PricewaterhouseCoopers has been building its Private Company Services practice in the U.S. to cater to the needs of growing companies that are benefiting from the economic recovery.

PwC’s U.S. practice for private companies is spearheaded by U.S. Private Company Services Leader Rich Stovsky, who is based in Cleveland. He stopped by the Accounting Today offices on Tuesday for a video interview about the “megatrends” and opportunities for private companies, which you can watch here. He also sat down afterward to talk some more about how the firm is working with private companies.

“The one thing that we pride ourselves on at PwC is bringing the firm to our clients,” he said. “In the private company group, we’ve got people solely dedicated to private companies. We formed this group in ’98, and we felt that there was a need to prioritize and to keep private companies in a group that received all the attention of our dedicated professionals. We built the group to about 2,000 professionals, about 170 partners, and we focused solely on private companies, the owners of those businesses, and high net worth individuals.”

For smaller firms than PwC, he advises them to bring the best resources they can to their private company clients, even if they’re sole practitioners and need to partner with an outside expert for help. “On a daily basis we bring in tax specialty experts, assurance experts, advisory experts, no differently than the largest public companies in our firm would have exposure to, and we bring those experts to bear,” said Stovsky. “We bring the firm to our clients so they have the best of both worlds. They get the private company focus of our group and then all of the resources of PwC whenever it’s appropriate. So the tax specialist who just worked on the largest multinational business may be working on a private company the next morning. I guess that’s how you drive value to your clients, to bring services to them that they need to solve a problem or to help them with an opportunity that they have. I don’t see small accounting firms or sole proprietors being any different. They may have to go outside for those services and we are certainly available to help. But that’s how we think we bring value to our clients.”

Private Company Standards
His group keeps a close eye on what is happening with accounting standards, including developments at the Financial Accounting Standards Board and its sister organization, the Private Company Council, which is helping it decide on alternatives that private companies can use to simplify the complex standards. The American Institute of CPAs also recently introduced its own non-GAAP Financial Reporting Framework for Small and Medium-size Entities, but PwC is waiting to see what standards FASB will ultimately decide upon for U.S. GAAP.

“Overall we’re in favor of the Private Company Council and the FASB’s efforts,” said Stovsky. “We think that it’s important to stay on GAAP, but we recognize that there are changes that would be appropriate for private companies. And if you read some of the literature out there and some of the articles that have been written recently, some of the people think these changes could apply more broadly. There are two proposals out in front of the FASB right now. One is regarding goodwill. The other deals with interest rate swaps. Both are welcome changes to the private company universe, so we’re supportive of that framework.”

PwC’s clients are clearly in favor of appropriate changes to GAAP for private companies, Stovsky noted. “I think within the PCC and FASB is the appropriate body to handle those changes,” he added.

Business Optimism
PwC regularly surveys business owners to gauge their opinions and in its most recent quarterly Private Company Trendsetter Barometer, it found growing optimism.

“The private companies surveyed have actually increased their revenue estimate for the next 12 months by about 15 percent to about 9 percent growth,” said Stovsky. “When we dig into that a little bit further, it’s about 10 ½ percent growth in companies that are doing business domestically and about 7 ½ percent growth in companies that are doing business internationally. We feel there’s optimism out there, but I think it’s cautious optimism. About 66 percent of the CEOs and CFOs we polled feel the U.S. economy is strengthening. Conversely about 54 percent feel that the world economy is still uncertain, so there is still a little bit of skepticism there. For that reason, they may be pulling back a bit or postponing some of their international investment. That plays right into the megatrends we talked about earlier. But we don’t think that’s a permanent elimination. We just think it’s a postponement or deferral until they feel a little bit more confident about the developing countries.”

In general, private company optimism seems to be on the upswing, according to PwC’s polling, with the majority predicting that next year will be better than this one.

Health Care Reform Changes
Even uncertainty about the shaky rollout of the health insurance exchanges doesn’t seem to be putting a damper on business expectations.

“There’s still uncertainty in the area and companies are addressing it really across the board,” said Stovsky. “I don’t have a client personally that is going to change what they’re providing their employees within the guidelines of the new law, so I think it’s business as usual for most of those companies. The companies in our group tend to be larger private companies and I think that benefit is one that they will continue to provide. But I do think that there is uncertainty on how to comply and they’ve got consultants from our firm as well as benefits consultants looking at their plans to make sure they’re in compliance so they don’t fall under any of the penalty provisions.”

