While Congress debates the debt ceiling and spending cuts, government contractors and entities - and the accounting firms that serve them - are functioning under an increasing regulatory environment that's testing some of their business fundamentals.

"With the [regulatory] landscape of the industry, firms and their clients need to create an infrastructure to make business decisions quickly," said Lexy Kessler, lead partner in the Government Contract Services Group of mid-Atlantic accounting firm Aronson. "They have to be nimble and agile."

Kessler's team offers traditional tax and audit services, transactional and advisory support, and contract solutions to Aronson's government clients. She cited one major contactor client tripling its compliance department over the last two years as an indication of the current administration's focus on transparency and oversight.

And the cost of compliance is having an impact on the bottom line. "Clients are really feeling it for how they price," Kessler said. "They are competitively pricing to get work, but increasing cost to do the work and get it. There are competitive pressures because the budget is shrinking - budget pressures are a unique animal."

And one that is not likely to be put out to pasture anytime soon, with the lead into an election year expected to stymie significant resolution on the national budget.

Kessler said that while some "companies get in [the government sector] and don't believe [the regulations] are applicable to them," they need to respect them, and not just because they are mandatory. The rules and restrictions also influence an organization's internal business mechanics. "Compliance really starts with something as simple as employees filling out time sheets and plays all the way through to what you charge through to the government," he said.

Regulations are also beneficial from the firm's perspective. "The positive is that [government clients] usually perform well on contract, go by the rules, get paid, and are not a big credit risk," Kessler elaborated. "It's a big differential from a commercial customer."

 

HIGH TOUCH, LOW INTERFERENCE

The scrutiny, of course, remains high when clients do not fulfill those functions.

"We always apply the headline test," revealed Scott Kies, managing partner at Arizona and New Mexico CPA firm Heinfeld, Meech & Co. "We try to keep clients out of the headlines. They end up in the paper for various reasons - it's the nature of government and cities, school districts and other entities we audit - that high level of scrutiny."

In addition to the firm's audit services, which comprise about 75 percent of its workload and are provided to entities such as the Arizona Department of Transportation and the City of Tucson, the firm also consults for governmental and nonprofit organizations. These clients are "definitely needing a really high level of service right now," Kies said. "We are constantly communicating, being a partner in their business. We are looking at it from their perspective of how to provide value, especially from an audit perspective, because otherwise they can just be a commodity."

Another priority for firms with government clients, especially in this environment of high regulation, is striking a balance between high-touch service and low operational interference. "We have to go above and beyond for clients, and make the audit as seamless as possible and as efficient as possible on site so we do not intrude on business or day-to-day operations and we minimize the impact," Kies continued.

 

MOVING INTO THE MID-MARKET

As government regulations increase, so do business expenses and, consequently, the competition between large and midsized organizations. "Larger companies are coming downstream," Kessler observed. "Middle-market contractors are competing with large organizations. We are beginning to see them trickle in their space, and it's difficult as a small organization to compete with Lockheed [Martin]."

Seth Zarny, information and technology partner at Washington, D.C.-based accounting and technology firm Raffa, has witnessed the overlap from the other side, noting, "Over the past eight years or so, the capabilities of [technology] systems have greatly expanded and are reaching the lower end of the mid-market space."

Beyond taking advantage of this increasing technological advantage, smaller organizations should navigate these newly overpopulated waters, Kessler stressed, by differentiating themselves. "They should make themselves unique to their customer," she said. "It's no different than a commercial business. There's plenty of work and there's going to be, but it will be more competitive."

Zarny has similarly tracked "tremendous similarities" between the government organizations that make up about 15 to 20 percent of his practice's roster and the commercial clients. For one, the larger government agencies are showing more interest in SharePoint and portal technology and embracing cloud-based solutions. "On the cloud-based server environment, certain applications are useful for various types of collaboration," he explained. "It allows organizations to potentially save costs."

Because cloud computing is still a "broad topic open to a lot of interpretation," security concerns for these shared access points do crop up, but Zarny said that they have not proved to be a barrier.

Meanwhile, there is a "slower rollout" in these services for smaller organizations.

 

STRATEGIC PARTNERSHIP

Firms with robust government client services must juggle different sizes, requirements, locations and "personalities" within their roster, according to Zarny.

This pool is also in flux, with joint ventures cropping up so organizations can present themselves "strategically as a better value to the government," said Kessler. While she often encounters these unions between small and large organizations, she explained that, "It takes different shapes and forms."

Firms looking to make their own partnerships with government entities will face the challenge of procurement, according to Zarny, who suggested locating opportunities through events. "Government organizations have various education sessions, nonprofit groups run education sessions and networking events, and agencies have vendor days, as prime contractors are frequently looking for smaller businesses to team with," he said.

In this way, regulation works in favor of the small or midsized firm. "A number of government organizations have small-business requirements where a percentage of every procurement needs to go to a smaller business or minority businesses," Zarny explained.

But accounting firms must remember to follow due diligence on all potential clients. "Be strategic in what you're pursuing," Kessler suggested. "With transparency and oversight and increasing regulation, your reputation has to pass the test of scrutiny. You are what you represent."

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