Forces of
Change
Don H. Hansen
Health Care Services Partner
Don.Hansen@mossadams.com
425.303.3013
A Period Of Challenges
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Enron, WorldCom, Tyco, et al
Financial restatements
Corporate bankruptcies
Confidence in US financial
reporting system shaken
The Response?
• Legislative action
• Increased regulation
– Federal
– State
• Financial reporting changes
• New audit standards
Sarbanes-Oxley Act of 2002
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Applicable to “Issuers” (those filing with the SEC)
Revises governance standards
New responsibilities on executives and boards
Adds new disclosure requirements
Documentation and testing of controls (Sec. 404)
Increases audit committee responsibility
Creates new federal crimes related to fraud
Significantly increases criminal penalties for violations
of the securities laws
• Creates Public Company Accounting Oversight Board
State Laws / Regulations
• Over 20 accounting reform proposals in 13
states
• Another 10 proposals on corporate
accountability
• Other activity ongoing outside of the state
legislative / regulatory arena
Washington State
• Board of Accountancy requesting comments
on changes to auditor independence rules
• Essentially adopting parts of Sarbanes-Oxley
– CPA firm must rotate audit partner every 5 years
– Can’t audit a company where CEO/CFO/Chief
Accountant was recently employed by CPA firm
– Prohibit certain non-audit services
• SAO will apply GAO independence standards
An ethics code
cannot replace
a backbone
Jeffrey L. Seglin
New York Times
Changes to Financial Reporting
• Changes to governmental reporting as well
– Not driven by financial reporting scandals
– Focus on clarifying government financial information
• Governmental Accounting Standards Board
GASB #34 – Financial reporting by state and local governments
– Significant impact on statements
– Adds required supplemental information to the statements
• management discussion and analysis much like SEC filings
• Other information required
– Will add complexity to your statements
Changes to Audit Standards
• Public Company Accounting Oversight Board
(PCAOB)
– Will set standards for audits of publicly traded
companies
• Significant changes from the AICPA for all audits
• New fraud auditing standard this year (SAS 99)
– Significant increase in auditor’s investigation of fraud
– Increase in audit time estimated from 10% to 25%
over historical audit hours
How Far Should It Go?
• Changes have primarily focused on publicly
traded companies
– Personal gain was driving the fraud
• Some suggest Sarbanes-Oxley should apply to
all companies
• Questions:
– What problem are we trying to fix?
– Is the cost worth the potential benefit?
– Do hospital’s need an audit committee?
Cost of Regulation
• Hospitals are already heavily regulated
• Will now have increased cost from regulation
of financial reporting
– GASB #34 - increases complexity
– Fraud auditing standard - increases audit time
– Independent auditors required to follow Generally
Accepted Governmental Auditing Standards
(GAGAS) – increased annual education for CPA
– Auditor rotation? – start up costs of new auditors
How Far Is Far Enough?
• Definitely need to improve confidence in
financial reporting
• Audit independence standards should be strict
• Mandatory rotation of auditors
– Will lead to increased cost
– Reduced understanding of client issues
– Likely result in more audit failures, not less
• Where should the focus lie?
Focus On The Process
• Financial reporting is about internal controls
– Control Environment
– Information and
Communication
– Monitoring
- Risk Assessment
- Control Activities
• Audits happen after the fact
• Good financial reporting results from day to
day activities and regular oversight
How Do You Improve Process?
• When the big 3 auto makers had to improve
quality, they didn’t just do more inspections
once the car was built – they made quality the
part of the entire process
• Accurate financial reporting has to be part of
the everyday way of doing business
How Do You Improve Process?
• If you want to improve quality, you don’t put
emphasis just on inspections done at the end.
• Integrity has to be a part of the entire
organization.
• It changes how you deal with vendors,
suppliers, and customers. It should impact how
employees interact, the message
administration sends, the message sent to
middle managers and employees.
• It takes Board commitment.
Board Involvement
• Central to Sarbanes-Oxley is increased
Board oversight via an audit committee
– Requires a financial expert who understands
the financial and accounting issues
• Difficult to have with elected officials
– Can an audit committee be effective?
– They should be asking the right questions
– They need to be educated and informed
How Are CPA Firms Changing?
• The CPA industry got a wakeup call
• The profession was founded on ethics and
integrity
• We have a responsibility to the public
• Many lost sight of that responsibility
• The AICPA will enhance discipline of
members who don’t follow standards
– Increased use of termination from public practice
AICPA Efforts
• Improved peer review process (audits of the
auditors)
• Center for Audit Committee Effectiveness
• Developing and anti-fraud and corporate
responsibility program
– Rebuild investor confidence
– Re-establish audited financial statements as a
clear picture window into corporate America
– Reduce the incidence of financial fraud