More Restatements in 2006 for Smaller Accounting Firms - Update 1

Of the 928 companies that announced in the first half of 2006 that they would file restatements of their results for prior periods, 504 were clients of firms other than the eight largest accounting firms, according to data compiled by AuditAnalytics, a company that analyzes audit problems, the New York Times reports. The number of restatements from smaller companies has more than doubled over the same period last year, while the number of restatements from companies audited by the larger firms is down 31 percent, the report says.

With Sarbanes-Oxley (SOX) requiring the Public Company Accounting Oversight Board (PCAOB) to inspect every firm that audits companies registered with the Securities and Exchange Commission (SEC), at least every three years, smaller firms may be preparing the restatements in anticipation of SOX 404 audits, the Times report suggests.

“The auditors are being audited by the PCAOB and that is forcing them to pay more attention to the details,” said Mark Cheffers, the chief executive of AuditAnalytics. The prospect of audits of internal controls “has been forcing smaller registrants to assure their statements pass muster,” Cheffers said.

One smaller accounting firm, Beckstead & Watts of Las Vegas, Nevada, is suing the PCAOB because the oversight board forced two Beckstead clients to restate financial statements because of errors.

Restatements from smaller companies involved in the stock options backdating scandal dominate the news currently, but CSK Auto Corp. of Phoenix, Ariz., is restating its results from 2003 and 2004, and has not issued statements for 2005 because of accounting errors related to accounting for inventory, and vendor allowances, other accrual accounts and related expense accounts, the company says.

CSK’s Audit Committee ordered the investigation, which was conducted with the assistance of independent counsel and a separate accounting firm. Maynard Jenkins, the company’s chairman and CEO, said, “Needless to say, I am extremely disappointed by the results of the investigation, and I will work with the Board to implement the policies and procedures to assure that the issues identified by the investigation do not recur.”

Material weakenesses had been identified in the company’s 2004 10-K. PricewaterhouseCoopers (PwC) is the company’s auditor, but CSK did not identify the accounting firm that conducted the investigation for the Audit Committee. The company announced that Martin Fraser, President and Chief Operating Officer (COO), Don Watson, Chief Administrative Officer and former Chief Financial Officer (CFO) and several other individuals in the company’s financial organization were no longer employed by the company.

Small businesses can be especially hard hit by fraud, with a median loss of $159,000, according to a study by the Association of Fraud Examiners, the Colorado Springs Business Journal reports. One reason that small companies and not-for-profit organizations experience so much theft and embezzlement, the study says, is that fewer that 10 percent have anonymous fraud reporting procedures and fewer than 20 percent have internal audit departments.

Angela Morelock, a certified fraud examiner with the Missouri-based accounting firm, BKD, estimated that only 30 percent of small organization fraud cases are prosecuted because directors fear that going public would hurt their financial base. With implementation of Sarbanes-Oxley, providing transparency in financial reporting will become a priority for these entities.

The PCAOB demonstrated its concern for the professional issues smaller firms and smaller companies will face when implementing the requirements of Sarbanes-Oxley at their October 5 Standing Advisory Group meeting. The final session (Session 4) was devoted to a discussion by a panel of three accountants, including one sole proprietor and two small business owners, of the following issues faced by smaller accounting firms:

  • How regional and local accounting firms monitor and implement new auditing or professional practice requirements
  • Education and training resources that are available to help smaller accounting firms understand and implement new standards and requirements
  • The extent to which regional and local accounting firms use the products and services of other audit firms in their audits and how that affects the way the audits are performed
  • Whether supplemental guidance should be issued to assist smaller accounting firms in the application of auditing and other professional practice standards – if so, the type of guidance that is needed.

The webcast of the panel discussion may be heard at www.pcaobus.org/News_and_Events/Webcasts.aspx#38

Editor's Note: This story has been updated to correct errors regarding CSK's management team changes. The correct information, per a company press statement, is that the COO and Chief Administrative Officer, among others, are no longer employed by the company.

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