Professional Services Monitor: Today

A Supreme Court ruling today on the case Free Enterprise Fund v. Public Company Accounting Oversight Board will force some minor changes to the Public Accounting Oversight Board created by the Sarbanes-Oxley Act.  The narrowly-focused ruling, based on separations of powers, found that the law as written by Congress unduly restricted the president in hiring and firing board members of the PCOAB.

The high court, in a 5-4 opinion by Chief Justice John Roberts, found fault with some parts of the Public Company Accounting Oversight Board, which was created as part of the act in the wake of collapses at Enron and WorldCom.

Congress had given the five-member board, a not-for-profit corporation, broad regulatory authority over accounting firms that audit publicly traded companies.

Justice Roberts said the structure of the accounting board violated constitutional separation-of-powers principles because it was too difficult for the president to remove board members.

“The president cannot take care that the laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them,” Justice Roberts wrote.

Justice Roberts said Sarbanes-Oxley “remains fully operative as a law.” He said the unconstitutional provisions governing the board could be severed from the rest of the law.

Justice Roberts said the Securities and Exchange Commission will now have the authority to remove board members at will. Previously, the SEC could only remove members for good cause.

In April, we took a preliminary look at FY2009 audit fees, based on the the proxy statements processed at the time.  We have updated this analysis with an additional 1,500 filers, bringing the total to 3,636 proxies tracked between January 1 and June 15, 2010.

The preliminary analysis showed PricewaterhouseCoopers with a small increase in total fees.  Now, PwC has a change of -0.8%, with KPMG next among at the Big Four at -2.8%.  Among the top ten firms by total fees, only ParenteBeard had positive growth at 6.1%.

June 2010 Fees Summary

The table below is a summary of filings where the FY2009 auditor is different than the FY2008 firm.  Moss Adams billed an average 31% more in FY2009 than what companies paid to a different firm in FY2008.  Among the Big Four, KPMG billed 24% more  that its FY2008 predecessor.

In April, we noted, “AIG’s $193 million paid to PricewaterhouseCoopers is the largest total we have tracked, eclipsing the $156 million General Motors paid to Deloitte for FY2002.”  After fully reviewed through our quality control process, AIG’s total fees are actually even greater, $205.2 million.

Between January 1 and April 15, 2010, we have processed 2,322 DEF-14A proxy statements, the primary form on which US public companies disclose fees paid to their auditors.  While this is by no means a complete set of data on FY2009, it does represent about 40% of what should be eventually filed.  All analysis below is based upon that set of 2,322 filers.  We will update again in two months when most of the rest of FY2009 should be filed.

Emblematic of the overall economic climate, of the 10 firms with largest aggregate fees only PricewaterhouseCoopers experienced positive growth (1.9%) between FY2009 and FY2008.  Next closest was Grant Thornton at -2.1%.  Again, this is from among the 2,322 filers noted above.

The 25 largest filers by total fees between 1/1/2010 and 4/15/2010 had an average growth of about 4%.  AIG’s $193 million paid to PricewaterhouseCoopers is the largest total we have tracked, eclipsing the $156 million General Motors paid to Deloitte for FY2002.  AIG’s proxy included the explanatory sentence, “The 2009 increase in audit and audit-related fees was primarily related to nonrecurring divestiture and restructuring activities related to AIA, ALICO and Nan Shan and other separate reporting requirements related to the Company’s restructuring activities.”

The SEC requires companies to disclose fees paid to their auditors in four categories–audit, audit-related, tax and other.  Audit represented 79.3% of the total in this segment, and the overall distribution is essentially unchanged between FY2009 and FY2008.

In another look at audit marketshare, below are the total FY2008 fees, average FY2008 fees per client, and number of clients in three cities—Chicago, Denver and Seattle—based on the city from which the firm is serving a client. That is, the data is grouped on the office of the firm signing off on the client’s financials. This is often the same city as the client’s headquarters, but not always. The data is taken from Ames Research Group’s audit fees database, sourced primarily from DEF-14A proxy statements.

More lists are available on our Auditor Marketshare page.

Fees are listed in $US millions.

