Handling the Small Public Audit Client

How small firms can keep their small business clients happy.

  • THE SMALL PUBLICLY TRADED corporate audit market offers a substantial marketing opportunity for smaller accounting firms.
  • A SURVEY SHOWS SUCH COMPANIES appear to be generally satisfied with their small firm auditors but don't know about or take full advantage of all the services their firms offer.
  • THERE ARE MINIMAL DIFFERENCES in expressed levels of satisfaction between companies audited by non-Big 6 firms and those audited by Big 6 firms.
  • THREE AREAS OF CONCERN TO many of these small public corporations are the cost of accounting services, the training and rotation of the accounting staff and the quality of service provided by their accounting firms.
  • Although the smaller firm often cannot offer all the services a larger one can, associations can be a solution.
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.

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
(net sales between $250,000 and $1 million)
Auditor Number of
Non-Big 6 firms
  Grant Thornton 10   2.3 %
  BDO Seidman 9   2.1  
  McGladrey & Pullen 5   1.2  
  Other accounting firms 226   53.2  
Total non-Big 6 firms 250   58.8  
Big 6 firms
  Ernst & Young 45   10.6  
  KPMG Peat Marwick 31   7.3  
  Coopers & Lybrand 31   7.3  
  Arthur Andersen 30   7.1  
  Deloitte & Touche 24   5.6  
  Price Waterhouse 14   3.3  
Total big 6 firms 175   41.2  
Grand totals 425   100.0 %
Source: August 1994 series of Compact Disclosure (Disclosure Inc., Bethesda, Maryland), which produced a listing of 425 companies. ( Compact Disclosure is a searchable database of information on corporate 10-Ks, available on CD-ROM.)

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.

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.

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?
  Non-Big 6 Big 6
Respondents 58 (55%) 47 (45%)
Years had auditor 6.95 7.29
Satisfaction with level of
personal attention
2.67 2.66
3 = Very satisfied  
2 = Somewhat satisfied  
1 = Very dissatisfied  
Assessment of auditor as
important resource in
helping address the most
important needs of business
2.21 1.89
3 = Yes, definitely  
2 = Usually  
1 = Only for a limited set of issues  
Satisfaction with service areas  
5 = Very satisfied  
1 = Very dissatisfied  
Knowledge of business 4.16 3.91
Audit and accounting 4.34 4.23
Information technology 3.38 3.40
Regulatory consulting 3.75 3.45
Tax 3.96 3.91
Other consulting and advisory 3.56 3.54
Contribution to the
success of business
3.39 3.13

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.

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.)

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.

Case Study

Think Small

M ike Cabrera knows the power of the audit for a small firm. M. A. Cabrera & Co. has just two partners, one staff CPA and three support staff, and yet about 60% of the firms practice is audits. Furthermore, the firm does not see auditing as simply a gateway to management consulting services engagements; theyre an end in themselves. Over the years, the firm has developed certain techniques for bringing in audit clients and keeping them happy.

A lot of Cabrera & Co.s clients are referrals from other local firms that are currently performing tax or MCS engagements for them. Because these firms may not be members of the SEC practice section of the American Institute of CPAs division for CPA firms, they risk losing any client that goes public. "Over the years, weve succeeded because weve developed a reputation for not stealing other firms clients. We take on the SEC audit, leaving the other engagements with the original firm. In the process, we get a new client, the other firm keeps an old one and the company gets good service from both of us." Cabrera, a member of the AICPA small firm advocacy committee, believes such "practice alliances" are essential for small firms. He will be teaching a session on it at the AICPA National Practitioner Symposium in June.

Small firm problems and advantages
In addition to practice alliances, Cabrera noted that key advantages for the small firm can be price and the experience the partners personally bring to each audit. "These small public companies are very price-sensitive," said Cabrera. "We are efficient, with little overhead and no untrained people. We can offer each client an auditor with a minimum of 12 years experience."

Often, newly public companies may have trouble grasping all the implications of being public. "For example, the president suddenly realizes his salary is public knowledge; the company has to get used to quarterly filings and so forth. All our clients were able to adapt, but during the learning curve they had to be talked through the process." Cabrera once realized that a newly public client had a chief financial officer who had difficulty working in an SEC environment, so the company had to find another position for him and hire a new CFO.

Because he is knowledgeable about publicly held companies, Cabrera also is able to advise companies on the pitfalls of going public. He tells them such a move is not for everyone and he can offer other options for raising capital. "I explain that going public does not have to be the goal of every successful business."

Sometimes a client grows beyond the firms capabilities. Even if a firm believes it can still handle an audit, Cabrera said he has to be aware of clients perceptions of a small firms limitations: "We had one client that we saw through an initial and second public offering. The third was designed to raise $25 million as the company expanded internationally. I think we still could have handled the audit, but we understood the underwriters needed a certain comfort level and passed the audit to a Big 6 firm. We realize we cant offer every service to every client."

Other services: today and tomorrow
M.A. Cabrera & Co. also does trust and estate work and has an individual tax practice. "Any small firm has to do some tax, but I dont see a lot of growth there and we dont emphasize it," said Cabrera. He is keeping an eye on the services identified by the AICPA special committee on assurance services and may consider the ones that are appropriate for his firm.

"Meanwhile, I hear that audit growth is flat and that banks are less frequently requiring audits and instead are doing their own analyses of companies. But I dont see the SEC eliminating audit requirements. We may have to change in the future, but right now well continue to perform the traditional audit."

Richard J. Koreto


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