| EXECUTIVE SUMMARY |
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| CAREL M. WOLK, CPA, PhD, is
associate professor of accounting at the University of Tennessee
at Martin. CHARLES W. WOOTTON, DBA, is professor of accountancy and finance at Eastern Illinois University, Charleston. |
Increasingly, smaller businesses are discovering that smaller CPA firms can meet their auditing and other accounting needs. Small firms should not assume that certain clients are out of reach; in fact, when it comes to attracting small business clients, they may have a number of advantages over larger firms. This article, based on a survey we conducted, shows where the opportunities are, points out how smaller firms can capitalize on them and discusses what happens when a client company gets too big for its CPA firm.
In this article, a small publicly traded corporation is one with sales of $250,000 to $1 million. (For comparison, a single McDonald's franchise can generate sales of over $1 million.) Exhibit 1, page 54, ranks the auditors of 425 small public corporations by the number of companies audited. Non-Big 6 firms audit 59% of this market as compared with 2% of the companies on the New York Stock Exchange.
Approximately 200 firms audit this 59%. That 425 companies are audited by more than 200 CPA firms shows how broad the small audit market is. Smaller clients turn to the local or regional accounting firm for audit and other accounting services.
AN AUDITOR'S SERVICES: THE STATUS QUO
Forty-one percent of the respondents audited by non-Big 6 firms
perceived their auditors as definite resources in addressing their
most important needs. Therefore, many companies believed their firms
were doing a good job assessing and addressing a broad range of client
needs. However, approximately 30% of small businesses viewed their
auditors as important resources only for a "limited set
of issues," indicating that CPA firms may underestimate the
service potential the small business client offers. The point is that
many firms may be missing out on opportunities for making happy
clients even happier and should strive to market any other services
they may offer.
How satisfied are clients with current services? Participants were asked to rate their level of satisfaction with their accounting firms for each of several service areas (see exhibit 2 ). On average, respondents seemed satisfied in all the areas listed. Most important, clients were just as satisfied with small firms as with large ones.
| Exhibit 1: Auditors of Small Publicly Traded U.S. Corporations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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WHAT CLIENTS WANT...
To attract additional small clients, CPA firms should be aware
of the service aspects that small businesses consider important. Firms
also should know the potential problems they face when they provide
services to small businesses.
It's obvious that a company is less than satisfied with its current firm when it replaces it with another. Identifying factors that motivate a company to change firms may help clarify what services clients consider important. Although most said they had not recently switched CPA firms, a number of companies said they had changed auditors in the past five years or were seriously considering a change. The reasons given most often related almost equally to cost ("too expensive," "fee structure," "expensive rates," and "fee was exorbitant for a company our size") and perceptions of service quality.
Respondents' comments about service quality were varied, noting audit staff turnover, the level of service and the training level of the staff members assigned to them. One client said, "We changed due to poor quality of service, mismanagement of audit, turnover of staff-generally they were inept." Another said, "Auditors were outrageously rude to client, self-serving." Also frequently cited was the need for additional services beyond the scope of the current firm, often because a company had grown-sometimes expanding internationally-and its accounting needs had grown with it.
...AND HOW TO ADDRESS THOSE NEEDS
CPA firms should focus on three major issues when trying to
attract or retain the small public client: the cost of their services,
the training and rotation of their staff and the quality of service
they can provide to clients.
Cost of services. These days most business enterprises concentrate on costs. In fact, to some small U.S. companies, an audit's cost can mean the difference between a profit and a loss for the year. Moreover, some small businesses see the audit primarily as a reporting or borrowing requirement from which they actually receive little or no direct financial benefit.
Firms can do two things to help address these cost concerns:
1. Focus on controlling audit costs, working with the client to ensure the cost is fair to both the company and to itself. Before the annual audit, the firm can discuss with management specific actions the client can take to help minimize audit fees. For example, there may be account analyses (such as legal expense or repairs and maintenance), customer lists and other supporting schedules (such as aging of accounts receivable) the client can prepare ahead of time for the auditor's use. Of course, client-prepared information does not reduce the auditors' responsibilities, but it can reduce the amount of time required to complete the audit. Similarly, the client can verify that records are in order before the auditors arrive. These include items such as the agreement of subsidiary records and general ledger as well as reciprocal accounts of consolidating entities. A client that has adequately prepared for the yearend inventory, with accounting teams thoroughly trained and appropriately scheduled, will be less likely to waste time during the auditors' observation.
