In the past month, two companies announced they had tapped their new chief financial officers from the auditing firm with which they were doing business. At the surface, the move appears to be a violation of Securities and Exchange Commission rules regarding auditor independence.
But closer inspection shows that—though the new executives were indeed employed by the company’s auditor—they were not involved in providing audit services, specifically.
And therein lies the critical exemption.
The Circumstances
Back in November, Mossimo—a small, public, Santa Monica, Calif.-based company that sells apparel through retailer Target Corp.—named Vicken Festekjian its new CFO.
Festekjian had been at accounting firm of Moss Adams, where she spent about three years on the Mossimo account. That’s according to a company press release in late November. In this role, Festekjian reviewed and prepared tax returns, reviewed compiled financial statements and assisted with quarterly and annual SEC filings, the company added.
"We have known Vick for several years having worked closely with him through our relationship with Moss Adams,” said Edwin Lewis, Mossimo’s vice chairman, president and co-CEO in announcing the hire. “As our accountant, Vick has done a great job assisting us with the preparation of our financial statements and serving as a key liaison with our auditors to ensure full compliance with the new regulations created by Sarbanes Oxley."
The other case involves $1.3 billion information services specialist Ceridian. Last week, the company named Douglas Neve executive vice president and chief financial officer. Neve is currently a senior audit partner with Deloitte & Touche.
"Doug is a veteran of the accounting world who has, over the last seven months, developed an in-depth working knowledge and insight as to Ceridian,” said Ronald Turner, chairman, president and chief executive officer of Ceridian, in a statement.
Ceridian went on to say in its press release that Deloitte has been assisting the company with its efforts to meet requirements under Section 404 of the Sarbanes-Oxley Act. Turner said Neve has been leading the Deloitte team, “so he already knows first-hand our finance department, our people, our systems and our internal controls."
The company also pointed out that its Audit Committee had retained Deloitte to assist with its investigation of the accounting practices in its largest division, Human Resource Solutions. In fact, from May 25, 2004 through Nov. 30, 2004, the company said it paid Deloitte about $5.28 million for providing services to the audit committee and the company.
It also said that as a partner of Deloitte, Neve has financially benefited from the services provided by Deloitte to the audit committee and the company.
Not A Violation
So, are Mossimo and Ceridian violating the auditor independence rules, given these seemingly cozy relationships between the companies and the two accounting firms from which they hired their new CFOs?
No, say lawyers. And the reason is very straight-forward.
Section 206 of the Sarbanes-Oxley Act states it is “unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.”
Greenberg
In other words, Section 206 only relates to independent audit work. So, in both cases, “Sarbanes-Oxley does not come into play,” asserts Joel I. Greenberg of Kaye Scholer. “If they are not the auditor, they are not subject to the independence requirements.”
In fact, Ceridian is careful to stress in its press release, “the company anticipates that Deloitte will continue to be retained by and provide non-audit services to the Audit Committee and the company.”
“I would think a place like Deloitte is real sensitive to this,” Greenberg adds.
And, although Deloitte is assisting Ceridian “with its efforts to meet requirements under Section 404,” this is okay as long as the accounting firm does not perform the auditor attestation. “That’s an auditor function,” Greenberg stresses.
Indeed, according to Ceridian’s latest proxy, KPMG audited its reports in 2003 and will continue to do so in 2004. Coincidentally, Mossimo also employs KPMG to audit its reports.
In fact, the SEC is actually encouraging companies to retain another accounting firm to help develop internal control procedures, precisely what Ceridian has been doing. This is why many observers have dubbed the Sarbanes-Oxley Act the “auditor full employment act.”
Related rules, guidance, FAQs and recent coverage on auditor independence issues are available from the box above, right.
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