006. “This is going to be a really long, frustrating year,” says Walker. As well, there is considerable controversy over whether the cost and pain of SOX is really accomplishing what it intended — to restore shaky investor confidence in the books of publicly traded companies.

“Common sense is gone,” complained Stephen Dickson, the controller for Wisconsin Energy Corp. in a January 2005 BusinessWeek look at SOX. “You have to document everything.”

Another troubling concern about the impact of the new rules is the stifling effect on corporate activity and the willingness to take risks to earn profits. Marcel Côté, president of Secor Consulting in Montreal, says SOX has undermined one of the most basic tenets of capitalism: risk taking. “It’s a major concern,” he says from a cellphone while traveling in a taxicab through Paris. “Every publicly traded company in North America is affected by SOX.”

Executives and their board members were once more prepared to take risks to earn profits — a legitimate part of doing business. “Risk taking is essential,” Côté says. But SOX has created an atmosphere of undue prudence and conservatism. As a result, companies are spending alarmingly large amounts of their time trying to minimize risk at the expense of innovation. “At the end of the day, it’s a lot more complex to innovate,” he says.

One spinoff of this more cautious approach has been the blossoming of private equity funds. These funds are buying up publicly traded companies and taking them private in order to escape the shackles of SOX, as well as for other reasons. “These private funds don’t need the ass protecting that publicly traded companies do and they tolerate management’s taking risks to try to generate profits,” Côté says.

Peter Morici, professor at the University of Maryland’s School of Business, believes it’s time to water down some of the more onerous aspects of the law before companies become so focused on corporate governance that they lose their incentive and drive and start looking to offshore exchanges. “SOX was concocted at a time of public hysteria and congressional outrage and has the predictable shortcomings of sovereign hubris,” he says. “Leave SOX in place as is and Americans won’t have to worry as much about the evils of capitalism, but they will enjoy fewer of its benefits.”

Morici says publicly traded companies may soon be able to avoid SOX compliance. That is, once the US$10-billion proposed merger by the New York Stock Exchange and Euronext, a network of European bourses, goes through. “The most significant NYSE-Euronext asset may be to help companies shift more easily among national exchanges to escape regulations that impose more costs than benefits to investors,” he says.

That view was echoed in June by Lon-don’s SEC equivalent, The Financial Services Authority, which said US ownership of the London Stock Exchange would not mean the imposition of US corporate governance rules on companies trading on the LSE. “Neither the FSA nor the Securities and Exchange Commission consider that US ownership of the LSE … would result in US regulations, including Sarbanes-Oxley, applying to companies listed or quoted on its markets or member firms of the LSE,” FSA chairman Sir Callum McCarthy then said.

In the meantime, SOX is not the panacea lawmakers were hoping for. It did nothing to prevent Fannie Mae, the US’s largest mortgage lender, from issuing a US$9-billion restatement last year. Yet Congress and securities regulators seemingly remain oblivious to the problems SOX is creating for companies.

For its part, the US Public Company Ac-counting Oversight Board says it is listening to complaints about being overzealous. Thomas Ray, the board’s chief auditor and director of professional standards, said that in May, the board released a plan to improve implementation of SOX’s internal control reporting requirements, making it easier for companies to comply with the rules.

Ray believes major opportunities for increased efficiency exist in two areas — the auditor’s evaluation of management’s assessment process and how the auditor’s risk assessment is applied to the nature, timing and extent of the tests of controls. And he said that an auditor’s documentation of the evaluation of management processes doesn’t need to be extensive, but should just show that the auditor is satisfied that management has an appropriate basis for its conclusion.

“I believe it also is helpful to point out that the auditor’s evaluation of management’s process is most efficient when management has done a good job documenting both the design of the company’s internal control and the assessment process and results,” he told the 25th SEC and Financial Reporting Institute conference in June.

To be fair, SOX has had positive effects. In March 2005, 116 US publicly traded companies reported some weaknesses or deficiencies in their internal controls, according to newsletter Compliant Week. “The auditors are doing better audits and charging for that,” Donald Nicolaisen, the SEC’s former chief accountant, told reporters. “More questions are being asked by everyone.”

Staffen says that many companies believe once you have complied with SOX, it all goes away. But every year, companies will be forced to go through the same painful procedures. “It’s like a computer,” he says. “Every time you buy one, you believe it is the last time you will need to. But not too long later, you’re looking at another one. SOX is the same way.”

That is why there will always be a need for people like Tevlin, who is enjoying his new freedom. “The pay is certainly in the ballpark and there is significantly less stress,” he says. And, more important, doing this kind of consulting means when the project ends, it ends. “I can now at least see the light at the end of the tunnel,” he says.

Peter Morton is the Washington bureau chief with the Financial Post