Tax Reform
Private companies are also keeping a close watch on the perennial tax reform efforts in Washington, which appear increasingly unlikely to happen on Capitol Hill this year.

“Right now, the tax rates were put at higher levels starting in January, so we’re looking at year-end planning for our clients, both individual and corporate,” said Stovsky. “And of course the corporations that are pass-through entities play right into the individual tax rates. Right now, we’re addressing the tax rates because some of the additional taxes have to be analyzed to see if they apply to certain situations of our clients. So we’re looking at that closely. But right now, the year-end planning strategy is going back to basics: run a projection for your clients to see what their tax situation is and then decide if they’re in a situation where it’s appropriate to accelerate expense and defer income, or the opposite if they happen to be in a minimum tax position.”

In the meantime, PwC is trying to guide clients to think about certain issues such as the tangible property repair regulations that the IRS issued this year.

“We’re working closely with them to decide which items ought to be capitalized versus expensed, and that set of rules is just being digested now by our companies,” said Stovsky. “There are expiring provisions, the so-called extenders, such as the research and experimentation credit and certain depreciation items, so there are a variety of items that still apply through ’13 that we have to keep our eye on as we move forward. Probably most interesting is tax reform, and we’re waiting right now for the House’s preliminary roadmap for tax reform as well as the Senate’s. We’ve heard about varying provisions, but until we see the initial submission we just don’t know exactly what to expect. Those should be out in the next week or two from the House and Senate. That’s going to be really telling and we’ll work with our clients on how it potentially will affect them.”

Megatrends for Private Companies
“Megatrends” such as increasing urbanization and demographic shifts around the world, as well as the increasing scarcity of natural resources, will also have an impact on private companies.

“When you look at the megatrends, they provide a huge opportunity for private companies,” said Stovsky. “There are some challenges, however, and that challenge lies with demographic shifts and having the people to do the work.”

PwC surveys family-owned businesses every year, and one of the main priorities for many of these businesses is innovation. “That plays right into the megatrends because when you think about resource scarcity, innovation around water and food and energy can be great drivers for businesses,” said Stovsky. “When you think about developing countries and economies, there are new businesses that are arising all the time. We think that innovation is the key, and playing within the megatrends will be really vital to these companies being very successful and expanding as they move forward. I think it’s a great opportunity, but you have to go in with your eyes wide open and understand what those issues are. The issues are accessing capital, accessing labor, doing the proper due diligence, doing the proper strategic planning, risk management planning, proper structuring, looking at tax rules in the various countries so you don’t wind up with a tax controversy that you didn’t expect, looking at supply chain and the way you set up manufacturing and develop relationships. Those are all very important fundamentals that have to be met in order for you to be successful as you expand and as you try to get your company to innovate. We think the megatrends align perfectly for private companies that we deal with. I just think there are challenges that they have to realize exist, and we want to help them with those challenges.”

IPO Market
For now, the majority of private companies plan to stay that way, with few tempted to follow in the footsteps of Twitter and make a big splash in the IPO market. But for many private companies, especially family-owned businesses, PwC is finding that succession planning has become a major issue.

“There are several IPOs that are out there right now pending, but the majority of our clients have no intention to go public,” said Stovsky. “In fact, in our most recent survey of family businesses, the majority, over 70 percent, say they want to transfer the business to the next generation. And we thought that was a pretty telling statistic. What’s more interesting is that they don’t believe the next generation necessarily has the skill and leadership ability to be innovative to be successful for the foreseeable future. So what we see companies doing is thinking about their succession plan. And we encourage them to really delineate a clearly defined and detailed succession plan. We see them thinking about succession, but succession of business ownership may not line up with succession of business management, and they’re looking now to bring in professional management. Whereas now, of the companies we polled, about 7 percent have professional management, non-family related, we think that’s going to move up dramatically as innovation becomes the key driver of success as they move forward.”

