by John M. Covaleski
New York - The dismantling of Andersen is beginning to reshape how the accounting industry serves middle-market business clients.
While accounting’s largest firms have been buying large chunks of Andersen operations, some well-heeled regionals, with annual revenues of about $20 million, are picking up Andersen’s middle-market clients in what the firms’ executives foresee as a prelude to a windfall of that niche departing Andersen and the remaining "Big Four" firms.
The windfall could be large, as Andersen had some 32,000 non-public, middle-market clients. While the industry’s largest firms define middle market as companies with under $1 billion in annual revenue, industry experts say that the vast majority of Andersen’s non-public clients have revenues of $500 million or less, placing them well within the service range of regionals.
By zeroing in on Andersen’s middle-market clients and partners, the regional firms expect to also position themselves to get middle-market business from the remaining Big Four. Some regional firm executives say the middle-market windfall could create enough new revenues to help their firms rival national firms, with revenues of $100 million-plus.
Still, more opportunity may result if federal regulations, in the wake of Andersen’s Enron scandal, restrict the additional services that firms can provide to audit clients. This, they say, could open the door wider for regional firms to deliver those services.
Smart & Associ-ates, a $17.5 million firm in Devon, Pa., has added five Andersen partners in recent months as part of a plan to expand its practice of providing manage-ment advisory serv-ices to the audit clients of Big Five firms. That practice, which accounts for roughly half of Smart’s annual billings, could skyrocket in the years ahead, according to company president James Smart.
"We don’t plan to be a regional firm for long, we expect some major growth." Smart said. "After the Andersen matter is settled, the market will need new firms to compete and we’re getting ready for that."
Smart has added four partners from Andersen’s management advisory services and information technology practice areas, and Neal Schneider, the former head of Andersen’s national financial services and insurance industry practice. The company also has a former Coopers & Lybrand partner heading its internal audit services practice.
"Andersen is proving to be the most incredible business opportunity we’ve ever had," said Bruce Carlin, managing partner of Carlin, Charron & Rosen of Worcester, Mass. He said his firm, which had $20.3 million in 2001 revenues, is getting service inquiries from three to four Andersen clients each week.
Carlin theorized that, in the wake of Andersen’s Enron accounting scandal, many privately held company clients "are realizing that they don’t need the Big Five to accomplish what they want accomplished - that a quality regional firm can do it just as well." He noted that many of the new middle-market inquires are from companies he has unsuccessfully marketed to in the past.
Carlin said his firm hired six former Andersen staffers and is in discussions with several Andersen partners. He also noted that Andersen operations in his home area of New England, like other parts of the country, have been acquired in large blocks by the remaining Big Four and by national accounting firms, such as Chicago-based BDO Seidman and Grant Thornton.
In Boston, Vitale Caturano & Co., which did $17 million in business last year, is gearing up for what it expects to be a major middle-market business windfall. The company plans to hire about 20 staff and managers from Andersen and an undetermined number of partners to prepare for that middle-market rush, said managing partner Richard Caturano.
"We expect to work out a deal that will bring us up a notch in the middle market," Caturano said. He said his firm, in the next year or two, will generate an additional $4 million to $5 million in fees from the middle-market clients of Andersen and the Big Four.
"The market is asking for this," Caturano said. "A lot of middle-market companies don’t want to stay in a Big Four environment, but they still want accounting firms that are strong and have great deals of expertise."
Practice management consultants advising regional firms also expect a windfall.
"This movement from Andersen and the Big Four is already happening and those clients and partners are finding that well-positioned regional firms have many of the attributes of the very large firms," said Jay Nisberg,
a Ridgefield, Conn.-based practice management con-sultant.
"This whole area is just now unraveling and it will be a bonanza for regional firms," said Allan Koltin, president of Chicago-based Practice Development Institute. He estimated Andersen had about 300 middle-market partners and only about 100 had committed to, or were in discussions with, other national firms by mid-June.
New York-based Marcum & Kliegman, in late May, hired Joe Perry, a senior partner from Andersen’s New York financial services and insurance industry practice, who brought clients with $1 million worth of annual fees, and an appetite to build that practice under his new employer.
Marcum & Kliegman managing partner Jeffrey Weiner is hopeful of recruiting more Andersen partners and rapidly expanding his firm in the process. "It certainly helps growth when you bring in a Big Five firm partner with $1 million in business and he grows that book to $1.5 million or $2 million in a year or two," he said. M&K reported $28 million in 2001 revenue.
In Pittsburgh, Ray Buehler, managing partner of Schneider Downs & Co., said his $20 million firm has gotten a surge of business for a fledgling practice of providing services to other audit firms’ clients. He said this practice, which delivers internal audits and services that may be conflicts of interest to the audit firms, has been available for two years, but had not attracted much business until the Andersen-Enron scandal .
"We first thought this would be a five-year initiative, but it has suddenly become a three-year reality that we already are two years into," Buehler said. Requests are coming from Andersen and other Big Four firms.
Buehler expects the Andersen-Enron scandal to prompt businesses to "split up their service requirements" among several providers, rather than using just one accounting firm. "The dynamics of the market have opened businesses’ eyes to having multiple service providers, which is an opportunity for firms like ours with a depth of services," he said.
The regional firm executives recruiting Andersen partners all say their work environments can match and even surpass the Big Four’s, despite the big difference in sizes.
Compared to the regionals’ $20 million average annual revenues, the smallest of the former Big Five last year reported more than $4 billion in U.S. revenues.
"What we can offer is an entrepreneurial spirit and autonomy in running a group that the Big Four cannot match," said Weiner. "That can mean ultimately doing better financially in this environment because you’re doing what you want."
Perry, M&K’s new Andersen partner hire, agrees. "There’s not nearly as much bureaucracy; you’re your own person, accountable for your book for your business," he said.
He noted that he recently hosted a breakfast meeting for clients and prospects after getting authorization to do so, almost immediately, from Weiner. A similar seminar at Andersen, he said, would have taken several weeks and layers of approvals.
The regional firm managers all expect Andersen partners to remain available. "A lot of Andersen people have gone to other large firms, but in six months, when these mergers take full effect, you may see these people back in the job market," Buehler said. His firm has not hired any Andersen partners, but he said the door is open.
Koltin believes there will be a second shakeout of Andersen middle-market partners who the joined Big Four, as those firms shift their attention to serving large public companies they get from Andersen.
"The Big Four will someday raise their bar above the middle market, and those middle-market partners from Andersen will become third-class citizens," Koltin said. "You could see 10 percent to 20 percent of them leave and be in play again."
