Revenge of The Bean Counters

There's a joke in the accounting trade that the difference between a wobbly grocery cart and a corporate auditor is that the cart has a mind of its own. Very funny, unless you had invested in MCI (formerly WorldCom), which recently announced that the pretax income it reported for 2000 and 2001 was just a tad off--$74.4 billion less than it had said, after writedowns and adjustments. Outside auditors have signed off on bogus earnings reports and balance sheets at companies from Rite Aid to Xerox. In some cases, auditors dealt with corporate brass intent on concealing thievery; WorldCom's ex-CFO, Scott Sullivan, recently pleaded guilty to fraud and conspiracy charges, for instance. In other cases, auditors simply lacked spine: again and again, they failed to police the books aggressively for fear of losing the client, along with consulting gigs that brought in higher profits than standard audit work.

The tables have turned. Strengthened and emboldened by the Sarbanes-Oxley Act, which overhauled accounting responsibilities, the bean counters have taken off their kid gloves and snapped on rubber ones. With their federally issued mandate to look for trouble, accountants no longer have to take a company's word that its audit policies are legit. The accountants have the power to challenge corporate ledgers with impunity--and they're raking in money doing so. "Auditors and audit committees are now in the catbird seat," says Harvard Business School professor Jay Lorsch. Companies no longer feel free to dump their auditors, for fear of sparking a public spat; no one wants to spook jittery investors, provoke shareholder lawsuits or another regulatory crackdown. "There's more respect for the auditor," says Julie Lindy, editor of Bowman's Accounting Report. "Companies no longer think the audit process is about creating the illusion that they're jumping through hoops."

The change in the relationship is largely because of Sarbanes-Oxley, known in the trade as Sox or Sarbox. The 2002 law stiffens accountants' spines in part because it places them under a new federal watchdog agency that will soon start spot-checking their work. That agency, the Public Company Accounting Oversight Board, also has an industry moniker--Peek-a-Boo--and recently issued a stricter set of rules detailing how auditors should evaluate internal controls. Companies must test these controls regularly, and such tests must be conducted by a firm different from the company's outside auditor, to avoid conflicts of interest. The agency's chairman, former New York Federal Reserve Bank chief William McDonough, is close to finalizing joint supervision rules with the European Union--welcome news to U.S. investors after the collapse of Parmalat, the Italian firm that had concealed $18 billion in debt.