The management letter might include a section suggesting changes in the accounting or internal control system that would help reduce future audit costs. It is especially helpful to identify areas that required excessive time in prior audits, as a basis for improving the efficiency of later ones.
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2. Make the client more aware of both the direct and the indirect benefits of an audit. When auditors do fieldwork or report to management, they should show how their work goes beyond simply providing a report to shareholders or lenders. The firm also should present the audit to management as a way to review operations and identify alternatives with direct financial benefits, such as increased profits, or indirect benefits, such as improved employee morale.
Auditors may observe instances where (although there is no impact on the financial statements under audit) the company's operational efficiency could be improved. For example, would centralized purchasing decrease costs by reducing duplication or enabling the company to take advantage of quantity discounts? Which computer applications could streamline a process? Would an updated policies and procedures manual help minimize employee misunderstandings? When the audit report is presented, the auditor could brief the client on upcoming changes in tax law or accounting principles that may affect the company. Firm personnel should be aware, throughout the audit process, of opportunities for additional services that could benefit the company beyond the audit, such as tax or financial planning, hardware or software selection and analysis of computer and information systems. The auditor also should stress that the firm is engaged on an "ongoing basis" and available to provide help as needed.
| Exhibit 2: Are Businesses Happy with Their Auditors? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Training and rotation of staff. Staff training at firms should focus on the small corporation's special needs. Furthermore, firms should appreciate the need for continuity in the staff assigned to service small business clients.
Personal attention is particularly important. In many cases, the owners operate the company, working directly with employees each day. They want to know personally the attorney who offers legal counsel and the members of the CPA firm that provides their accounting services; they also want to have faith in their competence.
Small business owners do not want to feel they are second-class citizens. At a minimum, the CPA firm should ensure that at least one member from the previous year's audit or a previous assignment returns to the subsequent engagement. Preferably, one staff member should serve as a potential long-term contact person. The firm should encourage the relationship between that staff member and client personnel. It is very likely that, as the contact person advances in the firm, he or she will not be able to spend as much time at the client's site; however, time spent on fieldwork each year goes a long way to establish continuity and overcome some small businesses' perception that only junior accountants are assigned to them. The small business owner should have one trusted "senior" person he or she personally knows and can turn to with problems or questions.
Staffing issues also can relate to clients' concerns about audit costs. Many small businesses believe firms use them as training ground for newly hired accountants, and a major cause of high audit costs is the time the clients spend each year familiarizing the auditor's new staff with their business procedures: Even though the company may engage the same firm as last year, the faces are new. If a firm assigns the same audit team (or at least part of the team) to a small business for a number of years, the hours (and costs) required for that audit can be reduced. Maybe more important, as a small business owner begins to know and value the expertise of the audit team, the owner is more likely to accept the audit's cost. Moreover, recognizing a firm's audit expertise can lead to a greater demand for one or more of the firm's other accounting services.
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Providing long-term quality service. Both the firm and the client may fear that as the small business grows in size and complexity the current firm no longer will be able to meet its service requirements. Firms must be realistic in their assessments of their capabilities to provide quality services to growing clients. For instance, when a small company goes public, it might need help in meeting Securities and Exchange Commission regulations, and its current accounting firm might not be able to provide that guidance. Or the small company might open an operation in Mexico and need the services of an international accounting firm. In some cases, a local firm might find it difficult to meet all the needs of a growing corporation, so the client would have to turn to a larger firm.
However, a small firm might be able to obtain the expertise it needs by joining one or more of the many associations of CPA firms. Today, there are associations appropriate for nearly any size firm. When greater expertise is needed, a small firm can call on a larger firm in the group (or the association itself) either to supply the needed information to its staff or to furnish the needed expertise directly to the client. ( The Public Accounting Report newsletter published a detailed list of 32 firm associations in its December 31, 1996, issue. To order a copy call 800-926-7926.)
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Many firms have found they can more successfully service the small corporate audit market by actively specializing in restricted services. By carving out a niche that gives them a competitive advantage with certain types of clients or services, they maximize the use of their resources and potentially reduce the litigation exposure resulting from trying to be "all things to all clients."
The small CPA firm should review exhibit 2 for guidelines on what is
making clients satisfied-and what is not, keeping in mind that small
public companies associate quality with value for dollars spent, and
focus on personal attention and the firm's ability to adapt to the
changing needs of a growing client.
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