Reprinted with permission from the Journal of Accountancy
As fallout from passage of the Sarbanes/Oxley Act in 2002 continues to emerge, one certain area of change surrounds audit committees. The provisions of SOX, as it is known, have bolstered the relative power and influence of boards and audit committees in many ways, including which CPA firms will be providing which services to the company. Rainmakers and business development professionals in CPA firms can take heart in the fact that those who find ways to gain access to audit committees, and professionally position themselves utilizing convincing messages, have much to gain.
The environmental changes have contributed to a general fuzziness in perception regarding the role of the audit committee. Whenever there is market confusion, those who design and suggest alternatives bring enormous value. Legal and market knowledge, combined with thought leadership, can help you properly develop opportunities
This article addresses these topics, with guidance for CPAs whose book of business includes public, private and public interest clients. That is, those who must comply, and those for whom voluntary compliance may bring an increased measure of fiduciary responsibility to their operations.
That Was Then
In the past, an audit committee was essentially an extension of a board of directors. Often, it functioned largely to rubber stamp operational management’s selection of a provider. A CFO would pronounce that a change in the auditor is suggested, and the committee would approve it. More often than not, it was all very straight forward, as the firm chosen to perform the audit also performed many or all of the other CPA-related services for the company.
Sarbanes/Oxley has changed all that. Audit committees have become decision-making bodies that determine whom the auditors will be and what services they will or will not provide within the confines of the law. The relationships between accounting firms and publicly held audit clients have changed in a number of substantive ways under the law. Among them:
- Audit committees, rather than management, now oversee the work of auditors.
- Audit committees are required to pre-approve services, including both audit and non-audit offerings that are not specifically prohibited.
- Auditors can no longer offer certain non-audit services to their audit clients. Among these: tax provision calculations, goodwill impairment calculations, bookkeeping, design of information systems, and internal audits, among others.
Interestingly when certain services are deemed “conflicted out”, the audit committee must take a position regarding their role in deciding providers for the other services. Although technically they may not be required to decide the providers for “conflicted out” services, they may decide to take a more active decision-making role.
As a result of the nuances, latitude and decision-making choices around service providers for various audit and non-audit services, the current market is extremely confusing when it comes to who the decision makers are in any given opportunity.
Additionally, although the legal changes apply to publicly held companies, many private and nonprofit organizations are exploring the benefits of voluntary compliance.
The above factors have, therefore, changed the nature of the opportunity development cycle in many ways:
- Your relationship development activities will be occurring with an additional set of decision makers – namely audit committee members.
- Audit committee members may perceive organizational needs in a different way from operational management, due to their different role and responsibility in the organization.
- Audit committee members, as well as traditional decision makers such as CEOs and CFOs, are often unclear about the audit committee’s part in the decision making process.
- Audit committee members are often in different cities and work in different companies, presently challenging logistical issues.
- Each opportunity process – that is decisions about which provider will be selected for tax services, internal audit services, etc., – may have a different set of decision makers – perhaps involving the audit committee, but perhaps not.
An example is a large non-profit where my CPA firm client was pursuing a major opportunity for audit and tax services. Firm partners asked three different C-level decision makers what role the audit committee would play in the decision. One said, “rubber stamp”, the second said, ” theyAREthe decision making body”, and the third one said “they will be as influential as operational management”. The challenge for the opportunity pursuit team was to determine which answer was the right one so that we could execute a winning strategy by initiating appropriate discussions with influential audit committee members.
Create Your Role
As you contemplate your role vis a vis audit committees, remember that much about the changing nature of audit committees has not yet shaken out, despite the legal “dos” and “don’ts” stipulated in the law. That fluid state can work in your favor. Additionally, many audit committee members were put in place before Sarbanes Oxley set a higher standard for experience and knowledge of audit committees. Members may be playing “catch up” in order to properly fulfill their responsibilities. Therefore, as a potential provider, I recommend you develop an advisory position that will distinguish you from other providers who may not see the opportunity or perceive its potential.
For example, you might offer input on suggested or enhanced processes dealing with the multi-provider environment. Put yourself in the shoes of the committee members. What are their pressure points? What is their level of exposure (personal, financial, legal or regulatory)? Your wise counsel directed to these needs will add value for them and earn trust, and business, for you.
Three Markets. Three Opportunities.
Differing motivations characterize the three market segments. For committees operating within publicly held companies, where they are the most common, regulatory compliance is the driving force. For large private companies and public interest entities such as nonprofits, where audit committees may not traditionally exist, the motivation is not strict compliance, but the increasingly important perception of independence.
Here, the goal is to know and implement best practices that will contribute to “uplevel” the environment in which they operate. That’s also the case downmarket with smaller nonprofit and public interest entities. They may lack the resources to determine where their compliance duties lie, but also seek an increased level of integrity, which their trusted CPA can ideally provide.
A proactive position elevates your role vis a vis your client. As well, it solidifies the relationship, extending your utility and permitting a broader perspective on the client’s business affairs. Bluntly put, it puts you more directly “in their face,” and in a position to offer valuable thought leadership.
