Big Shots

Are your chances of landing a big accounting firm following Enron down the drain?
Magazine Contributor
5 min read

This story appears in the October 2002 issue of Entrepreneur. Subscribe »

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.

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.

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.

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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