| 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.
| |
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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