| EXECUTIVE SUMMARY
|  THE NONAUDIT SERVICES
Sarbanes-Oxley prohibits CPAs from
providing to their public company audit clients are
bookkeeping or services related to the accounting
records or financial statements of the client;
financial information systems design and
implementation; appraisal or valuation services,
fairness opinions or contribution-in-kind reports;
actuarial services; internal audit outsourcing
services; management functions or human resources;
broker/dealer, investment adviser or investment
banking services; and legal and expert services
unrelated to the audit.
REGIONAL FIRMS CAN CONTINUE
TO CROSS-SELL nonaudit services—just
not to the public companies they audit. Midsize
firms will have a better chance to sell their
consulting services now that all firms are
proscribed from offering specific nonaudit
services to audited public clients, some say.
SOME CPAs HAD BEEN
EFFECTIVELY SHUT out from marketing
nonaudit services to publicly traded companies
because the larger national accounting firms
charged significantly lower audit fees. Now that
cross-selling is prohibited, small firms are in a
position to credibly pitch nonaudit services.
MANY FIRMS ARE PROVIDING
CONSULTING services to clients on the
consequences of Sarbanes-Oxley, adding more
service specialties, increasing marketing budgets,
dividing marketing between two staffs, adding
marketing staff and hiring marketing directors to
oversee their sales efforts.
TO PURSUE AUDIT AND NONAUDIT
MARKETING, a firm will need to analyze
its client base, restructure the firm to effect
the best provision of services and then market
services according to each client’s primary needs
balanced against what’s most profitable for the
firm. CPAs should work out the decision together
with their clients.
BECAUSE AN INDIVIDUAL FIRM NO
LONGER CAN serve as both the internal
and outside auditor for a public company client,
one CPA says it benefits his firm if a major
competitor wins the work it loses. It effectively
prevents that competitor from seeking a
significant portion of work the firm wants and
ensures that the internal auditor’s work is top
quality. | | Russ
Banham is a Seattle-based author, journalist and
playwright. His new book, The Ford Century,
a history of Ford Motor Co., came out in
November 2002. |
 he auditor independence rules mandated by
passage of the Sarbanes-Oxley Act in August 2002 are a
double-edged sword for regional CPA firms. No longer able to
use audit engagements as an opportunity to spot client needs
and sell remedial consulting services such as internal
controls tune-ups, information technology, actuarial
research or human resources management, many multiservice,
midsize firms must change their marketing plans. To avoid
sacrificing the considerable investment they made to become
versatile business services providers, most still will sell
nonattest services—just not to the public company clients
they audit. What these firms aren’t doing is exiting one
service market to focus on another—the strategy the largest
firms have been forced to use. Here’s how some midsize firms
are adapting to the law’s strict cleaving of audit and
nonaudit services.
BRAVE NEW WORLD
Sarbanes-Oxley is the
most major overhaul of federal securities regulation
since the Securities Exchange Act of 1934. By
founding the Public Company Accounting Oversight
Board, the legislation creates a system for federal
oversight of public auditors. It also mandates new
disclosure requirements for public companies and
harsher civil penalties for individuals and firms
convicted of accounting or reporting violations.
|
Consulting Had the Edge
The predicted profit for
each dollar of traditional services was
26.8 cents and for consulting services was
28.7 cents. Source: The Practicing
CPA, August 2001. From “The
Impact of Consulting Services on Small
Firms” by Nicholas J. Mastracchio and
Jeffrey Lippitt.
| |
The act’s prohibition against CPAs’ performing any of
eight nonaudit services for the public companies they audit
is the biggest challenge to accounting firms. Those services
are
 Bookkeeping or other services related to the
accounting records or financial statements of the audit
client.
Financial information systems design and
implementation consulting.
Appraisal or valuation services, fairness
opinions or contribution-in-kind reports.
Actuarial services.
Internal audit outsourcing services.
Management functions or human resources
consulting.
Broker/dealer, investment adviser or investment
banking services.
