It's the classic good news/bad news scenario. On the one hand, banks - many groaning under the weight of sketchy loan portfolios, besieged by aggressive regulators and a blizzard of new federal regulations - need all the help they can get from outside experts like CPAs to remain in business.

On the other, many banks are not surviving those stresses, resulting in a shrinking universe of potential clients for CPA firms.

So it's a mixed picture for practitioners already well-established in the financial services industry. Whether opportunity is knocking for other firms to enter the fray during this turbulent period also depends on a half-empty/half-full perception. Some CPA firms have managed to maintain a banking industry clientele that remains healthy, while others have not been as fortunate.

Serving a clientele of financial institutions today is not for the faint of heart, warned Jeffrey R. Watkins, who leads the Charlotte, N.C.-based financial institutions group at Cherry, Bekaert & Holland. "Our client base does not include any problem banks," he said. Those are primarily community banks sprinkled through the Southeast with assets ranging from $300 million to $2 billion.



Having client banks without problems is not a boast that Don Hutson of Springfield, Mo.-based BKD, can make. Many of his team's 1,200 or so Midwestern financial institution clients are operating "in a very difficult environment right now," although some are also "showing good results," he reported.

Many banks in formerly booming housing markets are suffering from the aftermath of the popped real estate bubble. But that's not the challenge for banks in the Dakotas and northern Minnesota that never had a boom that could collapse - the region served by Peter Hoistad and his team at Brady Martz.

Hoistad, based in Grand Forks, N.D., said that the health of the small, often isolated, community banks in the Dakotas is largely a function of the strength of the local farm economy. Also, many banks are "small family businesses, not unlike hardware stores," he said. That means they confront some universal small-business issues, including succession planning. Banks may shut down due not to a financial collapse, but simply to the retiring owner's inability to find anyone else inside or outside the family to keep it going.

But unlike hardware stores, of course, banks are heavily regulated. The rising complexity of compliance is forcing many small institutions to merge to amortize overhead costs, or simply close their doors.

The sweeping Dodd-Frank financial reform law enacted last summer looms large for many of Hoistad's smaller clients. "The consumer protection deal has a lot of people concerned about what level of regulation they're going to have with the new agency writing the rules," he pointed out.

But Dodd-Frank "is just the latest in a long list of regulatory changes" that, while burdensome to banks, also spell opportunity for CPA firms, Hoistad said.

"Right now," added Hutson, "institutions need expertise and experience [from CPAs] to guide them." It's not only about compliance, he said. Needed guidance also includes internal audit services, strategic planning, and mergers and acquisitions work.

Enterprising CPAs are eager to be of service. "We're trying to fill that void and provide them with a local option," said Jeff Graham, a former bank examiner who heads the banking practice for Conley & Co., based in Abilene, Texas. Beyond audits, Graham's team assists banking clients with complying with Regulations Z and E, and the Home Mortgage Disclosure Act, among others. He noted that CPA firms face stiff competition for such services from boutique firms staffed only by former bank examiners.

Brady Martz's Hoistad said that while many small banks would like to outsource as much of their regulatory compliance function as possible, his firm "does not replace their internal compliance function."

"We do more monitoring of their compliance work, as opposed to actually being there and doing the work on a day-to-day basis," he explained.



Of course, CPA firms that do bona-fide consulting cannot also perform audits, due to the presumed loss of independence. Thus Hoistad takes on compliance-related tasks strictly "under the 'agreed-upon' standards."

What does that mean in practical terms?

"Say a bank called me and said that they wanted me to 'Take a look at our compliance process,'" Hoistad explained. "That's way too vague. I would have to exercise too much judgment about which things to look at, how much testing I might do. That would be a consulting engagement." In contrast, he said, suppose the bank said, "I want you to look at the last 12 months of Bank Secrecy Act and anti-money laundering compliance to make sure our records are what they need to be." With that level of specificity, he could perform the work without having it place him in the role of a consultant.

Naturally, banks don't always call with a tightly defined engagement request. "So we'll sit down with them and find out what they really want to accomplish, and work with them to set us a scope and take the ambiguity out so we can meet the standards."

In one corner of the banking world, however, CPAs can perform attest work and consulting projects for the same clients. That sector, noted Thomas J. O'Connor, CPA, is mutual savings banks. Because they aren't stock companies, the Sarbanes-Oxley requirements do not apply here, he explained.

O'Connor heads the financial institutions unit of G.T. Reilly & Co. in Milton, Mass. Because that state's bank regulatory regimes had, until recently, discouraged large, out-of-state banks from moving to Massachusetts, many small community-based banks continue to thrive there.

Still, there aren't enough mutual banks to sustain the volume of consulting services that CPA firms are anxious to provide. In fact some banking practices, such as that at BKD, derive a substantial portion of their revenue (about 25 percent, in BKD's case) from pure consulting engagements, Hutson said.

Roughly another 25 percent of his group's revenue comes from providing tax services to banks, and the remaining 50 percent comes from assurance work, he says.



That almost suggests that there is plenty of banking industry work for CPA firms to divvy up among themselves. In reality, one CPA lamented, "We're all working to take each other's clients because there's nothing new coming in."

At the same time, the prospect of fresh competition from new CPA firms attempting to build up financial institution practices does not appear to worry the incumbents.

Not only is it a fairly stagnant sector, but liability carriers "consider banks high-risk engagements," noted Hoistad. "Any practitioner thinking about entering the arena would have to think about whether they want to take on the level of perceived risk, and know the impact on their professional liability premiums."

Watkins recalled the S&L industry meltdown during the 1980s, when many CPA firms faced a torrent of litigation - and adverse court judgments - from S&L investors who blamed auditors for failing to sound the alarm.

Meanwhile, one potential bright spot on the horizon for those serving banks today, as one CPA suggested, is that a few large firms "have bitten off more than they can chew; I think there will be some service issues for their clients, rendering them up for grabs for more fully staffed firms." AT

Jeffrey Watkins, the financial institutions practice leader for Cherry, Bekaert & Holland, has a warning for accountants thinking about doing audit work for banks: "From a technical standpoint, it's very different from auditing your standard enterprise."

An illustration of how that difference plays out in setting appropriate loan loss reserves offers a window into the special realm of bank auditing. Setting loan losses for a non-banking enterprise is "nowhere nearly as complex, nor does it require as much judgment, as with a bank," he explained. "Although there is specific guidance we use within GAAP, it's much more art than science, and you are continually having regulators looking over your shoulder and challenging you."

Indeed, auditors are finding themselves caught in the crossfire between bank regulators and the SEC. The SEC worries that banks are setting aside excessive reserves to "manage" earnings, while regulators are hounding banks to increase reserves, Watkins said.

Regulators are winning the battle. But that doesn't simplify the auditor's job, Watkins said: "Regulators may tell you reserves need to be between x and y, but they won't tell you how to get there." He believes they are using a model based on peer data. "But they won't share the model, so it's difficult to figure out what they're going to come in and do."

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