Stovsky acknowledged that there will always be public offerings, and it may be an appropriate strategy for many companies. “But if you look at the private companies in our economy today, there are about 5,000 private companies with sales over $100 million,” he pointed out. “There are approximately 450 private companies with sales over $1 billion and about 220 companies with sales over $2 billion, so these are large complex companies that largely plan to stay private. You see some IPOs, but really when you think of the number of private companies in the U.S., there are not that many IPOs relative to that overall number. And in the U.S., private companies make up about 99 percent of our business community and at the same time we see a decline in the number of public companies. From ’97 through ’12, the number of public companies declined by about 38 percent. I think private companies are playing a bigger role in the U.S. economy. They employ about two-thirds of the people in the private sector and plan to increase their employment next year by about 2 percent, which is up from 1 ½ percent the year before. So we think private companies will largely remain private and those who have an appropriate strategy to go public will do that. Some of our clients do that and we participate, but we see larger private companies remaining private as well.”

While PwC sometimes helps clients find financing and new management, that is not a big priority for the Private Company Services practice.

“We don’t typically bring in financing sources,” said Stovsky. “We make introductions. We help with relationships. We’re not investment bankers and we’re not financial advisors so we don’t bring the capital to them. But in our network certainly we have a lot of affiliations and a lot of relationships. One of the best things we can do for our clients is match up a buyer with a seller of goods, for instance, or a potential investor with a company, and there may be some mutual interest there. But we don’t do it on a formal basis. It’s really part of what we do. It’s part of being a business advisor to our clients.”

KPMG announced Monday that it is setting up a KPMG Capital unit to fund data analytics companies, but Stovsky doubts that PwC would do something similar (see KPMG Forms Investment Fund for Data Analytics Technology).

“I don’t see anything pending currently,” he said. “We have obviously made a lot of investments to add to our firm, but I don’t know anything like that on the horizon.”

PwC’s Private Company Services practice can also reach out to other groups within the firm who specialize in the area of business finance. PwC Corporate Finance LLC can advise clients in their capital sourcing process and introduce private companies to commercial banks, mezzanine funds and private equity firms. PwC also has a Capital Markets Accounting Advisory Services team that provides consulting around IPOs, secondary and follow-on equity offerings and corporate bond issuances.

Recruitment and Retention
PwC is working intently on transforming its internal processes. “When we look at audits and how we do tax compliance, for example, we’re working very hard on advancing the processes that go behind those two areas, including technology,” said Stovsky. “And we’re doing that for several reasons. The most important reason is quality. We think that as we get better at doing what we have to do, our quality will go up. Our quality is excellent today, but we can never be good enough, so we’re working hard to advance our quality and we think that drives value to our clients and really drives our relevancy in the marketplace.”

PwC has also been focusing on offering “thought leadership” articles from its people, which are available to mobile devices through its PwC 365 mobile app.

The firm recognizes that it needs to provide the right tools to its staff to do their jobs more effectively and efficiently so it can retain them. “Our people are looking for flexibility,” said Stovsky. “That’s the number one requirement when we ask them, ‘What can we do for you?’ By transforming how they do what they have to do, we think we’re really addressing that people issue and that will help us retain the top talent and attract the top talent. And then finally, if we can get more efficient we’ll be more competitive. That will help our stakeholders, the owners of our businesses, the clients that we have, as well as our firm and that’s critically important.”

The firm is also focusing on talent acquisition and diversity. “We are out in the market looking for the best and the brightest every day, including people that can bring new skills and new expertise to our business or enhance existing expertise that we have,” said Stovsky. “We’re very proud of our record on diversity. I think we have provided the climate and the setting and the programs to really allow our diverse population to excel, and they have excelled.”

He pointed out that PwC has ranked among the top three businesses for the past three years on DiversityInc’s annual list of the most diverse employers.

“If you look at the level of leadership in the firm, for example, in our Private Company Services practice, more than a third of our leadership is women and I’m very proud of that,” said Stoksky. “It’s because we provided the platform for those people to excel.”

Working Globally and Locally
His practice also benefits from having access to a global network at PwC. “I sit on our Global Middle Market Leadership Team and a day doesn’t go by that I don’t have a call from a colleague in some other jurisdiction, some other territory, or I don’t call a colleague with an issue or a question or some need, and we work collaboratively on a daily basis,” said Stovsky. “So our network is expansive. The PCS practice is resident in virtually every territory that we have. Private companies are served in every territory and that global network is just invaluable.”

In addition to having a global presence, PwC also makes it a priority to stay involved in the local communities in which it has offices. “We’re also very proud of our community involvement, both from a financial and from a time perspective,” said Stovsky. “We encourage people to give back to the community. We think that we have an obligation, and quite frankly it’s a lot of fun to do that. I think that makes us relevant and lets us give back.”