Hello, please meet Rosie Scenario. But do CPAs really believe it?
by Rick Telberg
At Large
The economic recovery may still be spotty and weak, but most chief executives of the fastest growing companies expect it will only accelerate over the next two to three years. Meanwhile, brisk business at the nation's smallest companies is straining inventories and forcing price hikes, which may signal the best economy in 20 years. But these are only two of the latest reports. {otherwise 3rd graf doesn't work}
Yes, 'tis the time of the rosy scenario. Gee, it must be an election year.
In the first report, issued by PricewaterhouseCoopers, 73 percent of "fast growth CEOs", say the economic upturn will last two to three years or more.
In the second report, released by the National Federation of Independent Business, chief economist William Dunkelberg reports that his Small Business Optimism Index (which kind of makes you wonder if we should call it the "pessimism index" during a recession) has averaged 103 or higher over the past 15 months, unprecedented since the monthly surveys started in 1986. "This is a very strong run," Dunkelberg reported, "confirming the view that 2004 will be the best economy in 20 years."
Sure, that's what you get from a Big Four firm and a Washington-based business lobby, but I'd rather put my money on what CPAs think. Fortunately, I have a few clues, based on input from you readers.
In the last two weeks, more than 200 At Large readers have filed reports on current and expected business conditions. About three in four call conditions now "good" to "excellent" and the same number expect the upturn to continue for at least the next three to six months.
That's not "the best economy in 20 years," nor a long-term boom. But it is a sign of strength and optimism.
"Business is good, has been good and will continue for an extended period of time without any unforeseen catastrophes," according to the managing partner of a local CPA firm in Bellevue, Wash.
Another reader, CPA Vee Cristobal in Los Angeles, says, "I started my practice a year ago. I've been busier every day because of more and more new clients; small businesses are needing my help. This is a good sign for our economy."
Across the country, in Clifton, N.J., a third At-Large reader, reports: "a lot of small business formation going on right now." That's another good sign.
But their optimism isn't limited to their business or the economy in general. Some 78 percent also rate the prospects of the CPA profession as "good" to "excellent." Another 67 percent report their own net earnings up from a year ago. And in the next three to six months, 55 percent will be adding permanent employees to their operations.
CPAs are skeptical by nature and by training. If they've begun to feel upbeat, it can't be ignored.
Saturday, July 31, 2004
Thursday, July 29, 2004
What's Your Business Worth?
CPAs take stock of a sellers' market for firms.
by Rick Telberg
At Large
The feedback from my series of reports on CPA-firm mergers-and-acquisitions has been overwhelming.
I've heard directly from over a thousand CPAs so far. Most agree on a few fundamentals:
1. It's a sellers' market.
2. The average sales price runs between 1.0- and 1.25-times annual revenues, with the best deals structured over three to five years as the seller bows out.
3. There are still more opportunities than a single CPA, or small CPA firm, can handle alone.
4. The imbalance between buyers and sellers won't last forever.
Here's a look into the mailbag:
"I believe there is an abundance of potential sellers in the marketplace who have not adequately planned for their firm's succession. Buyers in their 40s with energy and a commitment to adapting to market changes have an excellent opportunity to positively position themselves."
--Erich Rail
Pasadena, Calif.
On the other hand....
"Why should you be so vociferously in the ring attempting to hustle CPAs in their 50s to sell their 35-year-old accounting practices. Life expectancies are now nearing 80 years of age leaving boomers with 30-odd years of life left. If they sell their practices at roughly their gross annual billings they can't manage to call that a retirement trove. So, only those well-heeled (and it is a mistake to feel that all accountants are so well-planned that they could retire without the value of their practice) could survive without their practice incomes for 30 more years. Why all this rush to the registers with the accounting practices? Sage older accountants are wise enough to know that they can hire younger accountants to turn out production accounting, have a place to read the Wall Street Journal and work about four hours a day while commanding all of the respect in their community that they ever did."
---JDFCPA
"I have been reading your articles with great interest since I am a CPA that brokers the sale and merger of CPA firms. I agree that it is a seller's market and this year has been much more active than the past several years. I don't necessarily agree with your numbers. Although that differs based on geographic areas. In California, I seem to have 6-10 (maybe more) very qualified buyers for every good practice to sell. The not so good ones may only have 2-4 buyers, usually those frustrated with looking at the good practices, and not getting them. I also agree that this window will not be open forever. I suspect it will remain a seller's market for a number of years since CPA's tend be less prepared for their own retirement. (The cobbler's kid goes without shoes syndrome)."
-- John R. Ezell, CPA
ProHorizons (formerly Professional Accounting Sales of California, Inc.)
"There are many great opportunities for CPAs. We see many possibilities for expansion, but being a small firm with limited resources and time, its extremely difficulty to decide which is the wise choice. We are working on a plan to identify alternatives, select the best for us, and increase skills step by step over time. The information overload in almost overwhelming."
-- G. Craig Potter
Houston
"If we don't start training more newbies, we shall have no one to sell to."
-- Cynthia Ellis, CPA
McAllen, Texas
by Rick Telberg
At Large
The feedback from my series of reports on CPA-firm mergers-and-acquisitions has been overwhelming.
