Second-CPA-Firm Update

The Sarbanes-Oxley cloud has a silver lining—unzip it.

SMALL FIRMS CAN HELP COMPANIES implement the Sarbanes-Oxley Act’s ongoing requirements, take on engagements the company auditor may no longer perform or pick up assignments that larger firms forgo because they are too involved in Sarbanes-Oxley-related engagements.

SECOND-CPA-FIRM WORK IS VARIED: One firm is tailoring a new marketing campaign to helping companies with ongoing remediation and internal control outsourcing; it also has picked up tax work that companies chose to give to firms other than their auditors. Another firm won a documentation engagement, set up purely as a consulting project in which the firm followed AICPA Professional Standards and reported to the CFO.

CLIENTS SEEKING AN ADVISORY FIRM are looking for skilled staff who understand internal controls and have an audit background, the opportunity to work with a firm in a collegial rather than adversarial relationship and a reasonable price.

FOR LARGE FIRMS, PUBLIC ISSUERS are A-list clients. Their B-list (which might be private companies, not-for-profits or governments) may very well constitute first-rate clients for local firms.

TO OBTAIN BUSINESS, FIRMS SHOULD begin to form alliances with other CPAs and attorneys who are involved in SEC work—and demonstrate that the alliance is good for both sides. When wooing a potential referral source, firms should make sure the client understands what the firm has to offer.

ANITA DENNIS is a JofA contributing editor and freelance business writer.

he Sarbanes-Oxley Act and the PCAOB have created tremendous demand for accounting expertise. That has resulted in opportunities for small firms that can help companies implement the act’s ongoing requirements, take on engagements the company auditor may no longer perform or pick up assignments that larger firms forgo because they are too involved in Sarbanes-Oxley-related engagements (see “ Small Firms: Think Big! JofA , Jun.04, page 22, and “Section 404 Opens a Door ,” JofA , May04, page 55). In many cases, the services required are core competencies, and small firms’ competitive rates and depth of knowledge make them strong competitors.

How can small firms position themselves to become the second CPA firm—beyond the auditors—to serve clients’ needs? You don’t have to reinvent your firm. The services in demand aren’t exotic new specialties or complicated compliance services; they’re exactly the kinds of engagements small firms have been providing for years. The trick is to understand the new demand for your firm’s core competencies and then search out the clients and referral sources that need them. Firms have had a year or more to explore this market, so the JofA spoke to some CPAs with a track record in this area about their experiences. In addition, “Marketing Tips to Success,” offers detailed practice-development advice.

“We have gotten roughly $1 million in new work in the past year and we expect to get a fairly sizable amount more,” says Larry King, CPA, of 75-person KBA Group LLP in Dallas. The largest engagements are implementations related to Sarbanes-Oxley’s section 404 and to SAS no. 70, Service Organizations, which involve an auditor’s evaluation of a service organization’s controls. Once the effort to meet the initial implementation deadline is over, however, further internal control implementation and remediation work may well be a source of ongoing engagements.

Big Money

The SEC estimated the aggregate annual costs of implementing section 404(a) of the Sarbanes-Oxley Act to be about $1.24 billion, or $91,000 per company.

Source: .

“The firm initially saw it as a long-term business opportunity, even beyond the initial surge of implementation,” King says, referring to, among other things, the act’s ongoing documentation and internal controls testing requirements. “We believe there will be continuing opportunities in internal control work, changing software practices to accommodate the new requirements and other areas. We’ve also found a big market for internal control outsourcing among companies that don’t have the resources in-house to comply with all the requirements.” To meet the demand, the firm created a risk advisory services division, hiring a principal in charge of the area and a staff of six that is expected to grow to nine by early 2006.