Legal services and expert services unrelated to
the audit. Firms may provide other nonaudit
services—including tax—if the public company’s audit
committee preapproves the service and the entity discloses
the fact to investors in periodic reports. | Some practitioners
expressed concern that the new accounting oversight
board can—on a case-by-case basis if “appropriate to
the public interest”—prohibit other services besides
the eight stipulated. Others also worry that
individual states may become overzealous and extend
the federal prohibitions in ways that limit the work
they can do for privately held companies, but those
fears may be unwarranted (see “ If It Ain’t
Broke… ,” at right). Although a December
2002 SEC ruling (Final Rule: Revision of the
Commission’s Auditor Independence Requirements)
indicated the new oversight committee would
scrutinize all cross-selling activities very
closely, its “prophylactic” approach clearly was
not intended to be draconian. The rule states:
“Accountants will continue to be able to provide a
wide variety of nonaudit services to their audit
clients. In addition, they of course will be able
to provide any nonaudit service to nonaudit
clients.” Regional firms still can cross-sell
nonaudit services, such as IT systems, for
example—just not to the public companies they
audit. The rule also says, “While firms
will be prevented from providing some consulting
services to their audit clients, they will gain
potential clients from other firms who are
similarly situated.”
SILVER LININGS
Many firms that were stunned by both the
scope and the swift enactment of the new federal
securities legislation nevertheless think it will
create opportunities. For one thing, the new
climate of increased regulatory scrutiny means
audits are likely to become more complex, require
more work and generate higher fees, thereby
increasing profits. Indeed, midsize firms will
have a better chance to sell consulting services
now that all firms are proscribed from offering
specific nonaudit services to audited public
clients, some say. Those firms that think
it will become easier to sell consulting services
are stepping up to the plate with marketing and
other changes such as | If It
Ain’t Broke…
U nder Sarbanes-Oxley,
accounting firms that audit privately
held, not-for-profit, government,
family-owned or closely held organizations
may still market nonaudit services to
these clients. But there is growing
concern that some states and other
regulatory agencies will extend the
federal law to encompass
non-public-company audits. The tremors
caused by the new legislation will seem
minor compared to the aftershocks that
will occur if states move to extend the
federal law to non-public-company clients,
several firms say. “It will be a
disaster,” says Richard Kretz, CPA, of
Kostin Ruffkess & Co., Farmington,
Connecticut. “It’s the private companies
in particular that depend on us for
consulting, and if we suddenly could no
longer help them, it’s a big problem for
them—and for us. A big part of our
income is the nonpublic market.”
The recent GAO amendment (number 3)
to its government auditing standards
(yellow book), limiting the scope of
services CPAs can provide to government
agencies, contains prohibitions similar
to those of Sarbanes-Oxley. “For us, the
federal law has had limited impact
because owner-managed and privately held
company audits are the ‘sweet spot’ of
our practice,” says Robert Bunting, CPA,
of Moss Adams LLP, Seattle. “But
if there is a cascade effect and the
states decide to regulate audits in the
private sector, we will be profoundly
affected,” says Mark Hildebrand, Crowe
Chizek & Co. LLP, Indianapolis.
“Sarbanes-Oxley didn’t give me great
cause for concern because most of our
clients are closely held or private and
not subject to the act,” he says. “But
we keep hearing from those clients that
the states are preparing to clamp down
and not allow firms like ours to offer a
full complement of audit and nonaudit
services. If the states restrict
practice in this way, it will have a
significant impact on our firm and a
damaging effect on midsize companies and
the economy.”
| |
Providing consulting services to clients about
the consequences of Sarbanes-Oxley.
Adding more service specialties.
Increasing marketing budgets and adding
marketing staff.
Hiring a marketing director to oversee the
firm’s sales efforts and suggest new services. Paul
Sepp, CPA and director at Elmore & Associates, a
Missoula, Montana, accounting firm, provides consulting
services to clients on the ramifications of the new law.