I've heard directly from over a thousand CPAs so far. Most agree on a few fundamentals:
1. It's a sellers' market.
2. The average sales price runs between 1.0- and 1.25-times annual revenues, with the best deals structured over three to five years as the seller bows out.
3. There are still more opportunities than a single CPA, or small CPA firm, can handle alone.
4. The imbalance between buyers and sellers won't last forever.
Here's a look into the mailbag:
"I believe there is an abundance of potential sellers in the marketplace who have not adequately planned for their firm's succession. Buyers in their 40s with energy and a commitment to adapting to market changes have an excellent opportunity to positively position themselves."
--Erich Rail
Pasadena, Calif.
On the other hand....
"Why should you be so vociferously in the ring attempting to hustle CPAs in their 50s to sell their 35-year-old accounting practices. Life expectancies are now nearing 80 years of age leaving boomers with 30-odd years of life left. If they sell their practices at roughly their gross annual billings they can't manage to call that a retirement trove. So, only those well-heeled (and it is a mistake to feel that all accountants are so well-planned that they could retire without the value of their practice) could survive without their practice incomes for 30 more years. Why all this rush to the registers with the accounting practices? Sage older accountants are wise enough to know that they can hire younger accountants to turn out production accounting, have a place to read the Wall Street Journal and work about four hours a day while commanding all of the respect in their community that they ever did."
---JDFCPA
"I have been reading your articles with great interest since I am a CPA that brokers the sale and merger of CPA firms. I agree that it is a seller's market and this year has been much more active than the past several years. I don't necessarily agree with your numbers. Although that differs based on geographic areas. In California, I seem to have 6-10 (maybe more) very qualified buyers for every good practice to sell. The not so good ones may only have 2-4 buyers, usually those frustrated with looking at the good practices, and not getting them. I also agree that this window will not be open forever. I suspect it will remain a seller's market for a number of years since CPA's tend be less prepared for their own retirement. (The cobbler's kid goes without shoes syndrome)."
-- John R. Ezell, CPA
ProHorizons (formerly Professional Accounting Sales of California, Inc.)
"There are many great opportunities for CPAs. We see many possibilities for expansion, but being a small firm with limited resources and time, its extremely difficulty to decide which is the wise choice. We are working on a plan to identify alternatives, select the best for us, and increase skills step by step over time. The information overload in almost overwhelming."
-- G. Craig Potter
Houston
"If we don't start training more newbies, we shall have no one to sell to."
-- Cynthia Ellis, CPA
McAllen, Texas
Saturday, July 17, 2004
6 Things To Do Today To Thrive Tomorrow
The window is closing on a the sellers' market for good CPA firms. You don't want to be left out.
by Rick Telberg
At Large
A rosier economic climate and a general optimism among CPAs may be fueling a mergers-and-acquisitions binge among accounting firms unseen in years.
And it might be a good thing too: Because long-time observers suggest this seller's market may last only a few years.
In my continuing study of the M&A market for CPA firms, I'm finding a new positivism about the future that that is almost palpable. For instance, my contact with almost 300 CPAs in the last week alone convinces me that 85 percent of CPAs, particularly those in firms, feel good, or even excellent, about the prospects of the profession. And almost as many feel as optimistic about their firms in particular and the market for their services in business or industry.
But it takes a special breed of CPA to see the potential and seize the opportunity. Just ask Jonathan A. Karp, an attorney and CPA in Los Angeles who specializes in succession issues for CPA firms.
"I see this as an extremely active area, becoming more active over time," Karp says. "Many firms have not created an internal succession plan or don't have a second tier of partners able to assume management, operation and vision for the firm. So the partners have no alternative but to sell or merge."
"Buyers, on the other hand," Karp says, "are very actively looking for acquisition/merger targets in order to grow their practices and thus are very interested in locating firms to acquire."
Most partners are quick to acknowledge that their biggest problem is finding, hiring and retaining good staff.
"What is unacknowledged," Karp warns, "is the No. 2 'stealth' issue facing firms, which is the lack of a viable succession plan, either in terms of having qualified 'second tier' or junior partners to succeed the senior partners in firm management or the absence of a viable, financially responsible and feasible succession plan to buy out retiring partners."
Unless firms wake up and face the looming issues of succession and unfunded retirement liabilities, there will be a major change in the accounting firm environment in the next 10 years, Karp says.
"More and more of these firms will be looking to sell to other firms or merge their firms into other firms," according to Karp. Those firms who are not ahead of the game and don't start the process now may find themselves left in the cold, since the firms looking to buy practices will have already done so and may be reluctant to absorb further practices."
What must firms be doing today to survive tomorrow?
Here's my advice:
1. Get on the cutting edge of technology.
2. Build a niche. Some of the hottest niches right now are in low-end accounting software, investment management, business valuation, and estate planning.
3. Hire competent staff, train them, and treat them like you mean it.
4. Pin down your succession plan. It's not easy. It requires a hard look at what you really want out of life.
5. Give yourself time because it's a long process.
6. Get started now.
This seller's market won't last forever. By my estimates, one quarter of firms is looking to sell, a third is looking to buy and another quarter is expecting to grow organically.
What happens when all the good firms get bought up? You won't want to know.
by Rick Telberg
At Large
A rosier economic climate and a general optimism among CPAs may be fueling a mergers-and-acquisitions binge among accounting firms unseen in years.
