by Roger Russell
GREENVILLE, S.C. — Compliance with Sarbanes-Oxley continues to rear its head as a factor in firms’ practice management strategies, as South Carolina-based Elliott Davis, one of the nation’s largest firms, has pulled out of business valuation.
Elliott Davis, which is based here and reported $24.9 million in 2002 revenue, recently sold its business valuation and forensic accounting division to a company headed by former shareholder John Markel.
Elliott Davis managing shareholder Todd Mitchell said that his firm decided to sell due to concerns about compliance with the Sarbanes-Oxley accounting reform law, whose regulations include restricting firms from providing non-audit services — such as business valuations — to audit clients.
“We were faced with a decision to either sell the business unit, or not to serve many valued clients in the valuation and forensic services areas. Thus, the decision to transition the business unit to John, an expert in the valuation and forensic accounting arenas, was a simple one,” Mitchell said. “We’re here to do what’s best for our clients.”
A year earlier, Elliott Davis sold its former technology consulting practice, also to comply with Sarbanes-Oxley regulations. At that time, it said that it sold that group to comply with non-audit restrictions that the General Accounting Office was in the process of applying to firms’ “yellow book” audits of government entities and the audits of certain non-government clients.
The technology unit was also sold to former shareholder Tim Baker, who, with his brother Danny, has since been operating that business as Baker Consulting Inc., also in Greenville.
The business valuation practice is now known as Markel Valuation PC. In addition to former shareholder Markel, the firm has two senior analysts from Elliott Davis.
“While one can argue about whether the legislation that triggered this friendly separation from Elliott Davis is good public policy and in the best interests of consumers, the fact remains that many important engagements could no longer be accepted if we remained under common ownership,” Markel said.
He called the move a “pragmatic business decision” that ensures the quality of the business valuation service that Elliott Davis clients receive. “We see great potential to reciprocally refer clients to each other,” Mitchell added, “and we expect the relationship to be rewarding for all concerned — Elliott Davis, Markel Valuation and — most importantly — our clients.”
However, accounting and valuation business observers, including the National Association of Certified Valuation Analysts, said that firms could very well have restructured their organization, allowing them to stay in business valuation and stay in compliance with Sarbanes-Oxley.
Dean Dinas, senior economist and director of research of NACVA, said that there are differing schools of thought on the subject. “One of the best examples of how an accounting firm is able to keep its consulting-side clients is Deloitte,” he said. “A number of other Final Four accounting firms have also been able to bring back into the fold the former consulting people that crept out — there are enough matters of interpretation within Sarbanes-Oxley that allow such things.”
“On the other hand,” he said, “some firms saw so many conflicts they turned tail and spun off separate entities. I think they jumped the gun. Too many didn’t do their homework and lost a lot of the goodwill they built up with some of their clients over the years.”
The difference, according to Dinas, is the degree of separation between audit and consulting, the size of the firm and the complexity of relationships. “Firms that have kept everything under the same umbrella have established a firewall within the company,” he said. “Ones that didn’t draw a distinction between audit and tax, mergers and advisory services are in trouble.”
Elliott Davis spokesman Sam Patrick acknowledged that the firm was not completely precluded from valuation work by Sarbanes-Oxley.
“However, because we have such a significant share and presence with top clients in our geographic footprint, and because Sarbanes-Oxley forced a split off of certain kinds of services that might conflict with auditor independence, we had to decide whether to keep the practice in house.”
“Our firm is very client-driven — maybe to a fault,” he said. “Our first priority is to our existing clients. We made the decision to allow John to split off to an independent organization so he could provide those services with no question of independence for either one of us.”
Some observers speculate that Sarbanes-Oxley rules might prompt firms to sell consulting practices that they were already thinking about divesting because of declining revenue in a particular area. For example, after Elliott Davis sold its technology consulting practice last year, a story in Accounting Today reported that the technology practice’s revenue in the past year had dropped by $100,000 to $1.7 million, and its staff had been reduced from 18 to 16. Information on the business valuation practice’s past year’s results was not readily available.
However, Patrick said, the limits on consulting “were forcing us down the path where we had to make difficult choices in terms of how to give clients what they wanted and needed. We had a capable and respected valuation and litigation support group that was not being allowed to serve our clients, so the decision we reached was to sell the practice.”
Bob Brackett, a CPA and president of Chicago-based business valuation firm Crandall & Brackett, noted that accounting firms and consultants have been working together and separating, then getting back together for years.
“Accounting and tax prep have to follow rules,” he said. “They use last year’s words and this year’s numbers, whereas almost all consulting projects are as much art as they are anything else. They are more a part of the creative side. The goal is not to let creativity carry you away when doing an audit.”
