The right stuff: CFOs, auditors & audit committees reexamine their relationships.

• Author: Ross, Sharon
• Position: Sarbanes-Oxley Act of 2002

($427 billion) YEP, THAT'S RIGHT, A $427 BILLION LOSS. It's the estimated total loss in market value of WorldCom, Tyco, Qwest, Enron and Global Crossing. And it has been the impetus for a thorough reexamining of the client-auditor relationship.

Even before the unanimous passage of the Sarbanes-Oxley Act of 2002, CFOs, auditors and audit committees have been scrutinizing their relationships, looking for best practices that will quell investor fears, stabilize a volatile market and rebuild trust in the profession.

This reexamination has led some companies and accounting firms to take steps toward eliminating perceived conflicts of interest and improving the transparency of financial reporting and the auditing process.

Many public companies have scrutinized their decades-long relationships with their auditors and have determined it is time to select new ones. Others, such as Disney, backed away from giving their auditors consulting work. PricewaterhouseCoopers joined the ranks of KPMG and Ernst & Young and sold its consulting arm to IBM.

THE MARKET'S NOT CORNERED

But change hasn't been limited to public companies. Many privately held companies and nonprofit organizations have changed their financial reporting process.

For example, for the first time in its 92-year history, CalCPA modified the agenda of its annual meeting between its external auditor and audit committee to include an executive session. CalCPA management was excused, which allowed the auditor and audit committee to freely discuss any audit-related matters including internal controls.

This type of open meeting is based on a 1999 New York Stock Exchange Blue Ribbon Committee's guideline for audit committee practices. Even though many public companies did not start following the guidelines until last year, CalCPA felt it should proactively adopt the practice.

"In today's business environment, it's smart for both public and private companies to foster open, unrestricted communication between the auditor and audit committee," says Donna Lekosky, CalCPA director of finance.

In addition, Learning Tree and other public companies such as Rockwell International have gone a step further by including a clause in their audit committee charters about meeting separately with the external auditor without management present.

DIALOGUING WITH AUDITORS

"All companies should have an open, ongoing dialogue with their auditors, especially if there have been new professional pronouncements or changes in the company's business" says Lekosky. "No one wants surprises. I would encourage CFOs to stay in contact with their auditors throughout the year to ensure that everyone is on the same page."

CalCPA's auditor, Dave Ljung, a shareholder with Gilbert Associates, Inc. in Sacramento, agrees that...