“Our clients wanted clarification of the law’s specifics,
and we wanted to set the stage for its potential impact on
audit fees,” he says. “We also advised them to begin
implementing some of the corporate responsibility aspects of
the legislation whether or not they are public companies.”
| Richard
Kretz, CPA and managing partner at Kostin Ruffkess
& Co., a Farmington, Connecticut, accounting
firm, says he too has fielded calls from clients
“wanting us to be a sounding board about the
legislation. Some were disturbed we could no longer
continue to perform certain work. Those often were
uncomfortable discussions—for us and them.” However,
such calls present an excellent opportunity to
cross-sell or, as Kretz puts it, “cross-service”—as
long as it’s not in a prohibited area. In some
cases, he says, the firm will provide services the
client needs without breaking them out or billing
separately for them. One useful step a firm can
take to deal with the changes is to read the SEC’s
final version of the auditor independence
requirements and note where conflicts might arise
for its client base. The rules can be accessed at
www.sec.gov/rules/final/33-7919.htm .
MARKETING GETS MORE STRATEGIC
Many multiservice, midsize firms say they’ll
talk to each client to learn which service—audit
or consulting—matters most to it, then decide what
to do based on the input. Several say they are
restructuring internal operations and engaging
with other CPAs in firm-to-firm cross-selling
alliances. Other firms say the challenges wrought
by the legislation have necessitated strengthening
their sales units by upping the budget and adding
a marketing specialist to the staff (see “
Marketing Checklist ,” at right).
Edward Mendlowitz, CPA, senior partner at
Mendlowitz, Weitsen LLP, a three-partner,
12-person, East Brunswick, New Jersey accounting
firm, says, “We hired a marketing director for the
first time, increased our advertising budget by
$35,000 this year and are doing a lot more direct
marketing.” The firm has “launched a number of new
services for public companies—for example,
corporate governance services to boards of
directors and also a virtual bookkeeping service,”
he says. “Overall, we’re putting more than
$100,000 into developing these programs, which is
a lot of money for a firm this size.” |
Marketing Checklist
Here are cross-selling
ideas CPA firms can draw on in the new
marketing environment:
Use the confusion about the
implications of Sarbanes-Oxley to open
discussions with existing clients and
help them understand how the firm can
continue to serve it. These conferences
may be a new consulting service
depending on how detailed and
time-consuming they are. They also help
the firm realize what services clients
want and the expertise it now must
wield.
Change the marketing
structure and budget to parallel the
firm’s reorganized service segments. If
the firm expects to deemphasize audits
to 40% of the practice, then only 40% of
resources, both financial and staff,
should be directed to this business
segment.
To meet needs your
competitors can’t under the new law, add
or strengthen the requisite services.
Sources say many CPAs will focus only on
audits, leaving a pool of clients for
other services. Hire experts in the new
service segments. (Many firms will be
downsizing people well versed in the
expertise your firm intends to acquire.)
Refer your clients for
services to those firms you consider
your chief competititors and make sure
they mention you sent them.
Add a marketing director to
the staff, someone well versed in
sensing and seizing opportunities in a
changing marketplace. Many industries
have undergone profound change in recent
years—energy, financial services and
transportation are examples. Outside
perspective may be what your firm needs,
even if the specialist is hired on a
consulting basis. Investing in
marketing, even temporarily, will help
the firm acquire skills that yield the
capacity to handle additional clients
down the road.
| |
Mendlowitz says the firm’s decision to offer corporate
governance services is based on the observation that “boards
of directors now feel greater pressure to perform their
responsibilities to a higher standard. The firm teaches them
how to read financial statements, understand what the
reporting requirements are and what backup and additional
information they should obtain from the company.” The firm’s
marketing budget has been used for brochures, mailings to
attorneys and personal contacts with clients who are
directors. To provide its virtual bookkeeping
services, the firm set up a new department. It offers
“accounting and bookkeeping services to companies that don’t
want to hire their own people. We do it in our office and
they have access to it on the Internet,” Mendlowitz says.
“We have one ad alone costing us $25,000 a year and we’re
spending $40,000 overall on software and other
advertisements,” he says. “We plan to go after large
organizations that need to outsource their internal audit
services—one of the prohibited services—and have started a
new department to manage this,” says Mendlowitz. “From a
marketing standpoint, the legislation gives us an advantage
we didn’t have before: access to organizations that never
would have talked to us because we weren’t doing their
audit.” Based on perceived advantages or
disadvantages in the marketplace, other firms are adding
items to or deleting them from their service menus. Scott
Farb, CPA, a partner at the 60-person Beverly Hills,
California, office of Rothstein, Kass and Co., says the
impact of Sarbanes-Oxley has been mostly positive. The firm
has hired 10 former senior executives from the Big Four in
the past few months. “We’ve beefed up the business with
people who are experts in areas that we want to market more
fully, among them IT and tax consulting,” Farb says.
