| EXECUTIVE
SUMMARY |
 THE SARBANES-OXLEY ACT HAS
CREATED new requirements for
public companies, spurring greater demand
for professional services and for a range
of engagements that offer opportunities
to well-positioned smaller firms. ONE RESULT IS A CHAIN
REACTION in which the big firms
are going to focus on certain services
and push the rest down to midsize firms.
They in turn will push down work to
smaller firms.
SINCE THE ACT PREVENTS
AUDITORS from helping their
public-company clients with much of the
compliance work, there is an opportunity
for the “second CPA firm” to
perform internal control testing and
review internal control systems. In
addition, there will be increased demand
for business valuation and tax work.
THE FIRMS BEST ABLE TO
CAPITALIZE on these prospects
are those in or with access to cities
that are home to a number of public
companies. They should determine which
public companies are nearby and what
services they might need, and which large
audit firms in the area might be seeking
second CPA firms—both midsize and
smaller firms—to whom they can refer
some projects.
IN MANY CASES CPAs WILL HAVE only
to reorient their practices or expand
their knowledge and then create a
marketing strategy to get some of this
work.
CPAs SHOULD BE AWARE
that professionals in other fields are
offering services such as internal audit
engagements. Smaller firms planning to
seek such engagements may have to invest
in staff training and marketing.
|
| ANITA DENNIS is a JofA
contributing editor and freelance
business writer. |
or small firms there has never been a better time
in the history of the profession to grow a
practice,” says Richard Caturano, CPA,
president of Vitale, Caturano & Co. in
Boston, “because the Sarbanes-Oxley Act has
created new requirements for public
companies.” That has spurred demand for
professional services mandated by the act and for
a range of engagements that audit firms now
either cannot or choose not to take on themselves
for their own audit clients. Because of the
volume and variety of work needed, a
well-positioned smaller firm has an excellent
chance to offer its own expertise in numerous
areas and thus become what is being labeled a
“second CPA firm.”
This article reviews what kinds
of engagements smaller firms can pick up from
larger firms (also see “Section
404 Opens A Door,”
JofA, May04, page 55) and describes
marketing strategies that can enable such firms
to position themselves for growth.
 |
| |
| Source:
Survey of 136 CFOs and managing directors
of U.S.-based multinational companies,
PricewaterhouseCoopers’ Management
Barometer, www.barometersurveys.com, July 2003. |
A RANGE OF POSSIBILITIES
Section 404 of
Sarbanes-Oxley focuses on companies’
internal controls and financial reporting
procedures. Since auditors cannot help their
clients with much of the compliance work the act
requires, there is an obvious engagement
opportunity for the second CPA firm to perform
internal control testing and reviewing.
Not only does this present a
new practice opportunity, but it also is a
“way to balance your workload because this
work can be done in nonpeak times,” says
David Morgan, CPA, comanaging partner of
Lattimore Black Morgan & Cain in Nashville.
“Our audit staff is looking at a busier
spring and summer than we’ve had in a long
time.” Similarly, Caturano reports this
year, for the first time in its history, his firm
is fully booked for the summer.
While internal-control-related
engagements might be best-suited for firms with
20 or more professionals, that’s not the end
of the story. There are numerous other services
auditors may not be allowed to offer because of
the act’s restrictions or that large firms
may choose to forgo.
Audit workpaper
preparation. For their
public-company clients, audit firms can no longer
develop certain workpapers, such as cash
reconciliations, intercompany account
reconciliations or depreciation schedules, so
smaller firms may be called upon to pitch in.
“It really adds up to offering accounting
assistance to companies because their auditors
can’t help them in these areas
anymore,” Morgan says.
Caturano reports his firm
recently had an engagement in which it worked on
a business’s intercompany account
reconciliations. “In the past members of
that company’s audit team might have spent
two months doing these reconciliations because
the client didn’t have the staff to do
it,” he says. “Now the auditor
can’t do it any longer and the company
doesn’t want to hire a staff person to take
it on,” so the second CPA firm can make a
pitch for the work.
Business valuation.
Many public companies will need
valuations as a result of FASB Statements no.
141, Business Combinations, and no. 142,
Goodwill and Other Intangible Assets. In
other cases companies will need services
involving intercompany transfer pricing for their
international affiliates. Businesses also still
require valuations for other reasons—for
estate tax purposes or in litigation services
engagements, for example. Again, under the act,
the auditor can’t do any of this work. As a
result smaller firms with valuation practices are
in an excellent position to tap this market.
Tax. If
companies decide they would prefer not to have
their audit firms perform tax work for their
executives, Morgan says, that will create an
opportunity for any firm with a strong background
in tax-return preparation and knowledge of
taxation of stock options and related executive
compensation issues.
“A lot of smaller firms
have very strong individual tax practices and
already work with executives on their personal
tax returns,” Caturano says, which enables
them to provide valuable expertise to companies
seeking alternative providers.
Corporate tax accruals are
another area of opportunity. Morgan’s firm
has been engaged by large corporations to perform
their tax accruals because their auditors are
reluctant to take on this work due to
uncertainties about the act’s intentions in
this area. “A lot of the smaller public
clients don’t have the capability to do this
work in-house,” Caturano says, “and
many smaller CPA firms have the expertise to
perform it for them.”
Marketing
Strategies: Two Firms’ Tips
 Take a closer
look. When Vitale, Caturano
& Co. decided to position itself to
tap the market for engagements auditors
could no longer offer, it began with a
list of public companies in its area.
