SEC Warns Big Four Against Dropping Small Clients

The Securities and Exchange Commission is worried that the Big Four accounting firms are using the Sarbanes-Oxley Act as a handy excuse to drop smaller, less profitable audit clients.

The firms, however, say they simply do not have the staffing they need to help big companies meet the new internal control requirements of the law while serving the same number of smaller businesses, Bloomberg reported.

Ernst & Young CEO James Turley, for example, has testified before Congress that Sarbanes-Oxley has drained resources across the profession. "The Sarbanes-Oxley Act's requirements and pressures put a great strain on our ability to retain sufficient personnel," he told the Senate Banking Committee earlier this month.

In an interview Friday, SEC Chief Accountant Donald Nicolaisen said Sarbanes-Oxley requirements "should not be a convenient tool for them to manage their business. They do have a responsibility in the public trust."

Smaller companies that have been dropped recently by Deloitte & Touche LLP, KPMG LLP and Ernst & Young LLP include Titan Pharmaceuticals Inc., a developer of heart disease and cancer treatments; mining and paving-equipment maker Aztec Industries Inc.; and Seattle-based Cell Therapeutics Inc., which is developing cancer drugs. Other companies that have received termination notices are music-software developer MakeMusic! Inc., drugmaker Alteon Inc. and Gasco Energy Inc. of Denver.

KPMG last month dropped Alteon, which makes diabetes and heart drugs in Ramsey, New Jersey and has a $35 million market value. The company paid $89,000 for its 2003 audit, but that is just a fraction of the amount Big Four firms earn from the country's biggest businesses.

"After evaluating resources KPMG said they could no longer do our audit," said Alteon CEO Kenneth Moch. "We were shocked."

SEC's Nicolaisen said the trend is not yet a "major epidemic.”

Gasco's chief financial officer, King Grant, said his company was dropped by Deloitte. “Finding a new auditor is a pain, but we were told they just don't have enough manpower to meet the needs of big clients.”

The natural gas and oil producer hired Hein & Associates LLP, a Denver-based firm that audits energy companies. "It used to be that there was something wrong if you didn't have a Big Four auditor," Grant said. "Now companies are looking elsewhere."

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