Booting the Big 4
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Conventional wisdom dictates that if your company is public or you have designs on the public markets, the Big Four seal of approval is a must-have. Heeding that logic, for decades, entrepreneurs have been twisting themselves into pretzels trying to get onto the client list of one of the top accounting firms, eagerly trading personalized attention and service for alleged Wall Street cred.
These days, it hardly seems worth the trade-off. For one thing, fee hikes at the Big Four have made the sacrifice difficult to justify. "They've doubled their workloads and are making a ton of money off of Section 404, [the Sarbanes-Oxley requirement that companies set up internal controls for financial reporting and then assess their effectiveness]," says Colleen Sayther Cunningham, president and CEO of Financial Executives International, a Florham Park, New Jersey, professional association for senior-level corporate financial executives. FEI left a Big Four firm in 2004 after being presented with a 55 percent audit fee increase. For a nonprofit, she says, the hike was prohibitive, so they went with a regional firm instead. "It was a good thing for us," she says. "We're saving money, and we're getting as high-quality an audit, if not higher, as we had before."
The scandals of the past few years have indeed cast doubt on the Big Four stamp as a guarantee of quality. "[The] Arthur Andersen [scandal] was a huge wake-up call," says Debra Jeter, an associate professor of financial accounting at Vanderbilt University's MBA program in Nashville, Tennessee.
As a result, small and midsize companies are eyeing national and even local and regional firms. According to AuditAnalytics.com, a Manchaug, Massachusetts independent research provider, companies with revenues of less than $100 million--the smallest group measured--accounted for 69 percent of all Big Four clients who took their business elsewhere in 2004. And on the flip side, the Big Four have also been shedding smaller companies: They booted 80 percent more clients in 2004 than in 2001, and three-quarters of those were the smallest companies.
BDO Seidman LLP and Grant Thornton, two leading next-tier accounting firms, have gained many ex-Big Four clients. Both firms are increasingly "being considered in the same breath with the Big Four by investment houses," says Mark Cheffers, CEO of AuditAnalytics.com. But he adds that the uptick in business is causing even these second-tier firms to scour their client lists to weed out the least profitable companies--and all too often, those are the smallest companies.
BDO Seidman and Grant Thornton, however, both say they remain committed to their small-business customer bases. "Our focus is on entrepreneurial organizations," says Ed Nusbaum, CEO of Grant Thornton in Chicago. "If we ever lose sight of that, we're going to go out of business."
At the same time, however, the influx of new clients and the increased work at these firms, thanks to the onerous Section 404, has put the squeeze on capacity. "We are all resource-bound," admits Lee Graul, national SEC director for BDO Seidman in Chicago. "When we take in two more [clients] at the top, we have to look at the rest and say, How do we continue to provide service to the other companies we have?" They then analyze the profitability of each of those clients, assessing their ability to pay for services, level of preparedness and efficiency. Smaller companies that want to keep their spots need to maintain organized books and be ready for scheduled audits, advises Graul.
The other option is a solid regional or local firm. Cunningham cautions that a business planning to go public in the next three to five years should probably aim for a firm like Grant Thornton or BDO Seidman rather than a regional firm. But if you're content in the private sphere for now, a proven regional outfit--where you won't have to compete hard for personalized attention--could be the best place to open your books.
C.J. Prince is executive editor of CEO Magazine.