In practice, the PCAOB’s new rules have moved some companies to switch from their Big Four auditors to other accountancies for non-audit work; the rules have also spawned a cottage industry comprised of boutique tax firms. For instance, Beaudet outsourced her FAS 109 project to Capital J Advisors, a specialized tax firm based in Chicago. According to Beaudet, the firm was “a very cost-effective way to get expertise.”
She notes that Capital J’s hourly rate exceeded those of public accounting firms, which would have likely dispatched lower-level accountants to the task. But Beaudet was looking for a higher-level tax expert for her project, and the Capital J rate was lower than what a full partner at a Big Four would have charged. “These aren’t the guys you hire to sit around and do tax returns,” says Beaudet. (Under the new rules, auditors can still prepare corporate tax returns for clients.)
The rise of new boutiques has also prompted the migration of Big Four partners to these smaller firms. Beaudet, a former KPMG tax accountant, explains that the corporate tax community is relatively small and close-knit. Increasingly, the corporate-tax-accounting community has been abuzz with tales of tax partners from public accountancies that have left to start their own specialty firms. Some of the accountant-entrepreneurs have felt constrained by rules that wouldn’t allow them to focus on challenging tax work, she says.
Indeed, Capital J is one example. Co-founder John Walsh is a former Ernst & Young tax consultant, while his brother and co-founder James Walsh was a consultant with Arthur Andersen’s audit and investment banking divisions.
A side effect of the PCAOB rules is that increasing numbers of high-net-worth individuals have been seeking tax help from midsized public accounting firms like Holtz Rubenstein. That’s because CEOs, CFOs, and other wealthy corporate officers that previously hired their company’s auditor for personal income tax work are barred from employing those auditors under the new regulations.
As tax deadlines approach, the companies most likely to outsource projects are those with relatively small tax departments that have complex tax issues to sort out. That includes companies like Ryerson that do business across state and international borders or have thorny FAS 109 issues.
Other tax issues that may require expert intervention include those involving purchase-accounting (stemming from acquisitions) and LIFO accounting, which focuses on inventory valuation for tax purposes. (The LIFO, or “last in first out,” methodology uses the most recent items purchased to establish a benchmark cost of the same items over a particular period of time.)
One challenge for a company switching to a new tax specialist is that the firm lacks an auditor’s experience with that specific client, Beaudet says. Hiring new outsourcers thus requires more staff time to get the newcomer up to speed. In a perfect world, she says she’d prefer simply to use the bidding process to “get the best person for the best price,” and eliminate the worry about whether the person is an auditor for her company.
In the larger scheme, however, she thinks that the process of finding new tax advisors has been “very positive.” While eliminated the possibility of conflicts of interest, it enabled her to build a network of specialists.
Indeed, the tax director says she had no troubles in finding vendors during her search. “We’re big enough that we are on [tax firms'] target lists. In other words, tax specialists empowered by the new PCAOB rules are courting companies like Ryerson, as well as the other way around.