And it might be a good thing too: Because long-time observers suggest this seller's market may last only a few years.
In my continuing study of the M&A market for CPA firms, I'm finding a new positivism about the future that that is almost palpable. For instance, my contact with almost 300 CPAs in the last week alone convinces me that 85 percent of CPAs, particularly those in firms, feel good, or even excellent, about the prospects of the profession. And almost as many feel as optimistic about their firms in particular and the market for their services in business or industry.
But it takes a special breed of CPA to see the potential and seize the opportunity. Just ask Jonathan A. Karp, an attorney and CPA in Los Angeles who specializes in succession issues for CPA firms.
"I see this as an extremely active area, becoming more active over time," Karp says. "Many firms have not created an internal succession plan or don't have a second tier of partners able to assume management, operation and vision for the firm. So the partners have no alternative but to sell or merge."
"Buyers, on the other hand," Karp says, "are very actively looking for acquisition/merger targets in order to grow their practices and thus are very interested in locating firms to acquire."
Most partners are quick to acknowledge that their biggest problem is finding, hiring and retaining good staff.
"What is unacknowledged," Karp warns, "is the No. 2 'stealth' issue facing firms, which is the lack of a viable succession plan, either in terms of having qualified 'second tier' or junior partners to succeed the senior partners in firm management or the absence of a viable, financially responsible and feasible succession plan to buy out retiring partners."
Unless firms wake up and face the looming issues of succession and unfunded retirement liabilities, there will be a major change in the accounting firm environment in the next 10 years, Karp says.
"More and more of these firms will be looking to sell to other firms or merge their firms into other firms," according to Karp. Those firms who are not ahead of the game and don't start the process now may find themselves left in the cold, since the firms looking to buy practices will have already done so and may be reluctant to absorb further practices."
What must firms be doing today to survive tomorrow?
Here's my advice:
1. Get on the cutting edge of technology.
2. Build a niche. Some of the hottest niches right now are in low-end accounting software, investment management, business valuation, and estate planning.
3. Hire competent staff, train them, and treat them like you mean it.
4. Pin down your succession plan. It's not easy. It requires a hard look at what you really want out of life.
5. Give yourself time because it's a long process.
6. Get started now.
This seller's market won't last forever. By my estimates, one quarter of firms is looking to sell, a third is looking to buy and another quarter is expecting to grow organically.
What happens when all the good firms get bought up? You won't want to know.
Wednesday, July 14, 2004
5 Success Secrets for CPAs
If you think it's just technical skill or good connections, you're dead wrong.
by Rick Telberg
for Career Insider
What's the secret ingredient to succeeding as a CPA? If you think it's just technical skill or good connections, you're dead wrong.
Listening to hundreds of working professionals suggests that the critical success factors are, in fact, common-sense people skills.
"A positive attitude and the ability to get along with all types of people will take you far," according to a middle manager at a large company.
"Always be helpful and do more than what the client expects," says Kimberly Schrant, a CPA at a local firm in Anthony, Kan. "Take people out to lunch and dinner. They appreciate it."
"Good communication skills are often overlooked in our profession," according to Dan Livengood, head of his own firm in Marietta, S.C. "While technical ability is a necessity for all accountants, those that communicate and relate well to their clients definitely have an advantage. This is most applicable to those of us working with small businesses or in industry, where working with the individuals around us, not organizations, is key."
Livengood adds one more tip: "Make time for your personal life and personal development. People trust other people; not human adding machines who only understand numbers and long hours."
The comments were culled from over 600 responses I received from practicing CPAs who read last month's Career Insider.
Five items emerged as keys to success in a CPA career, in order:
1... Ability to relate to people, get along, communicate.
2... Technical skill and knowledge.
3... Integrity and good character.
4... Constant, lifelong learning.
5... Knowing how to balance life and work.
Professionals also appear to be reasonably happy and satisfied with their careers.
"I enjoy my work and am glad to be a CPA in public accounting," says a middle manger at a local accounting firm. "However, I believe it takes a dedicated person with a strong work ethic and the ability to 'change gears' quickly and to handle the stresses involved."
"In exchange for hard work, which is challenging and stimulating, there is a worthwhile trade-off for flexibility and control over your schedule, not to mention career opportunity," said one managing partner.
"It affords great flexibility," said a senior executive at a small manufacturer. "You can work part time or full time - for a small company or a large one. You can take time off to have a family and step right back in when you are ready."
Indeed, if most CPAs could do it all over again, they would. Fully three out of four surveyed say they would "probably" or "definitely choose a CPA career again.
And, they'd recommend it to others. When asked if they'd urge a young person into the field, just about as many, specifically 72 percent, said "yes."
by Rick Telberg
for Career Insider
What's the secret ingredient to succeeding as a CPA? If you think it's just technical skill or good connections, you're dead wrong.
Listening to hundreds of working professionals suggests that the critical success factors are, in fact, common-sense people skills.
"A positive attitude and the ability to get along with all types of people will take you far," according to a middle manager at a large company.
"Always be helpful and do more than what the client expects," says Kimberly Schrant, a CPA at a local firm in Anthony, Kan. "Take people out to lunch and dinner. They appreciate it."
