SOX Takes Toll on Industry Confidence, Client Ratings of Accounting Firm Performance

The stress of meeting the requirements for corporate financial accountability is taking a toll on confidence and client ratings within the accounting industry, according to the J.D. Power and Associates 2004 Audit Firm Performance Study(SM) released today.

The study, which measures audit firm performance in the wake of the Sarbanes-Oxley Act of 2002, is based on interviews with 1,007 audit committee chairs and 944 chief financial officers. The study finds a significant amount of angst among audit committee chairs and CFOs in the industry. Top management is concerned about the costs of implementing the extensive requirements associated with Sarbanes-Oxley compliance. Some auditors feel they are being stretched too thin because of additional audit requirements, which are impacting service levels. Also, audit committee chairs are feeling the pressure of increased accountability of the required financial reporting process.

The results of this are low accounting firm performance levels compared to other business-to-business studies, and a decline in the confidence level of the accounting profession. Furthermore, almost 9 out of 10 CFOs say the costs of implementing the new rules and procedural requirements of Sarbanes-Oxley are greater than the benefits of those changes.

Confidence is also particularly low among CFOs, with just 44 percent expressing high levels of confidence in the accounting industry. "In this period of tumultuous change in the accounting industry, Sarbanes-Oxley is heavily taxing the financial audit process," said Ron Conlin, partner at J.D. Power and Associates. "Many parties -- from internal management to the board of directors to the auditors themselves -- are struggling. The result has been, at least in the short term, relatively low ratings of the financial audit process and an erosion in confidence of the accounting profession."

Among the study's two audit firm performance segment rankings, Deloitte ranks highest among firms managing clients with more than $1 billion in revenue. Deloitte's strengths are in understanding the client's operations and its industry, the consideration of time and priorities, and handling difficult discussions. Grant Thornton ranks highest among firms managing clients with less than $1 billion in revenue. Grant Thornton performs particularly well in understanding the client's operations and industry, in responding to requests and questions, and in trustworthiness.

Another "second-tier" national firm, BDO Seidman, follows Grant Thornton in the rankings. "It is clear that the Big Four puts most of its emphasis on its larger clients," said Conlin. "As a result, ratings of their performance, particularly among smaller clients, are lower. This represents a major opportunity for second-tier national firms such as Grant Thornton and BDO to gain clients looking for more personal attention, particularly among those currently utilizing a Big Four firm."

The study finds that audit firms receiving the highest ratings from clients are those that build strong relationships with audit committee members by emphasizing communication. Audit firms that are candid, able to explain difficult issues in a clear manner, and are willing to ask the tough questions about all aspects of business operations enjoy performance index scores that are more than 200 points higher than audit firms lacking in these areas.

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