The firm will promote the new specialties, Farb says,
“through writing articles and making speeches, getting more
involved in the community and intensified public
relations—the old roll-up-your-sleeves approach.”
SELLING AUDIT VS. NONAUDIT SERVICES
Reorganizing service niches within a firm is an
ethical approach to selling under the new law. Ideas include
separating a firm’s marketing into two teams, one for audits
and the other for nonaudit services, and plying different
marketing channels for each, some CPAs say. To do this would
require a firm to analyze the client base to determine the
primary needs of each client, restructure the firm to effect
the best provision of services and then market those
services, balancing the client’s needs against what’s most
profitable for the firm. “What CPAs can do to
prepare depends on whether you’re looking at it from the
audit or nonaudit side,” says Farb. “What we’re seeing
because of Sarbanes-Oxley is a tremendous shortage of
qualified audit professionals because a lot of them went
into private industry or reevaluated their career options.
Accountants must become more focused on auditing and the
exposures related to it. I think continuing professional
education is the key, as well as hands-on partner training
and mentoring.”
| Many firms are in the analysis stage. They
recognize significant procedural changes are
necessary but are working out what those should be
and how to implement them. “Newer channels to market
our services will involve extra effort, cost and
changes in our business-unit makeup,” says Mark
Hildebrand, CEO of Crowe Chizek & Co. LLP, the
large Indianapolis-based, multiservice accounting
firm. “We’re still trying to flesh out what those
will be.” Other firms will split their
structures in two, says Robert Bunting, CPA and
chairman of the large Seattle-based accounting
firm Moss Adams LLP. His firm has developed two
marketing strategies to attract clients
post-Sarbanes: plan A and plan B. “Since we’re
primarily an audit and tax firm, our plan A is to
market these services in our proposal to a
potential client,” he says. “But if it appears
that the engagement will go to another firm, we
will immediately shift into plan B—opportunities
for specialized work. Each of these areas, or
plans, will have a separate marketing team,
philosophy and strategy.” In some cases it will
mean giving up internal or external auditing as
well as consulting. In auditing, because
“firms no longer can serve as both the internal
and outside auditors for their public company
clients, the firm or the client now must decide
which of those functions to assign to another
firm,” he says. “In cases where my firm can
influence this decision, it benefits us if our
most effective competitor wins the work we’re
losing.” |
Respect the Spirit As
Well As the Letter of the Law
F irms that refer business
to competitors with the understanding that
the courtesy will be reciprocated are
within the law, but they still must be
circumspect. While referrals in the
accounting profession are nothing new and
referral networks are part and parcel of
many professional associations, Robert
Bunting, CPA, of Moss Adams, Seattle,
warns that firms must avoid a formal
fee-sharing arrangement or the appearance
of a quid pro quo. “There is nothing
that precludes you from referring
business to another firm or having that
firm refer business to you,” he says.
“But the important thing is to maintain
independence.” Art Siegel,
retired vice chairman of the former
Price Waterhouse (now
PricewaterhouseCoopers), advises similar
caution. “Firms should be careful to not
give the impression they are trying to
get around the law through these
strategic marketing alliances,” says
Siegel, who in his long career also
headed the now-defunct Independence
Standards Board. “I would make sure
everyone understands what is going on,
particularly the audit committee of the
client. Anything that potentially
compromises auditor independence should
be carefully evaluated.”
| |
The reasoning is this: “Under Sarbanes-Oxley that firm
would be prevented from seeking most of the other work we
want. In addition, as outside auditors, we may have to rely
extensively on the work of internal auditors, so we want
them to be among the best. This is self-serving, but it’s
not entirely a financial issue. If our best competitors do
this high-caliber internal audit work, we and the client
both are likely to benefit,” Bunting says. “We hope our
competition will take a similar view and reciprocate in
areas where they face conflicts.” Recognizing that the
marketplace will be divvied up in new patterns, some firms
will pitch their services to competitors’ clients too (see
“Respect the Spirit As Well As the Letter of the Law”).
