September 11, 2003

Last week, at an ALI-ABA

Last week, at an ALI-ABA conference, I heard Dan Goelzer, PCAOB Board Member, speak and he noted that the PCAOB had received slightly over 200 registrations from audit firms so far. Audit firms need to register in order to be eligible to audit public companies. The deadline for registration is effectively now – even though October 22 is the deadline – because SOX provides the Board with a period of 45 days to review registration applications. And the PCAOB has specifically stated “U.S. firms that submit their applications after the first week of September might not receive approval by the Oct. 22 deadline.” [Non-U.S. firms must register by April 19, 2004.]

What does this mean? It means that it is quite likely that numerous audit firms have decided to get out of the business of auditing public companies. Last year, over 700 audit firms had at least one public company client. Of this number, the Big 4 firms had over 95% of the market and the vast majority of these firms had only one or two public clients.

The cost of registering with the PCAOB is immense. The registration application is quite burdensome (over 100 hours to complete for a small audit firm) and the risk of getting slapped by a rapidly growing PCAOB staff and losing your reputation – all for one or two public clients – is is too high for these smaller audit firms. [At some point, the applications will be made public. I hear that a typical Big 4 application contains over one terabyte of data – you won’t be able to download that over the Web.]

The upshot is that many small public companies are going to suffer and be forced to switch auditors. That is, if they can find one – at this conference, two panelists from the Big 4 mentioned that each of the Big 4 had shed “dozens” of clients recently as part of their quality control and due to higher fees that the client refused to pay. Now, this is a true cost of SOX.

For subscribers, Wachtell Lipton has updated its model pre-approval of non-audit services policy which we have added to our samples.