Confidence in Public Accounting Firms Returns, Strong Support for Sarbanes-Oxley BDO Dunwoody/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication June 7, 2004 COMPAS Inc. Public Opinion and Customer Research
1.0 Introduction Canadian business leaders have experienced a dramatic rise in confidence in the accounting firms servicing publicly traded companies. Over the past two years COMPAS has been tracking confidence in accounting firms through this business panel and confidence levels dropped sharply in July 2002, a week following the WorldCom scandal. Confidence in these accounting firms has returned to pre-worldcom levels. The Sarbanes Oxley Act, the US legislative response to the WorldCom corruption that includes stricter reporting and accounting regulations, enjoys strong favour among respondents. Business leaders give extraordinarily high scores to the five principal tenets of the Act and disagree with those who say the internal control report is too much to reasonably ask of business. Similarly, respondents agree that since WorldCom, Enron, and Nortel, the internal control report is necessary to regain investor confidence. These are the key findings from the current websurvey of CEOs and other business leaders conducted by COMPAS for publication in the Financial Post under the sponsorship for BDO Dunwoody and the Canadian Chamber of Commerce. 2.0 Confidence in Accounting Firms Returns to Pre- WorldCom Levels Business leaders continue to be as confident as ever in the accounting firms that service their own companies. When asked to score their confidence in their own accounting firms using a seven point scale, these firms continue to receive an average score of 6.1, as shown in table 1. More than three quarters of respondents gave their own accounting firms a confidence score of 6 or greater. 2
While confidence in their own accounting firms has continued to be strong, the accounting firms that service publicly traded companies are enjoying regained confidence from the business community. When asked to score the ethics of accounting or auditing firms doing the books of publicly traded companies, scores dropped sharply a week after news of the WorldCom scandal in July 2002 and today have returned to the same level enjoyed in January 2002. Today, these accounting firms earn an average score of 4.7, well above the mid point of 4, as shown in table 1. Table 1: (Q3) On a 7 point confidence scale where 7 means maximum confidence and 1, the opposite, how much confidence do you have in [ROTATE] Mean 7 6 5 4 3 2 1 DNK The ethics of the accounting or auditing firm employed by your own organization June 2004 6.1 39 38 10 6 1 1 0 5 July 2002 6.1 40 33 16 5 1 1 1 4 January 2002 6.0 37 37 13 5 3 1 * 5 The ethics of accounting or auditing firms doing the books of publicly traded companies June 2004 4.7 4 20 45 16 6 5 3 1 July 2002 3.9 3 12 21 24 20 11 6 4 January 2002 4.6 5 21 28 21 12 5 3 5 3
3.0 Extraordinary support for Sarbanes Oxley Act Business leaders were asked to score the principal tenets of the Sarbanes Oxley Act, the U.S. legislation introduced in 2002 as a response to the Enron and WorldCom accounting scandals. As illustrated in table 2, respondents give high marks across the board, and three aspects of the Act enjoy near consensus: the aspect of the Act which makes the destruction or creation of documents to impede an investigation a criminal offence received an average score of 6.6 our of 7 with 93% of respondents assigning a score of 5 or greater; the aspect of the Act that prohibits the purchase or sale of stock by officers and directors and other insiders during blackout periods received an average score of 6.5 our of 7 with 92% of respondents assigning a score of 5 or greater; and, the aspect of the Act that requires firms to have independent audit committees, whose members have no financial interest and receive no benefit from the company being audited received an average score of 6.3 our of 7 with 98% of respondents assigning a score of 5 or greater. As one respondent said, The entire system of publicly owned companies and their shareholders is based on trust. It is naive to think that all companies and all personnel in higher management will act altruistically and ethically. Therefore, there must be an independent means of auditing the actions of these companies and personnel. There must also be suitable and enforceable penalties when illegal actions are taken with regard to corporate governance. 4
Table 2: (Q4) As you may know, the Sarbanes Oxley Act was introduced in the United States in response to the Enron and WorldCom accounting scandals and applies to publicly held companies and public accounting firms. Using a 7 point scale where 7 means definitely agree and 1, the opposite, to what extent do you agree with each of the following aspects of the legislation. [ROTATE] Destruction or creation of documents to impede an investigation is a criminal offence Prohibits the purchase or sale of stock by officers and directors and other insiders during blackout periods. These firms must have independent audit committees, whose members have no financial interest and receive no benefit from the company being audited Requires an internal control report that outlines management s responsibilities for the internal control structure and assesses the effectiveness of the structure Auditors are not allowed to work for the companies they audit for a minimum of one year after the engagement Mean 7 6 5 4 3 2 1 DNK 6.6 74 12 7 1 1 1 1 4 6.5 63 19 10 1 1 0 0 6 6.3 55 23 10 5 1 1 1 4 6.1 41 28 17 6 1 1 0 7 5.9 48 23 10 7 4 2 2 4 One of the aspects of the Sarbanes Oxley Act that has received attention is section 404, which requires SEC registered companies to produce a control 5