Firm members set up meetings with two
groups from the local offices of national
firms: the managing partners and partners
who had public-company clients. “We
told them we were expanding our
capabilities, described our skills and
services and said we were hoping to take
on some of the added work that would
arise because of the changes
Sarbanes-Oxley has made,” says
Richard Caturano, firm president. The
firm then followed up this effort with a
direct-marketing campaign to company CEOs
and CFOs. Key company contacts received a
pair of binoculars imprinted with the
firm’s logo. A cover letter
introduced Vitale, Caturano and its
services, and urged the recipient to
“take a closer look at us. We got a
tremendous response,” Caturano says.
Educate
existing and potential clients. David
Morgan at Lattimore Black Morgan &
Cain suggests scanning the firm’s
client list to see whether there are CEOs
or CFOs among its tax clients. “That
makes it very easy to approach those
companies” to offer expanded
services, he says. His firm also sponsors
seminars for CFOs and other financial
professionals on how Sarbanes-Oxley might
affect their companies. At the first one,
“we expected 20 to 30 people, and
120 showed up.” Although most
corporations now are familiar with the
act, new accounting and PCAOB rules offer
the firm ongoing chances to provide
information updates, he says.
|
THE CHAIN REACTION
In addition to
creating more opportunities in specialized areas
for smaller CPA firms, Sarbanes-Oxley also has
generated greater demand for services overall.
Because the act added new layers of audit and
reporting requirements for public companies, the
auditor’s work has expanded. That
development combined with consolidation among the
larger firms means those national practices may
no longer be able to or may choose not to serve
some existing clients.
“The national firms
realize they have to do a lot more work on
public-company audits than they had in the
past,” Morgan notes. “Next year, for
example, they will have to report on their
systems of internal controls. The act also has
moved up the reporting deadlines, so they have to
get more work done in a shorter period. If they
are using all their resources on these tasks for
public-company clients, they may decide they are
not able to service nonpublic clients.” (The
full text of the act along with a summary of its
provisions and other resources are available at
the AICPA’s Sarbanes-Oxley Act/PCAOB
Implementation Central at http://cpcaf.aicpa.org/Resources/Sarbanes+Oxley/The+Changing
+Regulatory+Landscape.htm.)
That’s good news for
smaller firms. “The work is moving
downstream at a tremendous rate,” Caturano
says. But will middle-market firms be the only
beneficiaries if national firms shed some
clients? Caturano doesn’t think so.
“The big firms are going to focus on
services that will make money for them and push
the rest down to midsize firms. They in turn will
push down work that is not essential to them to
smaller firms.” A midsize firm might, for
example, give up hundreds of individual tax or
small business clients because the partners
decide they need to pay more attention to their
larger corporate clients. “The small firms
can really benefit if they have the right
expertise,” he says.
CREATING
A MARKETING STRATEGY
Caturano and
Morgan agree that the firms best able to
capitalize on these prospects are those in or
near cities that are home to a number of public
companies. How can these firms position
themselves to take advantage of these
opportunities? The first step would be a
two-pronged research project to determine
 Which public companies are
nearby and what services they may need that their
audit firms no longer will provide.
Which large audit firms in
the area may be seeking other CPA firms to whom
they can refer some projects.
Armed with a better sense of
the market, the potential second CPA firm will
decide what to focus on—whether that means
services directly mandated by the act,
engagements auditors can no longer offer or
services for smaller clients larger firms may be
shedding. The firm then must assess whether it
has adequate expertise and resources to take on
the new engagements (see “Tips for the
Sarbanes-Oxley Learning Curve”). If not, it may be necessary to
add more staff, as Caturano’s firm has done,
taking on nine former national firm partners.
Similarly, Morgan’s firm brought in auditors
who could address internal audit issues to
complement its existing staff, whose experience
with audits was more
financial-statement-oriented.
“When you hire new
experts, they create marketing
opportunities,” says Caturano. “We
brought in a specialist on transfer pricing from
a larger firm. We already had an existing
business valuation practice, but having this
specialist has given us added credibility in that
area.”
In many cases CPAs will have
only to reorient their practices or expand their
knowledge. For example, “many small firms do
business valuation engagements that involve
obtaining a value for an entire company,”
Morgan says. “Now they may be asked to value
intangibles only” under the new FASB
standards. In that case practitioners will need
to acquire an understanding of the standards and
their implementation in order to enter this new
market but won’t need to add personnel.
Finally, in forming a marketing
strategy, CPAs should be aware that professionals
in other fields are offering services geared to
complying with the act’s provisions.
“This market is not exclusive to CPAs,”
Morgan says. For example, he notes, the staffing
service Robert Half places temporary workers with
companies to complete specific projects related
to Sarbanes-Oxley requirements, while Robert
Half’s Protiviti subsidiary and Jefferson
Wells both offer internal-audit-outsourcing
services.
 |
PRACTICAL
TIPS TO REMEMBER |
|
These new
practice opportunities will be a
way to balance a firm’s
workload because they can be done
during nonpeak times.
Small firms
with strong form 1040 practices
should scan their individual
client list to discover
public-company CEOs and CFOs who
might want to use the firm’s
services in other areas.
In forming
a marketing strategy, CPAs should
be aware that professionals in
other fields will compete with
them to offer services to public
companies.
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|
SOMETHING FOR EVERYONE
“Sarbanes-Oxley
has created practice opportunities that are
available to every firm that is in a major
market,” Caturano says. To take advantage of
them, however, firms likely will have to make an
investment—either in people, office tools,
software, training and marketing or some or all
of these, Morgan says. Such an investment does
pay off, say Morgan and Caturano, who report
their practices have grown sharply in the past
year due to their efforts to capitalize on
opportunities created by the act (see “Marketing
Strategies: Two Firms’ Tips”).
“Both companies and their
auditors have work they need done. It’s just
a matter of educating the people in your market
about your own capabilities,” says Morgan.
“There’s potentially something in this
for everybody.”
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