"Good communication skills are often overlooked in our profession," according to Dan Livengood, head of his own firm in Marietta, S.C. "While technical ability is a necessity for all accountants, those that communicate and relate well to their clients definitely have an advantage. This is most applicable to those of us working with small businesses or in industry, where working with the individuals around us, not organizations, is key."
Livengood adds one more tip: "Make time for your personal life and personal development. People trust other people; not human adding machines who only understand numbers and long hours."
The comments were culled from over 600 responses I received from practicing CPAs who read last month's Career Insider.
Five items emerged as keys to success in a CPA career, in order:
1... Ability to relate to people, get along, communicate.
2... Technical skill and knowledge.
3... Integrity and good character.
4... Constant, lifelong learning.
5... Knowing how to balance life and work.
Professionals also appear to be reasonably happy and satisfied with their careers.
"I enjoy my work and am glad to be a CPA in public accounting," says a middle manger at a local accounting firm. "However, I believe it takes a dedicated person with a strong work ethic and the ability to 'change gears' quickly and to handle the stresses involved."
"In exchange for hard work, which is challenging and stimulating, there is a worthwhile trade-off for flexibility and control over your schedule, not to mention career opportunity," said one managing partner.
"It affords great flexibility," said a senior executive at a small manufacturer. "You can work part time or full time - for a small company or a large one. You can take time off to have a family and step right back in when you are ready."
Indeed, if most CPAs could do it all over again, they would. Fully three out of four surveyed say they would "probably" or "definitely choose a CPA career again.
And, they'd recommend it to others. When asked if they'd urge a young person into the field, just about as many, specifically 72 percent, said "yes."
‘Out of the Box’ Ideas for Audit Independence
Stern Business panel offers up creative and far-reaching reforms for corporate governance.
[Editor's Note: This report summarizes a strategic marketing and communications project for a private client.]
It could take more than a routine round of government and corporate reforms to fully and permanently restore investor faith in the nation’s accounting and auditing system, attendees were told at a major New York University Stern School of Business conference.
Despite a slew of so-called reform moves in recent years, said Art Siegel, a CPA, former PricewaterhouseCoopers vice chairman, and now a leading figure in corporate governance issues, there hasn’t been enough “thinking out of the box.” The system still relies on auditors as gatekeepers. But, Siegel said, “The gatekeeping function is one of the main culprits in the recent debacles.”
“The reason for the corporate governance failure is the inherent conflict of interest that exists because of the cozy relation between auditors and the managements of their clients who hire their services,” said NYU Stern Professor of Accounting Joshua Ronen.
Great Neck, N.Y., CPA Mark Lilling put it a little more bluntly: “You can’t be a little bit independent. Either you are, or you aren’t.”
For CPAs and other business and financial professionals, the place to be for “out of the box” thinking was at the NYU Stern School of Business seminar.
More than 135 leading practitioners, regulators and academics in the auditing field convened to discuss the impact of auditor conflicts on the industry, to propose recommendations to foster auditor independence and to help prevent future accounting scandals. The event was sponsored and co-organized by Lilling, president of The Audit Committee Consulting Team LLC, an advisory firm in corporate governance.
“The continuing rash of audit failures, collapse of Arthur Andersen, sanctions against Ernst & Young and continuing tax shelter abuses have damaged and possibly destroyed public confidence in my profession and my lifetime’s work,” Lilling asserted.
“Auditors have an important role in capital markets and public. And investor confidence in the fairness of financial reporting is critical to the effective function of these markets,” according to Lilling. “Congress gave an ‘exclusive franchise’ to certified public accountants. With this franchise comes a responsibility to the investing public which is not being met.”
The standing-room-only forum featured a panel of experts representing different points of view from Corporate America. Other commentators included John Biggs, former Chairman and CEO of the vast TIAA-CREF pension fund; John O’Connor, Vice Chairman and Services Leader at PricewaterhouseCoopers LLP; Thomas J. Ray, Deputy Chief Auditor for the new Public Company Accounting Oversight Board; and Melvyn Weiss, Senior Partner at the class-action law firm of Milberg Weiss Bershad Hynes & Lerach LLP.
The panelists addressed some of the major issues confronting the auditing industry and put forth the following recommendations:
-- The rule of auditor independence: Auditors should only perform auditing services, and corporations should consider various types of auditor rotation (e.g., change principal, change firm) to ensure independence
-- SEC guidelines for auditors to follow have not prevented scandals: Sarbanes-Oxley should provide a set of objectives, not rules, to assist auditing committees and auditors in implementing and adhering to standards, and to prevent the common practice, “if it’s not prohibited, it’s permitted”
-- Public duty: Auditors should proactively search for fraud – a duty inherent in the profession.
The event drew influential media coverage, with Thomson Corp.’s WebCPA reporting, for instance, that PricewaterhouseCoopers’ O’Connor gave the three primary reasons why his firm resigns as an auditor -- which he said happened 500 times in 2003.
1. A failure of the company to manage risk properly;
2. Lack of profitability for PwC; and,
3. Dissatisfaction with how PwC personnel are being treated.
And CFO Magazine reported that the conference yielded at least “two new notions of how to liberate audits: Insure the financials and ditch income statements.”