Services such as tax compliance might still be up for grabs,
“but many larger clients have been splitting those off for
some time anyway,” Bunting says. Overall, the
legislation has created a new playing field, providing
opportunities for some firms and obstacles for others.
“We’ve backed away from our traditional strategy of being
all things to all people,” says Kretz. “We’re unbundling
from a marketing standpoint—selling auditing, accounting and
tax services as separate areas of expertise. It’s time to
get back to basics now.”
REAPING AN UNEXPECTED HARVEST
For the most part, CPAs envision some good arising
from the new federal securities legislation.
However, “there will be some initial, short-term shock—in
our case it means that our go-to-market strategy and
channels of distribution for prohibited services must
change,” says Hildebrand. “Obviously, in situations where we
do an external audit for an SEC client and are restricted
from certain other services, we simply will market that
capability elsewhere.” Farb also reads the same tea
leaves. “Frankly, the legislation has created a
once-in-a-lifetime chance for us to obtain intellectual
capital from the big firms—people who are reexamining their
career paths,” says Farb, who heads a real estate niche. “We
see the act as creating an opportunity for us in the middle
market, too, now that big firms are less likely to focus on
it. We’re marketing from an industry perspective—emphasizing
our boutique services,” Farb says. “For example, we’re
getting closer to professional organizations such as the
National Association of Industrial and Office Properties and
the Urban Land Institute, sponsoring events and speaking at
conventions. We’re encouraged by the fact that we’ve
acquired 15 new privately held clients in the past few
months,” he says. Mendlowitz says his firm will
realize more audits and higher fees because of the
legislation. “We were shut out of marketing nonaudit
services to publicly traded companies because the national
accounting firms would lowball the audit with the goal of
selling their pricier nonaudit services. Now that
cross-selling is prohibited, the playing field has leveled.”
Kretz also perceives more opportunities to market
audit services. “We’re a regional firm and, like other firms
this size, traditionally make most of our money doing
audits,” he says. “But when we bid $50,000 on an audit and a
national firm bid $30,000—using the audit as a loss
leader—we had a pretty hard sell. Now that everybody is back
to trying to make money on the audit, it’s a much fairer
game.” It’s also one that may have fewer
participants in the future. “I expect the national firms
will begin peeling off some of their smaller SEC clients and
internal audit work to focus on higher margin business,
which in the long run will be an opportunity for us,” Kretz
says. “We’re building stronger relationships with national
firms. Recently we met with the managing director of one to
discuss our availability for local referrals in situations
where it no longer could provide services to a client. As a
regional firm we’re not necessarily in competition with
them, whereas they’d be reluctant to refer work to another
national firm because they don’t want them getting a foot in
the door.”
TALK TO YOUR CLIENTS
As accounting firms and their clients shake up their
relationships, new ones will emerge. “Clients will move away
from monolithic relationships,” one source says. “They’ll
shop for the best in class in each service category, no
longer defaulting to their auditing firms for the services.
Consequently, clients are likely to have multiple accounting
firm relationships.” Bunting says his firm now faces
difficulty in determining which services it will continue to
provide existing clients—audit work or nonaudit specialty
services. “Sometimes we have to ask ourselves whether we
want the audit,” he says. “That’s a very tough question to
answer, so we have been asking our clients to participate in
this decision making. We just had an audit client tell us we
were number one for the audit, but the company was giving it
to another firm because our nonaudit services to it were too
important. We discussed this and reached a decision
together.” Rather than become a “victim” of the
changes wrought by Sarbanes-Oxley, Bunting says, the firm
will continue to be proactive—“choosing what we want to on a
client-by-client basis, based on our analyses and theirs. In
the long run, the more discussions—even difficult ones—you
have with clients the stronger the relationship.”
One final word of caution: Firms must pay very close
attention to regulatory pronouncements, which are ongoing.
This is a good time to use the AICPA’s services to keep
track of any potential movement by state societies, the SEC,
FASB and Congress toward additional restrictions (go to http://cpcaf.aicpa.org/Resources/Sarbanes+Oxley/
The+Changing+Regulatory+Landscape.htm or call
the Sarbanes-Oxley hot line at 866-265-1977). |
