Making the leap? Issues surrounding voluntary adoption of Sarbanes-Oxley.

• Author: Cytron, Scott H.
• Position: Cover Story

It's no wonder public companies are shaking in their boots, or more bluntly, their "SOX." CPAs and accounting professionals know the drill by now, and if they don't, there's not much time to learn the ropes. Based on the well-publicized financial failures of Enron, WorldCom and other public companies, even those with squeaky-clean images now must undergo a radical change in their processes based on provisions throughout various sections of the Sarbanes-Oxley Act of 2002 (SOX).

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But now even some small businesses--not to mention not-for-profit entities--are beginning to be subject to similar levels of internal scrutiny. Does it make sense for businesses that are not facing the glare of public investors to voluntarily adopt SOX to improve their image, integrity and delivery of services? If they do adopt SOX-like provisions, who is going to be the watchdog for this group? Certainly not the Public Company Accounting Oversight Board (PCAOB), which at this time is only concerned with public companies.

Looking out for Small Business

A recent KPMG LLP study found that financial reporting fraud cost public companies an average of more then $250 million per occurrence. Although financial fraud occurs less than other types of fraud, this issue knows no difference between public and private companies. Simply put, fraud is fraud.

Across the country, as the PCAOB's activities trickle down to the state level, legislators and regulators are beginning to further examine their own state requirements as public companies begin implementing SOX regulations.

Again, the question of who is the watchdog comes into play, and helping to serve as an advocate to answer this question is the American Institute of CPAs' Special Committee on State Regulation, chaired by former AICPA Chair Kathy G. Eddy, CPA, a shareholder with McDonough, Eddy, Parsons & Baylous, AC in Parkersburg, W. Va. According to Eddy, the Committee's purpose is to determine the parts of SOX that are most likely to cascade and impact CPAs, along with the small businesses the membership serves.

Since its genesis in fall 2002, the Committee has issued several white papers, including "A Reasoned Approach to Reform and Complexity of the Issues," as well as five issue briefs on peer review, professional ethics, state boards of accountancy, auditor/partner rotation and scope of services. All documents are posted at the AICPA's Web site under www.aicpa.org/statelegis/index.asp

"We looked at the issues and tried to put a reasoned approach to the adoption of those areas at the state level," Eddy says. "If an issue like audit partner or audit firm rotation comes up in a state, the state CPA society, for example, can take just that piece of the documentation, or use it as a complete product. We're giving people a background that they perhaps didn't have before."

Tracking State-by-state Changes

While it can't be assumed that the Committee has effected any changes yet, there is increased regulatory activity occurring at the state level. Accountancy boards in many states have proposed rules that, to some degree, follow...