In his presentation, for instance, Professor Ronen suggested engaging insurers to achieve greater quality and honesty in the auditing process and provide management with strong incentives to improve the reliability and transparency of their companies’ financial statements.
Coined by Ronen as Financial Statement Insurance (FSI), the plan would require insurers to hire the auditors and set coverage and premiums for companies based on an initial risk evaluation; whether the coverage becomes effective would depend on the results of the audit. The insurance premium and other policy terms would be disclosed publicly for all investors to see. Insurers would be liable if their client’s shareholders sustained losses due to omissions or misrepresentations in the financial statements.
Separately, Shyam Sunder, a professor of accounting, economics and finance at the Yale School of Management, proposed using corporate tax returns as the publicly reported income statement to reduce both earnings management as well as aggressive tax reporting.
Sunder argued that management and auditors legally game the tax and accounting systems by decreasing income to lower taxes, while at the same time increasing income they report to the shareholders, placing a heavy burden of auditing and oversight on the IRS and the directors.
According to Sunder, using the same statement for both purposes would discourage manipulation by imposing real dollar costs on manipulation in either direction.
Assessing the results of the conference, Lilling vowed to continue effort to improve corporate governance and auditor independence. A book, for instance, is expected to become one of the outgrowths of the meeting.
[Editor's Note: This report summarizes a strategic marketing and communications project for a private client.]
It could take more than a routine round of government and corporate reforms to fully and permanently restore investor faith in the nation’s accounting and auditing system, attendees were told at a major New York University Stern School of Business conference.
Despite a slew of so-called reform moves in recent years, said Art Siegel, a CPA, former PricewaterhouseCoopers vice chairman, and now a leading figure in corporate governance issues, there hasn’t been enough “thinking out of the box.” The system still relies on auditors as gatekeepers. But, Siegel said, “The gatekeeping function is one of the main culprits in the recent debacles.”
“The reason for the corporate governance failure is the inherent conflict of interest that exists because of the cozy relation between auditors and the managements of their clients who hire their services,” said NYU Stern Professor of Accounting Joshua Ronen.
Great Neck, N.Y., CPA Mark Lilling put it a little more bluntly: “You can’t be a little bit independent. Either you are, or you aren’t.”
For CPAs and other business and financial professionals, the place to be for “out of the box” thinking was at the NYU Stern School of Business seminar.
More than 135 leading practitioners, regulators and academics in the auditing field convened to discuss the impact of auditor conflicts on the industry, to propose recommendations to foster auditor independence and to help prevent future accounting scandals. The event was sponsored and co-organized by Lilling, president of The Audit Committee Consulting Team LLC, an advisory firm in corporate governance.
“The continuing rash of audit failures, collapse of Arthur Andersen, sanctions against Ernst & Young and continuing tax shelter abuses have damaged and possibly destroyed public confidence in my profession and my lifetime’s work,” Lilling asserted.
“Auditors have an important role in capital markets and public. And investor confidence in the fairness of financial reporting is critical to the effective function of these markets,” according to Lilling. “Congress gave an ‘exclusive franchise’ to certified public accountants. With this franchise comes a responsibility to the investing public which is not being met.”
The standing-room-only forum featured a panel of experts representing different points of view from Corporate America. Other commentators included John Biggs, former Chairman and CEO of the vast TIAA-CREF pension fund; John O’Connor, Vice Chairman and Services Leader at PricewaterhouseCoopers LLP; Thomas J. Ray, Deputy Chief Auditor for the new Public Company Accounting Oversight Board; and Melvyn Weiss, Senior Partner at the class-action law firm of Milberg Weiss Bershad Hynes & Lerach LLP.
The panelists addressed some of the major issues confronting the auditing industry and put forth the following recommendations:
-- The rule of auditor independence: Auditors should only perform auditing services, and corporations should consider various types of auditor rotation (e.g., change principal, change firm) to ensure independence
-- SEC guidelines for auditors to follow have not prevented scandals: Sarbanes-Oxley should provide a set of objectives, not rules, to assist auditing committees and auditors in implementing and adhering to standards, and to prevent the common practice, “if it’s not prohibited, it’s permitted”
-- Public duty: Auditors should proactively search for fraud – a duty inherent in the profession.
The event drew influential media coverage, with Thomson Corp.’s WebCPA reporting, for instance, that PricewaterhouseCoopers’ O’Connor gave the three primary reasons why his firm resigns as an auditor -- which he said happened 500 times in 2003.
1. A failure of the company to manage risk properly;
2. Lack of profitability for PwC; and,
3. Dissatisfaction with how PwC personnel are being treated.
And CFO Magazine reported that the conference yielded at least “two new notions of how to liberate audits: Insure the financials and ditch income statements.”
In his presentation, for instance, Professor Ronen suggested engaging insurers to achieve greater quality and honesty in the auditing process and provide management with strong incentives to improve the reliability and transparency of their companies’ financial statements.
Coined by Ronen as Financial Statement Insurance (FSI), the plan would require insurers to hire the auditors and set coverage and premiums for companies based on an initial risk evaluation; whether the coverage becomes effective would depend on the results of the audit. The insurance premium and other policy terms would be disclosed publicly for all investors to see. Insurers would be liable if their client’s shareholders sustained losses due to omissions or misrepresentations in the financial statements.
