Grant Thornton LLP, the nation’s fifth largest accounting firm, recently announced that it would refrain from providing a number of internal control services to public audit clients.

According to Grant Thornton CEO Ed Nusbaum, the move reflects a "principles- versus rules-based approach to accounting" that is in keeping with the intent of Sarbanes-Oxley.

"There are areas in the legislation that are clear, and some that might be interpreted differently by others," said Nusbaum. "But the guide in gray areas should be the spirit of reform and protection of investors that the bill’s authors intended.

As a result, the $400 million Chicago-based firm will not take on engagements to document internal controls for its public audit clients. The ban will include evaluation and documentation of existing controls that management uses to support their conclusions regarding the effective design of those controls.

"If management needs assistance in documenting their internal controls," added Nusbaum, "we will inform them of other options that are available."

Partners Favored

Last month, a survey conducted by META Group showed that an "overwhelming majority" (59 percent) of CFOs favored their audit partner for this type of "pre-attestation" compliance work.

The high number ran contrary to META Group's — and many law firms' — recommendation that a third party be used for such services.

"While this may make the audit attestation process smoother, it limits the multiple views and guidance that may prove invaluable for a relatively new and untested regulatory environment,"

said META Group SOX compliance analyst John Van Decker. "Only 6 percent project that they will use a different audit vendor, and only 3 percent will employ a specialty compliance vendor."

View Of The SEC

According to Michael Corcoran, a former Managing Director of Business Advisory Services for PricewaterhouseCoopers and the current CEO of internal audit & advisory firm Harborview Partners, the Grant Thornton move mirror's the views of the SEC.

"If an auditor assists management with documenting internal controls, they would be acting as an employee and auditor independence is impaired," says Corcoran.

Under new rules effective in May, auditor independence is impaired if the attest auditor acts “temporarily or permanently, as a director, officer, or employee of an audit client, or performing any decision-making, supervisory, or ongoing monitoring function for the audit client.”

The SEC also concluded that, “designing and implementing internal accounting and risk management controls impairs the accountant's independence because it places the accountant in the role of management.”

According to Corcoran, an auditor is likely to exercise judgment on control definitions and effectiveness if they assist management in documenting controls. As a result, the auditor would be put in a position of acting as an employee and eventually auditing its own work, "violating two of the foundation principles behind the revised independence rules."

Practices Ended

According to a Grant Thornton statement, the firm the list of services it will no longer offer to public audit clients includes:

Designing controls;

Designing or implementing processes, controls or information systems that impact the financial reporting process;

Providing Grant Thornton auditor internal control software package to public audit clients

Grant Thornton will attest to, and report on, management’s assessment of internal controls of its public audit clients under SOX 404, and will continue to provide internal controls services for public companies that are not audit clients.

Skeptics say that the move is a shake-up-the-industry publicity stunt aimed at attracting new clients; specifically, public companies that are audit customers of the Big Four, and who might subsequently chose to use Grant Thornton for pre-attestation services.

So far, none of the Big Four have spoken out against providing such services to their audit clients.

Details on the internal control rules, including recent Q&As with experts in the field, are available in the box above, right.

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