When the founders of Giving-Capital Inc., a Philadelphia-based
company that provides online donation services, first went shopping
for an accounting firm for tax services in 1999, they had their
pick of mid-tier local firms. Instead, they chose a Big Five firm
that could grow with them, provide networking connections that
smaller firms couldn't and, most important, be a name their
clients-including American Express, Morgan Stanley and Salomon
Smith Barney-could trust. Little did they know the large, reputable
firm they chose, Arthur Andersen, would just a few years later find
itself waist-deep in scandal.
Fallout from the debacle has landed GivingCapital in the same
unenviable spot as hundreds of other orphaned Andersen clients. But
as a small business with 35 employees, it would now have to jockey
alongside much bigger companies for the attention of the Final Four
(as the remaining top-tier accounting firms have come to be called)
and even face competition for mid-tier accounting firms looking to
inherit some of Andersen's heavyweight clients.
82%
of CEOs of small to midsized businesses favor
harsher penalties, jail time and tougher prosecution in financial
abuses.
SOURCE: TEC
International
|
"A lot of small businesses are going to be squeezed out of
those mid-level firms, even the fast-growing, progressive
companies," says Norman Scarborough, associate professor of
economics and business administration at Presbyterian College in
Clinton, South Carolina.
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And as the choices narrow, "your ability to negotiate and
get decent pricing becomes more challenging," says Gretchen
Nickel, managing director and CFO at GivingCapital. "You have
to make a choice about whether you're willing to pay the bucks
for the big guys. If you don't [pay up,] you're not going
to get their full attention-go with a smaller firm."
Going Local
Some small businesses are opting for the latter, particularly
those that don't require auditing services and need only basic
tax and accounting services. The Phelps Group, a Santa Monica,
California-based marketing firm, made the choice years ago to
employ a local firm for all its accounting and has been thrilled
with the level of service, according to Phelps CFO Bob Berry.
"When you're working with big firms, you're probably
10 or 12 layers removed from any of the principals," he says.
By contrast, Berry gets the personal attention of the head of his
accounting firm.
But the Phelps Group isn't public nor is it planning to be
in the immediate future. Conventional wisdom has long warned
entrepreneurs who have one eye on the public markets that an
auditing firm whose name packs muscle with Wall Street is critical
to a successful IPO. That thinking has changed somewhat, given the
recent high-profile accounting messes, but the larger firms still
offer broader resources and brand names.
17%
of large-company CFOs say they've been
pressured by their CEOs to misrepresent earnings.
SOURCE: CFO Magazine
|
Also, a considerable number of small businesses do voluntary
audits, sometimes for their own internal checks and balances or to
give bankers an added level of confidence to negotiate a better
interest rate. GivingCapital has always done audits to reassure
clients and hopes to replace Andersen with another heavy-hitter,
"provided we get some decent pricing," Nickel says. The
company is fortunate in that the teams with whom it worked at
Andersen are currently relocating to other firms, lock, stock and
barrel, which may give Nickel a foot in the door at the new firms.
But to persuade a top-tier firm to take on GivingCapital's
business, at a reasonable price, she'll have to prove her firm
is going to grow at a healthy clip. "I'm selling them as
much as they're selling me," she says.
To attract top- or even mid-level firms where no prior
relationship exists, small businesses will have to demonstrate
significant growth potential so the accounting firms see the
possibility of doing audits and IPO work for them later, says
Scarborough. He advises CEOs to take a business plan along
"and do a sales job. 'I may be a small company now, but
look where we're going.'"
Small businesses that already have relationships at larger or
mid-level firms will have to be careful they don't get short
shrift due to an influx of former Andersen clients. If you start
noticing you're getting less attention from the partner who
used to call you personally, "then it's time to be a
squeaky wheel," says Debra Jeter, associate professor of
management at the Owen Graduate School of Management in
Nashville.
Another option is to go with a reputable smaller or local outfit
that has relationships with larger firms. That way, if your
business grows or you decide to go public, you have the option of
transitioning.
While the Big Five brand names used to be enough to get Wall
Street's stamp of approval, they're not enough anymore.
"We've got a whole new world on our hands," Jeter
says. "The quality of the audit is ultimately going to be the
deciding factor."
C.J. Prince is a New York City writer specializing in
business topics and executive editor of Chief Executive
Magazine.
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