Separately, Shyam Sunder, a professor of accounting, economics and finance at the Yale School of Management, proposed using corporate tax returns as the publicly reported income statement to reduce both earnings management as well as aggressive tax reporting.
Sunder argued that management and auditors legally game the tax and accounting systems by decreasing income to lower taxes, while at the same time increasing income they report to the shareholders, placing a heavy burden of auditing and oversight on the IRS and the directors.
According to Sunder, using the same statement for both purposes would discourage manipulation by imposing real dollar costs on manipulation in either direction.
Assessing the results of the conference, Lilling vowed to continue effort to improve corporate governance and auditor independence. A book, for instance, is expected to become one of the outgrowths of the meeting.
Tuesday, July 13, 2004
Buy or Sell? Firms Ponder Profits, Perils
Economic indicators suggest the time is ripe for CPA firm owners to be making major decisions to buy, sell, merge in or out, or re-invest.
by Rick Telberg
At Large for the AICPA
For many observers, the demand for solid practices is a good sign.
By some of my own off-the-cuff estimates, buyers outnumber sellers by at least three to one these days. As we discussed in last week's issue, there are three times as many firms looking to buy a practice as looking to sell.
"Many of our firms are having the best years ever," said Roman H. Kepczyk, CPA, CITP, and head of InfoTech Partners North America. "This success leads to expansion dreams kicking in for firms."
"The state of the profession is healthy," said Art Bowman, the Atlanta-based industry analyst and advisor. "But I'm not surprised that buyers might outnumber sellers. Buyers are in it for the long run and that means increasing the depth of resources they can deliver to
clients. It's a healthy profession but only the strong prosper."
On the other hand, a new wave of mergers and acquisitions among CPA firms could be a part of a larger trend already reshaping the competitive landscape.
"Well, this is a polarized profession, with the top 100 to 500 firms operating in a different world than the other 49,500 firms that are either sole proprietors or less than 10 people in total," said Ron Baker, a vocal advocate for value billing. "Since we are a mature profession, mergers and acquisitions will probably be on the rise over time, as a way to reduce redundancies, much like in banking or retail. I suppose in that sense, at the high end, it's more of a seller's market."
Still, it's easier than ever to launch your own practice, which complicates the picture.
"Certainly more firms are easier to start by a solo person with a laptop, Internet connection and FedEx account," Baker continued. "I meet all sorts of solos going out on their own, either from industry, coming from larger firms, or the government or education sectors. The barriers to entry are quite low, while the exit costs are quite large for established partners. It's really hard to make blanket statements about this profession because of the massive polarization. The Big Four operate in a different world than even the next 96 firms down, and the smaller firms are in another galaxy from them."
For the firm with growth on its mind, it's often cheaper and easier to buy rather than build, according to Allan Koltin, the Chicago consultant who engineered the recent merger of KGN into Virchow Krause. "It's the fastest way to grow the practice."
"For the acquiree," Koltin added, "it also represents a form of 'finality' and this step, along with a perceived 'giving up' of some level of autonomy causes a lot of acquirees to back away from upstream mergers or acquisitions unless it is crystal clear as to the benefits or the situation is desperate."
But some of it may be a mirage. Don Scholl, a veteran practice management consultant based in West Chester, Pa., suspects "many more firms are lookers than real buyers." And yet, for the sellers, it can give them context and insight into larger opportunities.
So buyers should be wary, as well. Gary Shamis of Columbus, Ohio, is a buyer, but a selective one. He's looking for solid practices. "We don't want to be someone else's succession plan."
by Rick Telberg
At Large for the AICPA
For many observers, the demand for solid practices is a good sign.
By some of my own off-the-cuff estimates, buyers outnumber sellers by at least three to one these days. As we discussed in last week's issue, there are three times as many firms looking to buy a practice as looking to sell.
"Many of our firms are having the best years ever," said Roman H. Kepczyk, CPA, CITP, and head of InfoTech Partners North America. "This success leads to expansion dreams kicking in for firms."
"The state of the profession is healthy," said Art Bowman, the Atlanta-based industry analyst and advisor. "But I'm not surprised that buyers might outnumber sellers. Buyers are in it for the long run and that means increasing the depth of resources they can deliver to
clients. It's a healthy profession but only the strong prosper."
On the other hand, a new wave of mergers and acquisitions among CPA firms could be a part of a larger trend already reshaping the competitive landscape.
"Well, this is a polarized profession, with the top 100 to 500 firms operating in a different world than the other 49,500 firms that are either sole proprietors or less than 10 people in total," said Ron Baker, a vocal advocate for value billing. "Since we are a mature profession, mergers and acquisitions will probably be on the rise over time, as a way to reduce redundancies, much like in banking or retail. I suppose in that sense, at the high end, it's more of a seller's market."
Still, it's easier than ever to launch your own practice, which complicates the picture.
"Certainly more firms are easier to start by a solo person with a laptop, Internet connection and FedEx account," Baker continued. "I meet all sorts of solos going out on their own, either from industry, coming from larger firms, or the government or education sectors. The barriers to entry are quite low, while the exit costs are quite large for established partners. It's really hard to make blanket statements about this profession because of the massive polarization. The Big Four operate in a different world than even the next 96 firms down, and the smaller firms are in another galaxy from them."