Chicago

Seattle

Denver

WebCPA.com last night reported that BDO Seidman’s fiscal 2009 revenue fell by 5.9%.

BDO Seidman said its revenue for the fiscal year ended June 30 fell 5.9 percent to $620 million from last year’s revenue of $659 million.

However, the firm said its tax business line experienced revenue growth of 6 percent. BDO’s assurance business fell 9.1 percent and its BDO Consulting business decreased 15.3 percent from last year’s high. Over the past four fiscal years, BDO Seidman has averaged double-digit growth of 10.2 percent.

The PCAOB today voted to adopted a rule, Auditing Standard No. 7, that “provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.” In other words, according to CFO.com, the rule prohibits lower-level employees for conducting final reviews of financial statements.

Under the new Auditing Standard No. 7, such reviews — which the PCAOB officially calls “engagement quality reviews” but are often referred to as concurring reviews — are expected to be done by a partner or other high-level auditor who hasn’t worked on the audit under review.

To further put the onus on reviewers to take the evaluations seriously, the PCAOB also today issued for comment a concept release to gauge whether concurring reviewers should be required to put their signatures on audit reports.

The PCAOB has struggled to explain how these reviews should be conducted. After the original proposal was made in February 2008, finance executives worried it would lead to “re-audits” rather than just a final backstop to an audit team’s work before signoff on a client’s financial reports.

If approved by the SEC, the rule would take effect for fiscal years beginning on or after December 15, 2009.

Separately, but in the same press release, the PCAOB is seeking public comment “on a Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report.”  That is, instead of the audit opinion simply reading, “PricewaterhouseCoopers LLP, New York, NY,” Partner & CPA Jane Smith would also need add her name to the opinion.  Partners personally signing opinions is not uncommon in other countries and jurisdictions.  We encounter this often in Scandinavian countries, for example this annual report from the Finnish company, Outokumpu.

This morning on my Facebook advertising sidebar, which I actually read more often than not, an ad for the AICPA’s FeedThePig.org site appeared.

FeedThePig.org is the AICPA’s financial literacy initiative, particularly aimed at younger people.  From its about page:

I’m “spokespig” Benjamin Bankes, here to remind you to feed your piggy bank.

This website is here to help you do just that. Here, you’ll find fun tools, a quiz, tons of tips and other resources. They will all help you think through your spending and saving habits, identify ways you can start saving and commit to making changes that will reduce your debt and grow your savings.

The spokespig himself itself is creepy in the same way the Burger King King scares the living hell out of my kids while also making them want a Whopper Jr.

Who’s VS. Creepier?

I mention this because financial education and literacy is important to me.  It’s crucial importance to successful adult life is woeful neglected by our educational system.  I also think that the accounting industry is suited to take an active role in educating young people outside of the classroom.  I know that FeedThePig.org has been around for some time, and I am glad to see that they are advertising themselves in the social media market.

This afternoon, we have posted a new list to our Audit Market Share list section, a list of the Department of Defense’s largest contract recipients for FY2008.  We have followed this list for 15 years, and this is the first time we can recall that any of the Big 6/5/4 have appeared in the top 100.  Furthermore, BearingPoint received nearly $750 million in defense contracts, some of which will presumably go to Deloitte and PwC in Fy2009, all other things remaining equal.

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Our 2009 Big Four Annual Report is now available for immediate purchase and download. More information at www.amesrgi.com/products_annualreport.asp

Mark Olsen, chair of the PCAOB since June 2006, announced his resignation effective then end of July.

Mark Olson, chairman of the Public Company Accounting Oversight Board, said he is resigning his post at the end of July, but did not elaborate on the reasons.

In a letter of resignation, Olson, 66, simply said, “The decision is entirely personal and reflects my desire at this time of life to establish new priorities.”

Olson was named PCAOB chairman on June 26, 2006, after serving on the board of governors of the Federal Reserve. The resignation will take effect after more than three years of service in the job, on July 31, 2009.

He was appointed by the SEC to run the board, which inspects accounting firms that perform audits on public companies. The PCAOB is also slated to begin inspecting accounting firms that audit non-public broker-dealers, such as the three-person accounting firm that audited Bernard Madoff’s investment management firm.