Insight: Less Loose Change

Sarbanes-Oxley and its demand for better internal controls has had a positive effect on business at PRGSchultz, the world’s largest recovery audit firm, according to Ian Griffiths, chief financial officer at the firm’s European operations.

“Since UK subsidiaries of US-listed companies need to comply with the new US regulations regarding internal controls and corporate governance, companies are now drilling down into their control frameworks to see where their internal control and risk management systems are weak or can be improved,” says Griffiths.

“As a result, we are getting more requests to evaluate systems and controls because clients are much more aware of the downsides of poor risk management.” He adds that recovery auditors may be in a position to steal a march on external auditors.

“Sarbanes-Oxley has made companies much more risk-aware. Because we deal with a very niche and specialised area of audit investigation, we are getting requests from clients and other companies to carry out work that is outside our core service offerings,” says Griffiths. “However, due to our forensic, investigative, and analytical skills, we are being asked to get involved in areas which previously we would not have considered to be part of our remit.” He declined to name these areas, however.

According to Griffiths, recovery audit firms also have a competitive edge over external auditors. “Recovery audit and specialist audit firms usually work on a contingent fee basis. We only get paid if we find money that has gone missing and recover it. Therefore, such firms are heavily incentivised to make sure that they perform and meet the needs of the client. External auditors, on the other hand, are paid on a standard rate, so partners are not as motivated and the work might not always be as diligent as it should be.

“As a result, recovery audit firms are receiving more queries from companies that want them to do work that would normally be assigned to external audit.”

But silver linings often come with clouds. One source within PRGSchultz’s European operations told Financial Director that the firm was being adversely affected by the fact that better systems, as mandated by Sarbox, means that there are fewer opportunities for recovery audit firms to find loose change falling out the holes in corporate pockets. The firm has a traditional specialisation in the field of accounts payable auditing, ensuring, for example, that companies make proper use of the discounts they are entitled to and so don’t pay their suppliers any more than they should.

The firm has often admitted that its own customers’ internal audit functions are its biggest competitors. In a conference call with Wall Street analysts in July following a decline in second-quarter revenues, Jim Moylan, CFO of the Nasdaq-quoted parent company, said: “The growth in the claims found by our own clients is part of the reason for the reduction quarter-to-quarter.” He added that the clients’ own internal audit was a factor that made for “an interesting negotiation when we talk about price with the customers”.

PRG-Schultz announced in October that it was making 378 people redundant – about 14% of its worldwide workforce. Most of these were back office staff, however, though some front-line auditors are also being shed.

Another source, who previously worked at PRG-Schultz, claimed that the firm’s decline in fortunes was more due to “a badly planned merger [between Profit Recovery Group and Howard Schultz in 2002], than the quality of work or any effect from Sarbanes-Oxley”.

Tim Lane, director at recovery audit firm Contract Compliance Audit Services (CCAS), disagrees with the idea that recovery audit firms are experiencing a hike in enquiries as a result of Sarbanes-Oxley. However, he adds that there are some associated benefits due to Sarbanes- Oxley, even if recovery audit firms do not have clients with a US-listing and do not need to be compliant with the US regulations.

“While the majority of UK-based recovery audit firms have not picked up any extra work as a direct result of Sarbanes-Oxley, many of us are still able to pick up new work and remain competitive because we are not as threatened anymore by the possibility that the Big Four and other large accounting firms might try to move into our market,” says Lane.

“Our experience has been that the top accounting firms are getting so much extra work associated with Sarbanes-Oxley compliance issues that they are too preoccupied to try to offer the specialist and niche services that we are able to offer our clients,” he adds.

“This is perfect for us. It means that we are free to build up our client portfolios and service offerings without having to compete with firms with much greater resources, though not necessarily expertise.”