For the firm with growth on its mind, it's often cheaper and easier to buy rather than build, according to Allan Koltin, the Chicago consultant who engineered the recent merger of KGN into Virchow Krause. "It's the fastest way to grow the practice."
"For the acquiree," Koltin added, "it also represents a form of 'finality' and this step, along with a perceived 'giving up' of some level of autonomy causes a lot of acquirees to back away from upstream mergers or acquisitions unless it is crystal clear as to the benefits or the situation is desperate."
But some of it may be a mirage. Don Scholl, a veteran practice management consultant based in West Chester, Pa., suspects "many more firms are lookers than real buyers." And yet, for the sellers, it can give them context and insight into larger opportunities.
So buyers should be wary, as well. Gary Shamis of Columbus, Ohio, is a buyer, but a selective one. He's looking for solid practices. "We don't want to be someone else's succession plan."
Wednesday, July 07, 2004
Two Firms Launch New Ethics Programs
BKD, Moss Adams aim to ensure high ethical tone throughout firms.
By Rick Telberg
for the Journal of Accountancy
Moss Adams LLP in Seattle and BKD LLP in Springfield, Missouri, are striking out for a new frontier in CPA firm management—formal ethics oversight. Their approaches differ—Moss Adams hired a single individual to act as an independent ethics officer, and BKD formed an advisory council of independent experts. But the aim is the same: to ensure the high ethical tone at the top of the firms is filtering through the organizations to clients and the public.
Robert L. Bunting, Moss Adams chairman and incoming AICPA chairman of the board, and William E. Fingland Jr., BKD managing partner, were at the AICPA’s New York offices for an Institute strategic planning committee meeting. The two firms, which are among the ten largest in the United States, had just issued a press release on their newly instituted oversight programs, and the Journal of Accountancy wanted to learn more about what prompted them to take this step and how they envisioned the process working.
Rick Telberg, editor at large, led the discussion with Bunting and Fingland.
Here are the questions:
-- Why introduce a formal ethics oversight function just now?
-- Are CPAs uniquely positioned at this point in history to be the ethical guides to corporate America?
-- You’ve each chosen different routes on how to approach this within your firms. Let’s compare and contrast.
-- How do your partners like it?
-- Both firms already had internal quality control functions set up. Does this take the place of that?
-- How has the community of clients, prospects and the public reacted to what you’re doing?
-- So what exactly will this public interest council at BKD and this independent observer at Moss Adams be doing with their time?
-- What resources and recourses do these entities have?
-- Are the council members independent in the way a CPA would understand independence?
-- Does the council have the power to go public—to resign, for example, with a press release?
-- How do you deal with the issue of liability? Do they have something similar to directors and officers (D&O) insurance?
-- Do the council members and the observer meet the clients?
-- Are you setting, in effect, a new standard for other CPA firms?
-- What kind of questions should CPA firms ask when they hear about this initiative?
-- What would you like to see come out of these initiatives for your firms, your clients, the public and the profession? How will the world be a different or a better place because of this effort?
For the answers and the full article, click here.
By Rick Telberg
for the Journal of Accountancy
Moss Adams LLP in Seattle and BKD LLP in Springfield, Missouri, are striking out for a new frontier in CPA firm management—formal ethics oversight. Their approaches differ—Moss Adams hired a single individual to act as an independent ethics officer, and BKD formed an advisory council of independent experts. But the aim is the same: to ensure the high ethical tone at the top of the firms is filtering through the organizations to clients and the public.
Robert L. Bunting, Moss Adams chairman and incoming AICPA chairman of the board, and William E. Fingland Jr., BKD managing partner, were at the AICPA’s New York offices for an Institute strategic planning committee meeting. The two firms, which are among the ten largest in the United States, had just issued a press release on their newly instituted oversight programs, and the Journal of Accountancy wanted to learn more about what prompted them to take this step and how they envisioned the process working.
Rick Telberg, editor at large, led the discussion with Bunting and Fingland.
Here are the questions:
-- Why introduce a formal ethics oversight function just now?
-- Are CPAs uniquely positioned at this point in history to be the ethical guides to corporate America?
-- You’ve each chosen different routes on how to approach this within your firms. Let’s compare and contrast.
-- How do your partners like it?
-- Both firms already had internal quality control functions set up. Does this take the place of that?
-- How has the community of clients, prospects and the public reacted to what you’re doing?
-- So what exactly will this public interest council at BKD and this independent observer at Moss Adams be doing with their time?
-- What resources and recourses do these entities have?
-- Are the council members independent in the way a CPA would understand independence?
-- Does the council have the power to go public—to resign, for example, with a press release?
-- How do you deal with the issue of liability? Do they have something similar to directors and officers (D&O) insurance?
-- Do the council members and the observer meet the clients?
-- Are you setting, in effect, a new standard for other CPA firms?
-- What kind of questions should CPA firms ask when they hear about this initiative?
-- What would you like to see come out of these initiatives for your firms, your clients, the public and the profession? How will the world be a different or a better place because of this effort?
For the answers and the full article, click here.
