SOX fallout: new service opportunities aren't without risk.

• Author: McFadden, John
• Position: Sarbanes-Oxley Act of 2002

Many CPA firms have new service opportunities that arise from restrictions set by the Sarbanes-Oxley Act of 2002 (SOX). Although these opportunities could lead to profitable new business, there is associated risk. Failure to realistically assess the risks and concerns associated with new client engagements prior to establishing a relationship could lead to client dissatisfaction and heightened professional liability exposure. As you wade through new service opportunities, it is important to evaluate these risks and understand the drivers of SOX-related changes.

Some of the more common reasons companies are changing CPA firms include:

* Adherence to provisions of Section 201(a) of SOX, which prohibits an auditor of a public company's financial statements from performing specific categories of non-audit services for the same company.

* Personnel resource constraints at national CPA firms due to the increased demands associated with auditing public companies under the standards of the Public Company Accounting Oversight Board (PCAOB). In many cases, national CPA firms have terminated relationships with smaller public company clients because of the lack of personnel to service them.

* CPA firm re-evaluation of client acceptance and retention requirements. Some client relationships are being terminated based on an anticipated reduction in account profitability due to SOX scope-of-service restrictions, risks associated with continuing the relationship given the higher level of required auditor reporting under SOX, and other factors.

* The higher costs of continuing to engage a national CPA firm. The increases are due to extended audit time and higher fees associated with new internal control reporting requirements applicable under SOX.

* A realization by the management of some public companies that their personnel and other internal resources are not sufficient to satisfy the internal control review, documentation, and evaluation requirements necessary for management to report on internal controls as required by SOX.

These drivers have created new opportunities for non-national CPA firms to audit the financial statements of small public companies and to assist companies they do not audit in documenting and testing internal controls over financial reporting.

Post-SOX Scenarios

CPA firms should conduct thorough due diligence investigations prior to accepting new clients and engagements. Consider the following example:

A national firm auditor...