Examining the relations between CPAs and CEOs

by Lisa van der Pool
August 31, 2007

Labels ranging from "trusting collaboration" to "cozy" have been applied to the relationship between small-business CEOs and their accountants in the days before the Sarbanes-Oxley.

However, in the five years since, the dynamic between the CEO the CPA has become distinctly less cozy.

"We are bringing a certain degree of skepticism that possibly wasn't there before, in terms of what we're being told by the CEO," said Joseph Ciccarello, an auditing services partner at Gray, Gray & Gray LLP in Westwood. "It's becoming one of those -- 'well, show me.' It's not enough that the CEO tells you what's going on. Before, there was more trust."

While traditionally the CPA often stood in as the go-to financial adviser for issues ranging from audits to yearly income taxes, public companies can no longer count on such one-stop accounting. Nowadays CPAs often find themselves in adversarial roles in order to maintain a high level of independence and ethics.

In a move that further draws a line in the sand between the two parties, a recent initiative by the Public Company Accounting Oversight Board prevents CPAs from handling much outside of auditing duties -- which forbids a CEO even from doing a CEO's personal taxes -- a significant shift from past practices.

"Before SOX I'd say the relationship was closer and it was perhaps more informal. Even at times perhaps cozy," said James Post, a professor of management at Boston University. "Today it's a lot more formal. There are liability issues that affect all parties now. In many of these relationships the CEO, CFO and CPA all are looking over their shoulders to see what their attorney's are telling them."

In the current climate CPAs often require third-party verification for information they've been given. And the days of accountants and their client CEOs going out to fancy dinners or catching the occasional Red Sox game may be over for good.

"We live in a litigious society. We are worried about justifying the advice given to the client. (The relationship) cannot be too friendly," said Ciccarello.

According to Post, this new paradigm is both good and bad.

"The positives are that there's great professionalism, there's more independence and that kind of tough look at the facts," said Post. "The negatives are that some of the guidance and perhaps some of the counsel that might have been given in the past now is really imprudent in an environment that's characterized by so much potential litigation."

Paul Weiner, chief financial officer at Palomar Medical Technologies Inc. in Burlington (Nasdaq: PMTI) said that prior to SOX, public companies would often use auditing firms as sounding boards.

"When SOX first came into place we basically couldn't talk to the accountants. They were really concerned that the SEC would go after them," said Weiner, whose company posted net income of $52.98 million on sales of $126.54 million last year. "Over time, Congress has eased up on the regulations and companies have gotten a little more assistance, but it's not the same as before. But at least we have access to their expertise now."

The shift to an often more adversarial relationship is not viewed as a bad thing by some accountants.

"I think the SOX requirements brought independence more to the forefront," said Bryan Cohen, a Samet & Co. PC in Chestnut Hill. "More care is perhaps taken from the CPA side. That relationship changed -- it may have even improved from the perspective that the CPA might have a better understanding of the client's business. It definitely educated both sides more but I don't think it had a negative impact. If anything I think it's improved the relationship."