by John M. Covaleski

Chicago - Some small CPA firms are having trouble handling their audit workloads, and large firms are taking notice.

Grant Thornton, accounting’s seventh-largest firm, plans to create a national service network to recruit regional and smaller CPA firm across the nation for alliance relationships, in which it makes its internal practice programs, specialized skills and expertise available to those small firms.

The alliance would be similar to ones already operated by Grant’s national and international rivals, BDO Seidman, of Chicago, and RSM McGladrey, in Bloomington, Minn.

Chicago-based Grant is among several large practices who see new opportunities in helping smaller firms deal with the Sarbanes-Oxley Act, the federal law that regulates the audits of publicly owned companies that are registered with Securities and Exchange Commission.

“In today’s market, firms that want to play in the SEC space need new relationships, and we can develop them,” said Mike Hartley, Grant’s senior manager of mergers and practice integration. While Grant expects to make a wide variety of its internal capabilities available to its network members, audit-related capabilities might get a slightly larger showcase.

Hartley said that access to Grant’s proprietary internal audit management system, Grant Explorer, will be the network’s “foundation” offering. He also expects Grant to help its members provide both external and internal audit services.

Elsewhere, RSM McGladrey has noticed an increased need for audit-related help from members of its alliance network, and Marcum & Kliegman, a regional firm in Woodbury, N.Y., recently added 25 partners and approximately $10 million in audit business from a rival firm that had less capability to support audit work.

Grant’s alliance, like BDO’s and RSM’s, will not just seek out audit practices, but will reach out to firms that can use assistance in virtually every major business service area, including non-SEC company audits. “Firms across the country want to be more competitive, and tapping into our national and international infrastructure will provide them [with] a wealth of knowledge they would not have locally,” Hartley said.

The program was still subject to internal management approval when this story went to press, but Hartley fully expects that it will launch early next year. The network will seek firms that range from $3.5 million to $5 million in annual revenue and serve middle-market companies, particularly ones with midrange capitalization.

“Sarbanes-Oxley is definitely a factor that could come into play for the firms we want to reach,” said Cono Fusco, Grant’s managing partner of mergers and practice integration. “Especially conflicts from Sarbanes-Oxley.”

The most prominent potential conflicts could result from provisions that require companies to periodically rotate the person in charge of an audit, and one that bans firms from providing internal audits to their external audit clients.

While firms with just a few partners will likely lack the manpower to rotate auditors for one client, the ban on internal audits is prompting some large audit firms to turn over internal audit engagements to other firms, who may not be equipped for the work.

Observers also note that audits are no longer practical or profitable for firms with less than 20 SEC clients, because Sarbanes-Oxley sets tougher training and other standards that are too costly for small practices.

Hartley and Fusco said that their alliance is positioned to help its members handle both external and internal audit services. Hartley said that alliance members could call on Grant’s national operations to review audit engagements and to sign opinions on audits the members have performed.

Fusco said that there may be cases where Grant Thornton has a Sarbanes-Oxley conflict with an audit client and it asks an alliance member to service that client.

For internal audits, Hartley noted that Grant’s acquisition of a large chunk of the former Andersen “has given us unbelievable skills for internal audits that we could make available.”

RSM McGladrey’s local firm network program is already capitalizing on small firms’ needs for audit practice help. In the past year, the 82-member RSM McGladrey Network added 12 firms, two of whom “saw potential problems with Sarbanes-Oxley,” according to Dan Brooks, the network’s executive vice president.

Brooks said that RSM is already helping alliance members gear up for new internal audit work by helping them prepare and sell proposals and initiate engagements. “Sarbanes-Oxley is still a moving target. But, as it unfolds, there will be plenty of opportunity for us,” he said.

Jeffrey M. Weiner, managing partner of Marcum & Kliegman, credits his firm’s SEC practice experience for attracting five partners-in-charge and a combined total of 45 SEC clients from rival Long Island, N.Y., CPA firm Grassi & Co.

“The partners wanted to be part of a well-established SEC practice, and our firm has been in this business a long while, while Grassi did not get into it until it acquired these partners,” Weiner said. “We have a lot more depth in services.”

Marcum & Kliegman has about 70 SEC audit clients, while Grassi has ceased doing SEC audit work to concentrate on providing consulting services to that sector. The partners who defected, according to Weiner, all joined Grassi during the first four months of 2002.

Grassi president Louis Grassi concurred that his firm lost the partners, but said that Weiner overestimated their total billings by about $2 million. He also said that the former partners’ clients “all have ongoing concerns and most are on life support.”

Grassi said that his firm decided to withdraw from SEC company auditing in January because consulting is more lucrative. “With Sarbanes-Oxley, you can’t do both, and consulting is more profitable and has less risk,” he said.

Weiner said that Sarbanes-Oxley might put more SEC auditors in the market for new firms. “If you have 20 to 25 SEC clients, you can still manage a practice in this area, but the firms with five or fewer clients can’t do it anymore,” he said. “You need critical mass to support the new rules and a large partner group to handle auditor rotation requirements.”

Also competing for CPA firm members are more than 25 national and international alliances that enable firms to network and share resources, but do not tap into one major firm’s capabilities. Those other alliances include ACPA International, of North Andover, Mass.; AGN International, of Aurora, Colo.; and Moore Stephens North America, in Bethesda, Md., to name a few.

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