The communication between auditors and the executives of public companies has increased due to the Sarbanes-Oxley Act (SOX), but the topics under discussion are more restricted than in the past. SOX regulations have left many public company executives confused about what can and cannot be discussed with their auditors. If you have stopped asking your auditor's advice, you are missing an important opportunity.

Some public company executives complain of a sudden lack of access to their auditors. Auditors are increasingly concerned about maintaining their independence as a result of SOX. This has left many auditors gun-shy about providing information that can be valuable to the executives of public companies. Nevertheless, public company executives and their auditors must make an effort to communicate to produce an environment that is conducive to sharing ideas and information. If you are the executive or board member of a public company, Bailey offers these three tips for making the most of the relationship with your audit firm.

Tip #1: Don't be afraid to ask questions. Executives and board members should not hesitate to ask questions of their auditors, even if they are unsure whether an answer is permitted. Your auditor is aware of what can and cannot be asked and will respond accordingly. You can broach issues dealing with revenue recognition, valuations and the interpretation of a transaction, for instance. If the auditor cannot help you with specifics, he or she can point you in the right direction. The auditor is likely to be connected with excellent sources for helping you with "off-limit" areas. He or she can recommend a terrific support team of attorneys, bankers, management consultants and other professionals.

Tip #2: Learn about new pronouncements. We suggest to board members and executives that they ask their auditors about new pronouncements on a regular basis. The discussion should go beyond simply understanding the new rules. Your auditor may have ideas on how to respond to the pronouncements—ideas that can reduce frustration and save time. Ask how new pronouncements may affect loan covenants and operating results. Explore how the pronouncements may affect the business going forward. Ask about pending rules. Consider the early adoption of pending legislation if it results in better management.

Tip #3: Discover new ways to improve management and operations. Auditors know how to improve corporate governance, reduce the risk of fraud and lower operating costs. Auditors can tell you how companies in your industry deal with sticky corporate governance issues. They can tell you how other firms operate efficiently, from back-office operations to inventory control. While auditors may be restricted from helping clients develop internal control policies, they can tell you how others are tackling SOX challenges. Progressive companies view the SOX environment as an opportunity to develop better management and tighter operations.

SOX legislation should not mean the end of open communication among the executives of public companies and auditors. Sharing ideas and information leads to the development of higher standards for the business community as a whole. Better business practices are at the heart of SOX legislation.

Marjorie Bailey is a Stonefield Josephson Principal and business consultant. For additional information on making the most of the relationship with your audit firm, contact Marjorie Bailey at 415-981-9400 or mbailey@sjaccounting.com.

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