by John M. Covaleski

Accounting reform law is making attest work more attractive than ever.

Bloomington, Minn. -- Despite making audit work more difficult, the Sarbanes-Oxley accounting reform law is luring some CPA firms back to attestation and other traditional services.

H&R Block, which gained accounting profession consolidation fame by acquiring the non-attest practices of CPA firms and bundling them into its RSM McGladrey national business services unit, is back in a buying mode with an eye for firms with audit and other attest expertise.

“We are back in the M&A marketplace -- and audit is very, very important to us,” said Bill Travis, senior vice president of RSM and managing partner of McGladrey & Pullen, an attest practice whose member firms work with RSM but are all owned by their CPA partners. RSM and M&P are both based here.

After being very aggressive in mergers and acquisitions from the late 1990s through 2001, Block/RSM cut back on deals last year to concentrate on assimilating its earlier purchases. Travis said that Block has a new buying strategy that is placing a “high priority” on attest services.

RSM is part of an unexpectedly positive reaction to the Sarbanes-Oxley Act, which set several new financial reporting standards for public companies, significantly restricted the non-audit services that auditors can provide, and created the Public Company Accounting Oversight Board to oversee the public company audit profession.

“The Sarbanes-Oxley Act and all the turmoil the profession has been in has resulted in a reminder to the capital markets of how important attest work is,” Travis said. “It’s improving the profession and resulting in real opportunities for new business.”

“In the post-Enron/PCAOB world, national firms have completely changed their focus,” said Allan Koltin, president of Chicago-based practice management consulting firm PDI Global Inc.

“It’s a whole different approach — the evolution is back toward the core,” added Atlanta-based practice management consultant Gale Crosley.

Other national accounting firms sensing Sarbanes-Oxley-related opportunities include BDO Seidman, which made several key executive changes that, it said, reflected its increased focus on traditional audit and tax services. Chairman and chief executive Dennis Field, who led BDO’s rapid expansion into new consulting areas in recent years, took an “indefinite” leave and BDO added four new board members — all with assurance or tax service backgrounds.

BDO vice chairman Jack Weisbaum, who’s serving as interim chairman, confirmed that the firm is reacting to increased demand for assurance work since SOX became law. “Our SEC practice grew faster than any other non-Big Four firm in the first half of this year. We’ve always had the personnel to do this work, but have never seen the growth in this area that we see today,” he said.

However, in Accounting Today’s 2003 Top 100 Firms survey, BDO’s 2002 annual revenues fell by nearly 16 percent against the prior year, to $353 million.

Mayer Hoffman McCann, which has spent the past year building a national attest practice by consolidating other CPA firms affiliated with Century Business Services, now plans to further build that national company by adding firms not affiliated with CBiz. “The market demand is there — Sarbanes-Oxley has a lot of companies evaluating their auditor relationships,” said Bill Hancock, national proactive director for Kansas City, Mo.-based MHM.

Regional CPA firms that have expanded their audit focus include Woodbury, N.Y.-based Marcum & Kleigman, which, earlier this year, added 25 partners and approximately $10 million in audit business from a rival firm that had less capability to support audit work.

Recent activity by smaller firms has focused on helping businesses comply with various subsections of Sarbanes-Oxley, such as Section 404, which requires public companies to implement internal controls for their financial statement preparation systems, and issue periodic reports on their effectiveness. Auditors must audit the reports, but are prohibited from helping firms to prepare them.

Recent entrants in this work area include Weaver and Tidwell, a $19.64 million firm from Fort Worth, Texas, which is launching a Risk Management and Sarbanes-Oxley Services unit staffed by key personnel from its business consulting services group.

“With the enactment of Sarbanes-Oxley, we stepped back and tried to think of what implications it had on public companies and what services they would need,” said managing partner Mack Lawhon. “We saw two buckets of services — 404 work and internal audit outsourcing.” (SOX prohibits external auditors from providing internal audit services to their clients.)

Other internal audit services in the wake of Sarbanes-Oxley include CBiz, which, in September, acquired HarborView Partners, a Stamford, Conn.-based internal audit specialist with which it had an alliance. Among the dozens of 404 work specialists that have sprung up is a consortium of firms in the Southeast brought together by Marshall Jones & Co., a 10-professional CPA firm in Atlanta.

While Sarbanes-Oxley’s service prohibitions may drive 404 and internal audit business to other CPA firms, practitioners seeking audit work expect the law’s requirements that auditors must perform more services will drive engagements their way. They note that SOX’s additional requirements make it hard for the Big Four, already handling extra clients from the defunct Andersen, to accommodate all their audit clients, and they suspect that some private companies may fear being charged the extra fees that SOX requirements have created for public companies.

“The key item is fees,” said Hancock. “Sarbanes-Oxley has caused the rates for SEC work to increase, and some private companies are saying they’re not getting the benefits of increased rates because they are not public.” His MHM focuses its audit services on larger, privately held companies.

MHM, a 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, late last year launched its effort to become a national attest practice by merging with six other CPA firms, all affiliated with CBiz in the same way.

It now has more than 20 CBiz-affiliated CPA practices in its fold, covering about 23 markets, and Hancock said that its size makes the practice attractive to additional CPA firms outside the CBiz universe. He expects to add at least two more offices in the first two months of 2004.

MHM seems most interested in firms with experience serving privately held companies with annual revenues ranging from $5 million to about $250 million. Merged CPA firms would be re-branded Mayer Hoffman McCann, and their partners could opt to become MHM shareholders.

While MHM’s deals have been mergers of CPA firms into another, larger CPA practice, Block/RSM’s deals may not be as straightforward. In the past, Block has acquired the non-attest businesses of CPA firms and placed them in its RSM McGladrey unit, while the firms’ attest partners had the option of joining McGladrey & Pullen.

One major difference in Block/RSM’s new buying strategy seems to be that the attest portions of CPA firms will drive the deal-making, versus the original deal decisions that seemed mainly based on the acquired firms’ non-attest practices.

Travis said that, generally, RSM McGladrey buys the non-attest business and M&P buys the attest business and finances its acquisitions through “internal resources or debt financing.” He added, “The specific approach for each deal depends on the needs of the seller and the size of the deal.”

Travis added that he is interested in attest practices in geographic markets that include southern California, New York and Atlanta, and in industry niches that include banking/finance and subsectors of manufacturing.

Just how firms’ increased emphasis on attest services will impact their consulting work is still unclear. BDO’s Weisbaum said that there would be no impact on consulting services — many of which were launched under Field.

“The way we run our non-attest business, they are not a conflict to our attest work,” he said. “They will continue to be supported to the utmost.”

However, Gary Boomer, whose Manhattan, Kan.-based Boomer Consulting advises CPA firms on technology matters, said that firms are backing away from technology consulting services ever since SOX became law.

Lawhon said that the profession’s approach to consulting — particularly technology consulting — may change because of the increased emphasis on financial reporting quality. He speculated that the consulting focus could shift to services that ensure that the financial information generated by software systems is correct and meets the specific needs of clients’ trading partners.

“The face of consulting services for closely held companies is already changing,” Lawhon explained. “Before, they called us when they needed new accounting software. But now we are getting involved in areas like determining if they qualify for specialized lines of credit.”

Weaver and Tidwell’s technology consulting includes a business services group that offers consulting on entry-level accounting software applications Peachtree and QuickBooks, and an affiliated unit that provides services on Microsoft Business Solutions’ Great Plains financial management software for middle-market companies.

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