“We got the work almost exclusively through active marketing, using the tagline ‘Cover Yourself: Get SOX,’ ” King says. “Our marketing director ran ads in the local business journal and did a mass mailing to public companies throughout Texas. We followed up by sending these companies mailing tubes with monogrammed socks in them and some marketing materials.” The firm then sent prospects a white paper and another mailing with golf balls and tees with the firm’s logo. Those efforts, along with a telemarketing campaign, not only generated significant section-404-related work but also brought in several new clients who had been considering changing auditors.

Now that large companies have generally tackled their initial Sarbanes-Oxley implementation, the firm is fashioning a new marketing campaign to gain work helping companies with ongoing remediation and internal control outsourcing. It also has picked up tax work that companies chose to give to firms other than their auditors. In one case, a company’s audit committee was contacted by a whistleblower; the corporate counsel engaged King’s firm to investigate because it could offer an outsider’s objectivity. The firm’s risk advisory services area also consults with corporate boards and audit committees.

Similarly, Weaver and Tidwell LLP, a regional firm in Texas, built a practice billing upwards of $4 million through internal audit outsourcing, section 404 compliance and information technology auditing, says partner Alyssa Martin, CPA. Its tax and business services group has won about $600,000 in engagements to provide small and midsize companies with services their auditors can no longer perform for them or choose not to, including accounting, tax and tax planning, financial reporting and due diligence. And the audit group has won about 10 engagements that Big Four firms could no longer service due to client size or scale.

“We have hired SOX consultants, internal auditors and IT auditors at all levels—20 people in all,” Martin says. “For projects or tax and reporting work, we have added two or three people.” Among the firm’s successful marketing activities has been networking with partners in Big Four firms, who have proven to be excellent referral sources.

New clients have engaged Averett, Warmus, Durkee, Bauder & Thompson, a 47-person firm in Orlando, Fla., to help with Sarbanes-Oxley-related second-year testing and plan documentation and to perform internal control testing for companies before the auditors arrive. An airline that realized its own internal audit department might not be up to coping with the act outsourced section 404 documentation and testing to the firm, and an insurance company hired the firm for a documentation engagement. The engagement was set up purely as a consulting project, with the firm following AICPA Professional Standards and reporting to the CFO. The firm had previously done consulting work for both clients, but then marketed itself to them for new work with the act in mind.

What have these and other clients been seeking when choosing an advisory firm? Three things, according to the firm’s partner Jim Warmus, CPA:

Skilled staff who understand internal controls and have an audit background.

The opportunity to work with a firm in a collegial rather than adversarial relationship.

A reasonable price. The firm charges substantially less than some of the large firms in its area, though Warmus stressed that staff skills were far more important to clients than price.

“We have experienced managers who work directly with the clients on their policies and procedures, their testing plans and whatever they want,” Warmus says. “The hard part isn’t the technical side, it’s having the background you need to understand the big picture. Firms like ours have a large advantage because we have that background.”

The firm has added five staff members since July 2004 and is actively seeking more, from the senior to supervisor level. Many other firms are looking for the same people—ones who are seasoned but not too advanced in their careers—but Warmus has had some success targeting large-firm employees and offering them a less frenetic pace. “Below the manager level, we don’t ask people to work more than 2,300 hours a year,” he says. “We check our hours continuously to make sure people aren’t being overworked. We don’t want to work them to death. We want them to have a family life.”

Get Involved With 360 Degrees of Financial Literacy!

The first step any CPA should take to join the profession’s 360 Degrees of Financial Literacy effort is to sign up on the AICPA’s Financial Literacy Volunteer Database. Registered CPAs have access to a number of benefits, including invitations to an annual financial literacy teleconference series, timely updates on activities at the state and national level and a monthly e-newsletter. The teleconferences feature speakers from organizations and government agencies with active financial literacy programs and outreach. The e-newsletter helps volunteers learn about helpful resources and tips for volunteering in their own communities and highlights volunteers’ inspiring success stories. Register today at . Volunteer resources, including the CPA mobilization kits, are available at .