report. 71% of respondents agree that since WorldCom, Enron, and Nortel, the internal control report is necessary to regain investor confidence and help to ensure that major fraud and accounting scandals do not continue and scored this statement 5 or better on a seven point scale, as shown in table 3. Less than half of respondents (41%) agree that the internal control report is too much to reasonably ask of business because it places an extraordinary burden on staff time to create the documents and thousands of dollars in consulting fees for one accounting firm to advise on the work and then another to have the report certified and scored this statement 5 or better. Two respondents who favoured the control reports noted: At times some companies will overplay the cost implications of various regulatory requirements such as additional audits. Many times, companies simply need to consider the requirement and determine how they can comply and do it as efficiently as possible. Often costs are not as onerous as first thought. There will always be people attempting to defraud the public, shareholders or creditors. Accountants working for public companies should recognize that they work for shareholders and therefore have a duty to report any findings that they feel are massaged. One respondent frustrated with the additional requirements commented, My company is currently working on Sarbanes Oxley compliance. It is a colossal waste of money and time. Honest people are honest and those bent on defrauding and manipulating systems and processes will find a way to do so, no matter what documents are on file. 6
Table 3: (Q5) Some say that the internal control report requirement is important because it forces companies to make ongoing efforts to prevent internal fraud while others say the amount of work and cost involved is prohibitive for most companies. Using a 7 point scale where 7 means definitely agree and 1, the opposite, to what extent do you agree with each of the following statements [ROTATE] Since WorldCom, Enron, and Nortel, the internal control report is necessary to regain investor confidence and help to ensure that major fraud and accounting scandals do not continue The internal control report is too much to reasonably ask of business because it places an extraordinary burden on staff time to create the documents and thousands of dollars in consulting fees for one accounting firm to advise on the work and then another to have the report certified Mean 7 6 5 4 3 2 1 DNK 5.8 6 29 36 16 10 3 1 6 3.9 4 12 25 13 15 15 8 7 4.0 Confidence in Markets Remains Unchanged Since December 2002, confidence in the three major North American stock markets has remained unchanged. As shown in table 4, the TSE continues to earn an average score of 72% out of 100, the NYSE earns an average score of 71%, up slightly from 69%, and the NASDAQ is also up slightly from 61% to 64%. 7
Table 4: (Q1) As you know, investors have been reflecting on how much they can trust publicly traded companies to provide accurate and timely information about their finances as well as about the continuity of key executives. Using a 100-point report card type scale where 100 is the best possible score, how much confidence do you have in the accuracy and timeliness of information provided by companies trading on: [ROTATE] The TSE The NYSE The NASDAQ Mean DNK June 2004 72 2 December 2002 72 5 June 2004 71 2 December 2002 69 5 June 2004 64 2 December 2002 61 5 5.0 Business Leaders Somewhat More Inclined to Assign Responsibility to the Accounting Profession for Accounting Scandals Business leaders are somewhat more inclined to hold the accounting profession responsible for major accounting scandals than they were before the WorldCom scandal. When asked the question, Thinking of the high profile collapse of Enron and past meltdowns in Canada (e.g. Confederation Life, Northland Bank), how much do you hold the accounting profession responsible? Please use a 7 point scale where 7 means very responsible and 1, the opposite, respondents assigned a mean score of 4.7 in January 2002 and 5.0 this week, as shown in table 5. 8
Table 4: (Q2) Thinking of the high profile collapse of Enron and past meltdowns in Canada (e.g. Confederation Life, Northland Bank), how much do you hold the accounting profession responsible? Please use a 7 point scale where 7 means very responsible and 1, the opposite. [ROTATE] Mean 7 6 5 4 3 2 1 DNK June 2004 5.0 15 25 28 14 11 4 1 1 January 2002 4.7 10 22 24 14 9 7 4 9 Methodology The National Post/COMPAS web-survey of CEOs and leaders of small, medium, and large corporations and among executives of the local and national Chambers of Commerce was conducted June 1-4, 2004. Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of 163 are deemed accurate to within approximately 7.7 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D and Tamara Gottlieb. 9