Friday, July 02, 2004
It's a Great Time to Sell
Or is it? Growing firms are scouring the terrain for acquisition candidates. Is your firm going to be ready when opportunity knocks?
by Rick Telberg
At Large
With an economic recovery underway and the prospects for an expensive new cycle of technological and regulatory retooling for the profession, many CPA firm-owners should be thinking about cashing out.
So why aren't more CPAs in the market to sell?
The reasons are varied and complex. But most experts seem to agree that firm owners are facing a three-to-seven window beginning right now to plan for an orderly exit and successful retirement. If you're planning a move, now's the time.
By some of my own off-the-cuff estimates, buyers outnumber sellers by at least three to one these days. That is, there are three firms looking to buy a practice for every firm that's in the market to sell.
By that economic reasoning, it should be a seller's market. But that's not necessarily so. Too many small or solo practices are not ripe for sale. In real estate parlance, they lack "curb appeal."
Preparing a firm for sale is worthy of a book, and there are many of them, so we won't go into all the aspects here. But, essentially, too many CPAs have fallen prey to the classic "e-myth." In other words they've spent too much time, effort and money working "in" the business instead of "on" the business -- working hard, but hardly building transferable asset value. For these people, and there are many, considering that perhaps half all firm owners are now in their 50's, time is running short to get their practices in shape to maximize the return on their life's work.
"The accounting profession is changing with more medium-sized firms trying to grow and some want to do it with mergers or acquisitions," agrees Mark Lilling, a Great Neck, N.Y. CPA , who peer-reviews about 1,000 firms regularly, maybe more than any other firm in the state. "The older professionals are not planning for the future and just keep working and aging. The buyers are looking at accounting like a business and want to grow, but the older CPA's are not reacting.
"Many CPAs are completely willing to work past retirement age," according to Max Krotman, general counsel of GlobalForce, perhaps the nation's largest brokerage for CPA firms mergers and acquisitions. "They just don't know when to quit."
But done properly, with intelligent transition strategies and sensible financial arrangements, Krotman and GlobalForce are making good deals all the time. "The problem is that too many prospective sellers just don't know where to start." Well, one answer is to call someone like Krotman before it's too late.
"The new regulatory environment has been a boon to larger firms, including those whose practice doesn't include SEC work," said Bruce Marcus, co-author with August Aquila of the new must-read book, "Clients at the Core: Marketing and Managing Today's Professional Services Firm."
"For the smaller firms, it means greater competition, and a need to learn new ways to do old things." Marcus said. "At the same time, increased sophistication in marketing has given the edge to larger firms, particularly those who understand that marketing is now an integral part of a firm's practice."
It's a wonder, then, that many firms don't feel it's more profitable to sell than to retool to compete and to function under new regulations.
by Rick Telberg
At Large
With an economic recovery underway and the prospects for an expensive new cycle of technological and regulatory retooling for the profession, many CPA firm-owners should be thinking about cashing out.
So why aren't more CPAs in the market to sell?
The reasons are varied and complex. But most experts seem to agree that firm owners are facing a three-to-seven window beginning right now to plan for an orderly exit and successful retirement. If you're planning a move, now's the time.
By some of my own off-the-cuff estimates, buyers outnumber sellers by at least three to one these days. That is, there are three firms looking to buy a practice for every firm that's in the market to sell.
By that economic reasoning, it should be a seller's market. But that's not necessarily so. Too many small or solo practices are not ripe for sale. In real estate parlance, they lack "curb appeal."
Preparing a firm for sale is worthy of a book, and there are many of them, so we won't go into all the aspects here. But, essentially, too many CPAs have fallen prey to the classic "e-myth." In other words they've spent too much time, effort and money working "in" the business instead of "on" the business -- working hard, but hardly building transferable asset value. For these people, and there are many, considering that perhaps half all firm owners are now in their 50's, time is running short to get their practices in shape to maximize the return on their life's work.
"The accounting profession is changing with more medium-sized firms trying to grow and some want to do it with mergers or acquisitions," agrees Mark Lilling, a Great Neck, N.Y. CPA , who peer-reviews about 1,000 firms regularly, maybe more than any other firm in the state. "The older professionals are not planning for the future and just keep working and aging. The buyers are looking at accounting like a business and want to grow, but the older CPA's are not reacting.
"Many CPAs are completely willing to work past retirement age," according to Max Krotman, general counsel of GlobalForce, perhaps the nation's largest brokerage for CPA firms mergers and acquisitions. "They just don't know when to quit."
But done properly, with intelligent transition strategies and sensible financial arrangements, Krotman and GlobalForce are making good deals all the time. "The problem is that too many prospective sellers just don't know where to start." Well, one answer is to call someone like Krotman before it's too late.
"The new regulatory environment has been a boon to larger firms, including those whose practice doesn't include SEC work," said Bruce Marcus, co-author with August Aquila of the new must-read book, "Clients at the Core: Marketing and Managing Today's Professional Services Firm."
"For the smaller firms, it means greater competition, and a need to learn new ways to do old things." Marcus said. "At the same time, increased sophistication in marketing has given the edge to larger firms, particularly those who understand that marketing is now an integral part of a firm's practice."
It's a wonder, then, that many firms don't feel it's more profitable to sell than to retool to compete and to function under new regulations.
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