Some firms are doing the same types of engagements they always have, just more of them. DeMeo, Young, McGrath, a 10-accountant firm in Fort Lauderdale, Fla., has seen a surge in audits of publicly traded companies. “A lot of people have gotten out of the business of auditing SEC companies,” says partner Roberta Young, CPA. She says her firm’s audit practice has doubled in Sarbanes-Oxley’s wake, largely due to referrals from small firms that have chosen to shed audits because of their added complexity. Her firm has not needed to add staff to handle this additional work, but has instead been able to hire part-timers when they’re required.

To obtain second-firm business, “begin to form alliances with other CPAs and attorneys who are involved in SEC work,” Young advises. It helps to be able to demonstrate to referral sources that an alliance is good for both sides. “When other CPAs refer work to me, the referring accountant keeps the tax work, which we don’t do. We do only the audits.” Most CPAs understand what great referral sources large firms can be, but Young’s experience shows that small ones can be an excellent source of new business, too.

In some cases firms are getting engagements simply because their larger counterparts are overloaded with Sarbanes-Oxley-related assignments. For example, Battelle & Battelle LLP, a 75-member firm in Dayton, Ohio, has grown about 10% in the past year, with about a 30% increase in audits of benefit plans.

“The national firms are shedding benefit plan audits as well as audits of midsize privately held companies, we assume to work instead on Sarbanes-Oxley-related engagements,” says partner Jay Moeller, CPA. Although the firm has not received any direct referrals from large firms, it has gotten work through its contacts with existing clients, bankers, lawyers, insurance companies and benefit plan administrators.

Marketing is handled by a committee of four people, including three partners and the marketing director; other managers and senior accountants contribute, too. The group meets monthly to formulate strategies, including cold-calling and other outreach efforts to inform the firm’s traditional manufacturing and distribution clients about its benefit plan capabilities.

“You’ve got to beat the pavement and not be too proud to ask for work,” Moeller says. Most important, given the wide range of opportunities out there and the complexity of some assignments, make sure the potential referral source understands what your firm has to offer. “You can go to lunch and have a nice time, but don’t forget to tell them what your firm can do and what kind of work you’re looking for.”

The Institute answers individual questions at the Sarbanes-Oxley Act hot line: 866-265-1977, and provides up-to-date compliance information for CPAs at Sarbanes-Oxley Act/PCAOB Implementation Central,

AICPA’s Annual Accounting and Auditing Update Workshop (2005 ed.) (# 736181JA).
Annual Update for Accountants and Auditors (2004–2005 ed.) (# 730024JA).
Auditing Update: A Review of Recent Activities (2005 ed.) (# 732771JA).
Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).
Internal Control and IT: Reliable Reporting and Fraud Prevention (# 732550JA).
Internal Control Reporting: A Guide to Effective Documentation (# 732470JA).
Internal Control Reporting: A Manager’s Guide to Surviving the Audit (# 732490JA).
Internal Control Reporting: A Practical Guide to the PCAOB Standard (# 181421JA).

Consideration of Internal Control in a Financial Statement Audit, an AICPA Audit and Accounting Guide (# 012451JA).

Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS No. 55—SAS 78 (# 060671JA).

Financial Reporting Fraud: A Practical Guide to Detection and Internal Control by Charles R. Lundelius Jr. (# 029879JA).

Guide to Financial Reporting and Analysis, John Wiley & Sons (# WI354252P0000DJA).

Web sites
Center for Public Company Audit Firms, .
CPA Marketing Tool Kit, .
PCPS Firm Practice Center, .

For more information or to place an order, go to or call the AICPA at 888-777-7077.

Clearly there are many ongoing practice development opportunities available for firms that understand what they have to offer and how to use their competencies to fill emerging needs. “The largest firms do a great job working with the public issuers,” Warmus says. “But they’ve made those companies their A-list clients, and they may no longer be as interested in the private companies, not-for-profits or governments. But for local firms such as ours, those are the A-list clients.”

Clearly, no matter what market constitutes a firm’s A-list, there are new chances to expand a practice’s horizons in its chosen target area.

