Companies sensing a big chill with auditors: the outside auditor-corporate client relationship has changed considerably in the advent of Sarbanes-Oxley and the PCAOB rules. Stricter standards and an insistence on independence have created uncertainty and some friction.

• Author: Millman, Gregory J.
• Position: Public Company Accounting Oversight Board

The rules fashioned by the Sarbanes-Oxley Act have been the source of a lot of grumbling, and not a little public criticism. H. Rodgin Cohen, chairman of the Sullivan & Cromwell law firm, has compared Sarbanes-Oxley to the Patriot Act passed in the wake of the 9/11 attacks. Both laws were enacted in a time of crisis, he says, and both present "the risk of an unrealistic oversight and enforcement process that places institutions in undue jeopardy and discourages rational, in favor of defensive, compliance policies."

Perhaps nowhere has Sarbanes-Oxley affected companies as profoundly as in the audit relationship. Of course, the Act outlined some general principles with which no reasonable person could disagree, such as the principle that an auditor should be somewhat more independent of management than Arthur Andersen was of Enron Corp. But subsequent (somewhat delayed) rules and guidance and standards from the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have had what more than one CFO has called a "chilling effect" on the relationship between auditors and management.

This is one point on which management and auditors can both agree. "It's not good policy, "said Garrett L. Stauffer, senior partner in the national risk and quality practice of PricewaterhouseCoopers, during the SEC's public roundtable on Sarbanes-Oxley implementation in April. "It's driven bad behavior, it's prevented good communications and it has the impact of going backwards when you think about the quality of financial reporting."

"What you're finding is ultra-conservatism," observes David L. Shedlarz, vice chairman and former CFO of Pfizer Inc. Many executives believe the auditors have drawn into a kind of shell, and the executives say they can no longer rely on their auditors for answers to questions about how to interpret accounting standards. Some are afraid to even ask--worried that by posing a question they will betray ignorance, and therefore find themselves cited for a control deficiency. Some have found it necessary to hire two separate audit firms--one to provide advice, the other to attest.

Others have tried to hire another audit firm and found it impossible to get any auditor to go on the record with an answer to their question. Audit committee members say that a certain amount of tension in the relationship between managers and auditors is good, but worry that they're now getting too much of a good thing. Tension, it seems, is approaching the breaking point.

"Probably some level of tension is constructive, because you want oversight responsibility between the auditor and management," says Jim Copeland, former chairman of Deloitte & Touche, who chairs the audit committee of Equifax and serves on the boards of Conoco Philips and The Coca-Cola Co. "But when it becomes too great, you worry about a lack of transparency and willingness to be open that makes the auditor's job more difficult."

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