The 'other' cascading effect: new opportunities, new risks.

• Author: Wolfe, Joseph

Passage of the Sarbanes-Oxley Act of 2002 (the Act) has resulted in significant legal and regulatory changes affecting auditors of publicly traded companies. The passage of additional laws and implementation of related regulations that affect the auditors of non-public companies, known within the CPA profession as the "cascading" effect, continues to be of great concern. And with good reason: Such laws could restrict the ability of CPA firms to continue to render various non-audit services to their non-public clients.

However, passage of the Act and other new state and federal laws and regulations, such as the revisions to Government Auditing Standards on independence, has also created a different "cascading" effect. While implementation of these laws and regulations imposes additional duties on CPAs and, in some cases, restricts their ability to render professional services to clients, it has also created new professional service opportunities.

Under new SEC independence regulations imposed in connection with the Act, certain services that previously could be performed by auditors of public companies are now prohibited to them and will need to be performed by other professional service firms. The services, include, for example:

* Financial information systems design and implementation

* Appraisal or valuation services

* Internal audit services

* Human resource services

Additionally, under Section 404 of the Act, public company management is required to include an internal control report in its quarterly and annual reports. This report can not be prepared by external auditors, although the external auditors are required to attest to the representations made in the report. In order for management to be able to make such representations, the company may choose to utilize its internal audit department or an outside CPA firm other than the independent audit firm to design and test the effectiveness of internal controls.

Under the revised Government Auditing Standards, auditors can not perform internal audit functions or be responsible for the design, development, installation or operation of a computerized accounting system and remain independent. This creates still another set of professional service opportunities for CPA firms, because the auditors of entities subject to these standards can no longer render these services.

Liability Risk Implications

What are the liability risk implications of undertaking services for new clients under these...