The Large Company Environment
In a large company environment the challenge of opportunity development is much more complex than ever. Historically one of the prime tasks was to figure out which executive held the decision making power. Often you could gaze at an organization chart, call on key people, and draw conclusions to craft your relationship development strategy. The organization chart was a roadmap to boss/subordinate/peer relationships, giving you clues to the dynamics of interpersonal influence. Audit committees don’t have a similar roadmap. I was recently involved with a CPA firm in an opportunity which had over a dozen decision makers at the Board level! It took a well executed call program to determine which board and audit committee members were the most influential. Through heavy questioning of potential decision makers we were able to determine who held the power and influence.
One of your first tasks, therefore, is to ask each potential decision maker how proactive a given audit committee will be in this decision, and which audit committee members are most influential. Early in the opportunity process, this should be your first line of questioning. Don’t assume anything. For example, if the opportunity is for tax services, don’t assume that because it’s not an audit, the audit committee won’t be involved. Don’t assume that you know what is and isn’t considered a conflicted out service. The scope of your proposal could very well be influenced by the interpretation of audit committee members or in-house counsel regarding what is deemed “conflicted out”. You need to be talking to these people to make sure that you are on target.
A larger problem is getting to audit committee members, in-house counsel, and other decision makers whom you have traditionally not called upon.
Often you are going to need to figure out how to convince the CEO and CFO to create access for you. When top brass erects a fire wall between you and a committee, your chances of success are limited. Unfortunately, the first and only time audit committee members and a potential provider usually meet is in the oral presentation. It’s virtually impossible to establish your differentiation based upon a one hour meeting, when you are preceded and followed by multiple equally qualified providers. Also, if you didn’t interview audit committee members, your strategy and focus could be wrong. I recently witnessed a CPA firm client who was stopped by the prospect in the middle of the orals because the presentation was off target. The partners had to execute additional discovery work before reconvening with the decision makers a week later.
So how do you motivate a gatekeeper to allow you access? You’ve got to convince them it’s in their best interest to permit you to develop a full understanding of the needs of the organization from the perspective of the audit committee members. Members are going to have a different set of articulated needs than operational management, and you need to hear that perspective long before you are in front of them for a final presentation. The point here is that with so much attention being paid these days to fiduciary responsibility, risk is reduced when everyone is on the same page. This is such a crucial point that you must be able to identify audit committee needs during the call process somehow. One approach is to formally include interviews of audit committee members into your standard opportunity development methodology. Inform your prospect that this is the standard way that your firm discovers needs – in addition to viewing prior year tax returns, talking to operational management, etc.
Now imagine that yours is a midsize CPA firm with no publicly held clients. You can use your knowledge of the changes affecting public companies, for example new internal controls requirements, and apply it creatively to your existing client set. Anticipate that private companies will want to benefit from the regulations with which public companies are required to comply, but to a lesser extent.
For example, they may wish to enhance their internal controls capability, but may not require a full-blown internal controls assessment and implementation. Other possible roles for you may be to keep the audit committee, finance committee, and owners apprised of upmarket dynamics and potential future applicability.
Consider this operational strategy. Identify your top five clients and request of each CFO a meeting with him or her, the CEO, key board members and the audit committee to discuss the change in environment and to dispel any rumors. Suggest that you take on the role of information and education resource, a trusted team member who can identify some specific sensitivities in the organization regarding internal controls and governance.
As a result of the meetings, you might conclude, for example, that there is a viable market for a one-day fraud or internal control assessment seminar. And you may also decide that a half-day workshop with board members, or a board roundtable led by your firm would be promising strategies. Make no mistake about it, the tone being set by Sarbanes Oxley is going to permeate the entire business environment. This is the most profound change to have occurred in the financial markets in decades, and it’s only a matter of time before best practices filter down market. Shifts of this magnitude always produce opportunity, so sit up, take note, and proactively position yourself as a thought leader.
Smaller companies and public interest entities such as nonprofit organizations are eager for best practices inspired by regulatory changes, but not necessarily bound by them. The court of public opinion, more than theSEC andIRS, are their constituencies. It’s your job to develop and deliver services to their audit committees that are commensurate with their goals and budgets and that strengthen their fiduciary integrity. You can also help them assess the environment and draw conclusions about the relevance of the changes to their organizations.
According toGary Shamis, Managing Partner for SS&G Financial Services inCleveland, “Nonprofit boards have a much heightened awareness of their responsibilities as a result of Sarbanes/Oxley and some GAO changes.” He calls audit committee relationships a “hot topic” in this strata of the market, adding that “Nonprofits want to become as transparent as they possibly can and want to comply at a higher level” than in the pre-SOX era.
Don’t wait for this market, or any of the three, to come to you. Anticipate their needs and devise ways to fulfill them. That’s the way to leverage audit committees for new business.
Make Your Move!
Sarbanes/Oxley has irrevocably changed the landscape for CPA firms. The environment has shifted from one in which audit committees passively offered and delivered their “blessings,” to one in which they select and approve auditors. This change, from review and signoff, to active oversight and control, can spell opportunity for firms ready to embrace the changes, respond with a broader set of strategic solutions and creatively devise new applications such as adequacy of controls, risk of fraud, and appropriate governance.
Selling at the audit committee level is, without question, more complex than it was in the past. The mechanics of the relationships, new decision-making processes, and a broader potential role for savvy firms are the current realities. New business opportunities are there; you just may have to work a little harder to identify them.