by John M. Covaleski

Kansas City, Mo. - In what may be a harbinger of a broader shift in the marketplace of attest services for privately held companies, the CPA firms that are affiliated with national businesses company CBiz are consolidating into a national attest services company.

The national company is Mayer Hoffman McCann, the Kansas City, Mo.-based CPA firm that, in 1998, sold its non-attest services practice to CBiz, and maintained its audit and other attest services practice as a separate entity.

Six other CPA firms, all affiliated with CBiz in the same way - have, thus far, merged their attest practices into MHM, and negotiations are now underway to add others.

The firms that have merged into MHM are - Ballard Folkins & Nussbaum, in St. Louis; Parks Palmer Turner & Yemenidjian and Dutch Franklin & Co., both of Los Angeles; Strayberry Barnes Marietta & Lutrell, of Bakersfield and Oxnard, Calif.; and two Philadelphia-area firms, Jones Hayward Welgus McNally & Lenzi, and Zelenofske Axelrod CPAs. The combination expands MHM to a total of 64 shareholders from the 23 that it had before the mergers began in early July.

"The time is right to enter the national business arena," said MHM national practice director Bill Hancock. "The firms we are pulling together have strong reputations as excellent local practices. We will combine those local service skill sets into a company with the enhanced resources of a national organization."

Each of the merged CPA firms are or will be re-branded Mayer Hoffman McCann, and their partners can opt to become MHM shareholders. Their former non-attest practices, which were already re-branded CBiz, would not be directly affected by the mergers; however, it’s possible that clients of the national audit practice could select CBiz for consulting services and vice versa.

Industry observers said that a national audit company, such as MHM’s, could capitalize on audit market changes in the wake of the Andersen audit scandals. "There will be a signif-icant change in the busi-ness model for audit firms and, with that, I think it’s possible that more deals like this [MHM’s] will evolve," said Alan Anderson, senior vice president of member and public interests for the American Institute of CPAs.

"There’s now a huge, new opportunity for audit-only firms. Mayer Hoffman McCann is advancing an idea that others will follow," predicted Allan Koltin, president of Chicago-based practice management consultants Practice Development Institute.

The new national MHM is primarily targeting middle-market, privately held companies with annual revenues ranging from $5 million to about $250 million, Hancock also expected to attract business from publicly owned companies, but said that that segment is not a key target.

Its attest services include financial audits, reviews, compilations, projections, forecasts and litigation support.

The mergers catapult MHM from one state (Missouri) into operations in three states with the potential for a much wider geographic base. At the start of the year, 33 CPA firms with operations in 23 states were affiliated with CBiz.

All those CBiz CPA firms are prospective additions to MHM.

Based on merger talks that are now underway, Hancock expects to have a total of 117 shareholders by year’s end. He declined to give any other statistic that quantifies MHM’s size, such as revenue or total employees.

The combined MHM could have more than 1,000 employees by year’s end, based on the industry rule of thumb that firms have an average of nine to 11 employees per each shareholder or partner. MHM would, then, have more employees than the firm that ranks 20th on Accounting Today’s 2002 Top 100 Firms list.

Plans call for MHM to establish a national company recognition by concentrating its service offerings and expertise in key niche industries, which include real estate, construction, nonprofits, health care and trade associations to name a few. MHM is also striving to have all its offices operate under common platforms in areas that include work papers, methodologies and systems and quality control.

Hancock, 49, is spearheading the consolidation and oversees the combined company. He said that planning began in the summer of 2000, long before the audit scandals involving Arthur Andersen surfaced, but he acknowledged that those scandals may now be making a case for the national audit company that MHM is slated to become.

"We are looking at middle-market businesses that have been served by the Big Four and national firms and we feel that we have a lot to offer those clients," Hancock said. "Some middle-market clients that are not that big for the Big Four are very big for us and we will be putting our best resources forward to serve them."

Industry observers say that the middle-market companies being targeted by MHM may have a greater demand for audit services as the Big Four and national firms focus their efforts on trying to attract the 2,300-plus public companies formerly served by the now defunct Andersen.

"There’s a lot of low-hanging fruit in the middle market as the national firms go after the bigger public fish left over from Andersen," Koltin said.

MHM’s competitors in the middle market concur. "Middle-market clients of the Big Four will be under-served because of the massive assault on Andersen’s public clients," said Jay Hanson, partner and managing director in the national audit practice of McGladrey & Pullen, which has more than 1,000 middle-market attest services clients. "There’s a big opportunity for anyone serving this segment.

However, Hanson also said that MHM will be challenged to truly create a national company, "rather than just a confederation of firms." MHM’s affiliated CBiz, also known as Century Business Services, has been grappling to establish itself as a national company ever since it emerged as one of accounting’s first consolidators in the 1990s.

While the company’s financial reports have improved since a new chief executive, Steven Gerard, began a restructuring two years ago, CBiz had floundered for several years. At one point, there was speculation that it would shut down amid dissatisfaction among its member firms while its stock price dropped, in one year, from almost $12 to a low of 81 cents.

Bloomington, Minn.-based McGladrey & Pullen is structured similar to MHM. It is national attest service company that is affiliated with RSM McGladrey, the non-attest consulting services consolida-tion arm of H&R Block, which, like CBiz, acquired the non-attest practices of CPA firms and melded them into a national services company and left the attest practices as separate companies.

"There’s no question that there is now a lot of opportunity in the serving midsized clients with a national company," said Carl R. George, chief executive of national accounting firm Clifton Gunderson, in Peoria, Ill. "The Big Four and national CPA firms will spend so much attention in going after Andersen clients that voids [in the middle market] will be created."

MHM’s newest shareholders include a former Andersen partner, Laurie Hawkins, who joined the national practice from its new St. Louis office Ñ the former Ballard, Folkins & Nussbaum Ñ which previously led the emerging markets practice group for Andersen’s office in that city.

"I’ve really enjoyed working with middle-market com-panies," Hopkins said. "What really excites me about coming here from a Big Five environment is the ability to serve the middle-market clients with the resources of a national firm."

Hopkins, one of six new MHM shareholders in St. Louis, believes that the firm already "has the critical mass needed to be a national company."

Mark Lutrell, a new MHM shareholder, in Bakersfield, Calif., also cited the ability to offer a national company’s resources. But, he added that he was also interested in enabling his company’s employees to join a bigger organization.

"I would expect this to give our employees a chance to participate in an expansion that a national company can give us and that we could not realize on our own," he said.

Providing clients and employees with the benefits of a national company were also among the main reasons that CPA firms partners cited when they joined CBiz and other industry consolidators en masse in the 1990s.

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