A Good Year for Outsiders

Plan A for Group B accountancies? In the year of the corporate scandal, pick off as much business as possible from Big Four firms.

Lee Graul says he’s starting to see the door open. Open slightly, mind you, but open nonetheless. And that, he says, is better than having his nose pressed up against the glass.

As director of the SEC practice for accountancy BDO Seidman (SEED-man), Graul helps court new audit clients for the Chicago-based firm. Time was, says Graul, that he rarely made a sales pitch to a Fortune 500 company. Although Seidman audits 300 publicly traded companies, it and the other handful of second-tier accountancies never had the cachet or market clout of the Big Four (nee Big Six) auditors.

In fact, many of these second-tier firms were classified as “Group B” auditors by the accounting industry’s leading trade group, the American Institute of Certified Public Accountants. (They’re also often referred to as “national” and “regional” firms.) But the last 12 months or so have presented these Group B firms with an A-1 opportunity to pick up major new clients.

The most obvious source of this opportunity: the demise of former accounting stalwart Arthur Andersen. Andersen’s inglorious fall from grace left 1,400 publicly traded companies without an independent auditor. And Group B firms have rushed in to fill the void.

According to Arthur Bowman, editor of the Atlanta-based Bowman’s Accounting Report, some 500 to 600 of Andersen’s former clients have opted to do business with one of the surviving Big Four accountancies. But, he says, Group B firms have picked up at least 81 Andersen accounts — a huge number by past standards.

What’s more, roughly one half of Andersen’s former clients have not yet announced who their new auditors will be. In this year of front-page accounting scandals, SEC investigations, and revenue restatements, industry watchers say Group B firms will likely scoop up their fair share of ex-AA clients.

Indeed, in the past six months, Graul says he’s participated in sales presentations to three multibillion-dollar companies — prospective clients who in years past never would have even looked at a Group B auditor.

This phenomenon isn’t just limited to BDO Seidman, the fifth-largest accounting firm in the United States. Ed Nusbaum, CEO of Grant Thornton, says his company has gained at least 200 clients this year at the expense of Big Five firms, half from Andersen. In addition, the Chicago-based Group B firm has hired 60 former partners and 500 other former employees of the now defunct accounting firm. Nusbaum says those Andersen alumni have brought additional clients with them.

Even regional accounting firms, which make up the lion’s share of the 1,200 bookkeeping companies listed in the AICPA’s SEC Practice Section, have seen an uptick in interest from small-cap clients of Big Four firms.

Says Grant Thornton’s Nusbaum, “The situation for accounting firms has changed dramatically in the last six months.”

Rules of Engagement

If the accounting landscape is changing, so too are the rules of engagement.

Large-cap companies such as Walt Disney and Apple Computer, for instance, have announced they will no longer purchase non-audit services from their independent auditors. In the past, top-tier accounting firms have been accused of trying to parlay audit contracts into consulting contracts — things like ERP implantations and financial reengineering. And in a number of cases, it appears that the financial rewards from non-audit engagements have outstripped the cash generated from bookkeeping services.

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