Marketing Tips to Success

Here’s a step-by-step program for identifying your firm’s options and capitalizing on them.

Identify your firm’s strengths. Understand your practice’s particular strengths. Ask and answer questions such as: Does our firm have a strong audit staff that can take on audits that other firms no longer want or are able to handle? Could we provide internal audit outsourcing based on their previous industry experience? Do we have specialties—from tax to business valuation—we could market to auditors or their clients?

Firms that target Sarbanes-Oxley-related opportunities say they have noted increased demand for an array of services, including

Internal audit outsourcing.
Accounting services (including write-up).
Audit preparation services (such as workpaper preparation).
Inventory-related services.
Reconciliation services.
IT support and management services.
Tax services.
Business valuation.
Valuation of intangibles.
Due diligence services.
Audit committee guidance.
Unconsolidated subsidiaries.
Financial services.
Special projects.

Research your market. Once you have inventoried your strengths, look into likely prospects in your local market. It may be possible to form alliances with large-firm offices to work together on engagements, or to get good referrals from them. Find out which of their partners have the kinds of clients your practice could best serve.

Similarly, smaller firms shedding audit engagements may be willing to give referrals or even share engagements. Consider offering a pilot program in which you work together on one client; suggest signing a noncompete agreement so they will refer clients to your practice.

You’ll also want to market directly to companies. Identify the kinds of services public companies located in your area might need.

Identify your objectives. Narrow the list to a specific set of services and decide how your firm can provide them. Make decisions by matching your firm’s existing skills with your market’s needs. Will you add new staff? Will you reinforce existing competencies or recruit staff with different experience?

For large companies, you may want to concentrate on services their auditors can no longer perform. The middle market may be seeking to outsource some areas that internal staff no longer handle. Nonpublic companies or not-for-profits may need traditional services that larger firms no longer are willing to offer.

It may be a good idea to start small with your own internal pilot program. Choose one type of assignment and the most promising prospect; determine what you’ll need to win and service the engagement; and launch a marketing effort. Use what you learn from this attempt to determine your next steps.

Get started with marketing. This may mean simply taking a good prospect—a CFO, board member or larger-firm partner—to lunch and explaining what your firm can do and how your skills can benefit the prospect. Don’t forget traditional referral sources such as lawyers, bankers and former staff members, as well as members of boards of directors who in many cases will be taking more active roles in engagement assignments and firm selection. Let them know your firm’s strengths.

Close the deal. Build a business case for why a client should work with your firm. Start by determining your unique value proposition, explaining in a sentence or two what your firm can offer to address the prospect’s needs and why it is uniquely qualified to help them. Then construct your marketing proposal around that. Here are some important points to make:

Local firms offer high-quality, well-managed staff as well as active partner or manager involvement in engagements.

Companies’ own accounting staffs may no longer have the time to do the work they once did given the demands of Sarbanes-Oxley and PCAOB requirements. A CPA firm can reduce the burden.

Small firms that concentrate on accounting, tax and attest services can promise strong focus and expertise in those basic services. If firm members specialize in areas such as business valuation or IT, portray the practice as a boutique operation with hands-on service.

Using a second CPA firm for a variety of services reassures audit committees, which prefer to see a second professional involved because of the independence it affords.

Smaller firms offer very competitive billing rates, as well as possible summer work discounts.

Steps to Success
If you research your firm competencies and your market, identify your objectives, launch your marketing effort and close the deal with a strong business case, your firm will be in an excellent position to benefit from the tremendous growth opportunities that the Sarbanes-Oxley requirements present.

—James Metzler

James Metzler, CPA, is AICPA vice-president, small firm interests.


Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.


News quiz: Retirement planning, tax practice, and fraud risk

Recent reports focused on a survey that gauges the worries about retirement among CPA financial planners’ clients, a suit that affects tax practitioners, and a guide that offers advice on fraud risk. See how much you know with this short quiz.


Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.