When Sykes Enterprises revealed Tuesday that its annual audit is taking longer than expected, a lot of investors assumed the worst and headed for the exits.
They may have overreacted: Some audit delays have no more sinister cause than a need for more time to assemble records an auditor requested.
But stock market history includes plenty of instances in which investors had good reason to be concerned about any hint of audit problems. Sometimes they are a sign of far deeper concerns than the current quarter's results.
One recent, highly publicized example of what can go wrong: Cendant Corp. The marketing and franchising company had to acknowledge that its predecessor company, CUC International, used irregular accounting practices to inflate its earnings from 1995 to 1998. The stock plummeted on the news, prompting shareholders to sue. In December the company agreed to pay $2.8-billion to settle lawsuits. Ernst & Young LLP, which had been the auditor (and is now Sykes' auditor), said it would pay $335-million.
Other companies that have had to report accounting irregularities include Waste Management, Sunbeam Corp., Rite Aid Corp., Oxford Health Plans, Mercury Finance, W.R. Grace & Co. and Livent.
A lot of audit issues are judgment calls, said Gary Holstrum, a professor of accounting at the University of South Florida in Tampa and a former member of the American Institute of CPAs' auditing standards board.
It can make a big difference when sales are booked (counted as revenue) and what percentage of accounts are written off as uncollectible, he said. "Revenue recognition and accounting estimates allow for a tremendous amount of potential leeway in interpretation and application of the standards," Holstrum said.
Securities and Exchange Commission Chairman Arthur Levitt thinks auditors have been too lax. He is crusading against what he calls "accounting hocus-pocus," which makes companies' financial statements look better than he considers justified.
Maintaining auditor independence is a key issue, one that arose last year at Sykes when the company was one of several revealing that the SEC had ordered it to drop its former auditor, PricewaterhouseCoopers, because some employees in the firm's Tampa office had been buying stock of client companies.
Tuesday the CPA group said it will require the nation's top five accounting firms to set up more rigorous internal control systems to ensure that accountants obey rules prohibiting them from owning stock in the companies under their scrutiny.
_ Information from the Associated Press was used in this report.