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Silicon Valley Companies Beefing Up Internal Audit Divisions

Forget flamboyant chief executives, high-rolling venture capitalists and fast-talking analysts. These days, the hottest job in Silicon Valley is…internal auditor.

Internal auditors are the folks paid to sniff out problems like embezzling chief financial officers or fraudulent bookkeepers, and set up the controls to prevent them. But during the bubble many companies, especially young Silicon Valley start-ups, saw little need for such corporate overseers.

That's all changed.

Internal auditors note proudly that their jobs are no longer viewed as low-level compliance posts, but instead have become influential executive-level positions with clout and muscle. After all, wasn't it an internal auditor — Cynthia Cooper — who discovered the massive fraud at WorldCom and became a Time Magazine Person of the Year?

“If you walk into a roomful of CFOs and CPAs these days, it's the heads of internal audit who have their chests out,” said Chuck Eldridge, co-head of a new internal-audit practice for headhunters Korn/Ferry International.

A slew of local companies including Network Associates have either hired new or more-experienced chief internal auditors or beefed up their staffs. Headhunters say finding experienced internal auditors is among the top requests they've got these days — a far cry from the past.

“Five years ago, if you asked many CEOs about internal auditing functions, you would have gotten a really puzzled look,” said Brett Good, Bay Area director at Robert Half International, a job-placement firm.

Auditors got especially short shrift during the bubble from small but fast-growing tech companies, said Derek DeWinter, a San Jose-based financial headhunter. “Most companies are young, and have been busy firefighting rather than worrying about internal controls.”

They got educated quick after WorldCom and Enron.

After those corporate scandals, there was an avalanche of new laws proposed or passed to prevent corporate malfeasance in the future. Almost all of them dictate that companies have the kind of fraud-spotting procedures that internal auditors live to provide.

The granddaddy of the new laws is the Sarbanes-Oxley Act, named after its two sponsors in Congress. It requires among other things that corporate executives put their own hides on the line each quarter by signing a “certification” that their financial results are accurate — and that internal procedures to catch problems are up to snuff. The potential penalty, if that turns out to be false: up to 20 years in jail and up to $5 million in fines.

Headhunters and consultants say Sarbanes-Oxley sent chills up the spines of executives across the valley and the country. It woke many of them up to the fact that they didn't have a good enough handle on the weak links in their own companies.

“They are paranoid of the repercussions of not complying,” DeWinter said.

Sarbanes-Oxley also requires companies to fully document their internal controls for financial reports, and get an outside auditor to bless them. That's a major change in many cases. “Most companies have a semblance of internal controls, they are just not well documented,” said Bob Hirth, managing director at Protiviti, an internal audit services unit of Robert Half.

In addition, the New York Stock Exchange has proposed a rule that any company whose stock trades on its exchange must be able to show that it has internal auditors, either in-house or hired out. Some speculate the Nasdaq Stock Market will do the same.

It has all conspired to create a boom time for internal auditors. “It's becoming as hot as technology was a few years ago,” marvels Mark Viego, a managing director at accounting and auditing firm Jefferson Wells in San Jose.

At many companies, the job is drawing people back into the profession who formerly would have considered internal audit beneath them.

“When I was first approached for this job I wasn't that interested,” said Ernie Elkins, who became head of internal audit for Hitachi Data Systems in Santa Clara in November. Elkins, a former corporate planner for KPMG, had thought his next job would be that of a corporate strategist or financial analyst. Instead, he's helping Hitachi Data Systems, a division of Hitachi, identify the risks to its business at all levels and put in controls to prevent problems. “The scope of the responsibilities and what they wanted was much elevated from my past experience with internal audit,” Elkins said.

Auditors say that many practices they recommend routinely could have helped prevent some of the scandals, restatements and revenue problems that plagued companies during the bubble.

For instance, some basic controls might have prevented companies from awarding each other contracts simply to generate the appearance of revenue growth, said Doug Taylor, Director of Internal Audit for Northern California at Jefferson Wells in San Jose.

Taylor said he has gone into companies to set up control procedures, only to find that the company lacked such Internal Audit 101 rules as putting large contracts out for bid to at least three vendors. “When I ask `How do you go about buying stuff?' they say `We know friends, we just sign a contract,'” Taylor said.

David Roche, the new vice president of global audit services at Network Associates, said his company is benefiting from new controls, too. He said he and a colleague implemented a program to check with all customers and document which licenses they were using. While that helped fulfill internal-audit goals of fully documenting customer deals, it also woke the company up to the fact that some customers were using licenses they hadn't paid for.

“It provides assurance to our management team that we are in fact able to account for all the licenses we sell,” Roche said.

Despite high unemployment in the valley, headhunters say they can't find enough candidates to fill the demand. That's because companies, jittery about the penalties for lax procedures, all want candidates with years of experience in internal audit, not just any old financial expert who might need training.

“I've done more internal audit work in the last year than in the last eight combined,” said headhunter DeWinter.

Still, not everyone's holding his breath for a new Law & Order spinoff, “Law & Order: Internal Audit division.”

“I'm not sure they are ever going to make a TV show out of it,” Eldridge said.

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