Representatives of the state’s leading CPA firms gathered at the Four Seasons Hotel on November 14 to discuss issues affecting their profession. The gathering was part of Nevada Business Journal’s monthly Industry Outlook series. Kathleen Foley, editor of Nevada Business Journal, served as moderator for the roundtable, which included discussion of the Sarbanes-Oxley Act of 2002, which was passed in the wake of the scandals involving Enron and the national CPA firm Arthur Andersen. Other issues highlighted were recruitment and retention of professional staff, changes in Nevada’s tax structure and potential changes to regulations for private companies. Following is a condensed version of the discussion. Attendees were asked to introduce themselves and briefly describe what changes (if any) their firms have made in the wake of Sarbanes-Oxley.
David Hall: L.L. Bradford & Company is a very unique company in that we are large enough to do the same work as the large national firms, such as public company audits, but we are small enough to remember the importance of customer service. Sarbanes-Oxley has created some interesting opportunities as well as challenges for us. It is providing us with additional work, but it has also increased overhead costs. We believe we will be able to recoup these costs, but if not, it will definitely affect our firm and the type of clients we perform work for in the future.
Bruce Patton: Patton & Petersen is a small local firm. We specialize primarily in small and medium-size businesses, , profit-building enhancements. We do some expansions kind of to help smaller people get a little bit of enjoyment out of what we do, starting technically with what is having a major impact on us at this point. We are kind of concerned about what it might be doing, and it trickling down. We do a lot of technology consulting as well.
Howard Levy: Piercy, Bowler, Taylor & Kern is among the largest local firms, and we do work in almost every industry. We have a substantial audit and SEC practice, and, consequently, Sarbanes-Oxley is very important to us. We specialize primarily in gaming, government, not-for-profit, real estate and construction, but we handle just about everything that comes along. We also offer tax, litigation support and real estate valuation services.
Bill Wells: RSM McGladrey has over 100 offices nationwide and over 5,000 employees. Our office here has about 100 people, and it’s a well-diversified practice. We’re a CPA firm and also a business services firm, and I have served clients in a wide variety of industries.
Katina Peters: Tompkins & Peters CPAs has two offices, one here and one in Hamilton, Montana. We are a full-service firm specializing mostly in construction and non-profits. We also do litigation support and business evaluations, which is kind of a specialty.
David Chavez: Chavez & Koch does public audits also, so Sarbanes-Oxley has been great for us. We opened an office in San Diego last year, but we really hadn’t started working it until May this year, so we’re getting it off the ground now. We do a lot of retail, construction and gaming.
Curt Anderson: Fair, Anderson & Langerman is a mid-size local firm with about 30 people. We handle most industries, a lot of construction and real estate development and retail. We also offer management consulting and have a computer technology group. Sarbanes-Oxley hasn’t really affected us yet.
Gary Johnson: Johnson Jacobson & Wilcox employs about 23 people. We serve closely-held businesses – no public work at all. Some of our clients are in real estate, development, construction, auto dealers. We do succession planning for closely-held businesses.
Foley: The first topic on the agenda is the Sarbanes-Oxley Act. It’s going to affect some of you more than others, depending on which firms serve more publicly-owned companies. Mr. Levy, you had said your firm performs audits for publicly-owned companies. What changes have you had to make in your firm?
Levy: We haven’t had to make too many changes yet, but there’s a lot still on the horizon. We’ve also had a couple of changes in auditing standards that were not driven by Sarbanes-Oxley, such as a new fraud standard. This involved very few changes for us, because we were already doing what the standard required. Basically, it requires us to really stay tuned to the very rapidly developing changes in regulations coming down from a variety of sources, including the Public Companies Accounting Oversight Board, PCAOB – which was created by Sarbanes-Oxley – and the SEC. So it’s a matter of keeping your eye out for those new requirements and making sure you’re ready to comply by their effective dates, which are all different.
Foley: There has been some talk about Sarbanes-Oxley having trickle-down effects on private companies.
Johnson: I think what people are alluding to is the concern that we might have two different sets of standards. Are our state boards or state governments going to start adopting laws and regulations so we don’t have two different standards? If so, it will cascade down to private companies, and that will affect us significantly. Typically, when we deal with a closely-held business or a family-owned business, we’re helping them with a lot of consulting issues other than just an audit or some other type of test service. Under Sarbanes-Oxley, we might be prohibited from doing a lot of that. It will increase the cost to clients if they have to hire several service providers – one doing compliance work or audit work, and the others consulting with them on tax planning or information technology systems or accounting systems.
Patton: With small businesses, you don’t get the same economies of scale. Large businesses may be able to bring in two separate firms – one to do the audit and one to do the other services – but small businesses don’t have that same flexibility.
Johnson: Has Nevada tried to adopt laws and regulations similar to Sarbanes-Oxley?
Levy: Nevada tried to adopt one change in the requirements involving gaming licensees, but it ended up being applicable only to public companies, resulting in no impact beyond that of Sarbanes-Oxley. However, Nevada has a very long history of copying what California does. And in California, there have been a lot of bills proposed that would restrict the activities of independent auditors for private companies. They might also change the Board of Accountancy in order to get more public representation and not have it controlled by CPAs, which is part of the whole spirit of Sarbanes-Oxley – to take away some of the self-regulatory power CPAs have had for years. Many states have proposed changes similar to what is required by Sarbanes-Oxley, but I haven’t seen any state going the full route and trying to adopt everything. It seems very likely the Auditing Standards Board will go out of business, and the standards intended to apply only to public companies will then be applied to everybody. That will cause auditors to do more work and spend more time, and audits will cost more money.
Chavez: The reason some of that’s going to come into play is because public companies are going to have accounting issues when they try to merge with private companies. I have read that a merger that would ordinarily take a week is now taking up to two or three months for the due-diligence stage. They have to really check the accounting, because when they’re merging those numbers into their financial statements, they have to make sure they’re correct.
Levy: They have to upgrade the auditing too, because if the auditing doesn’t comply with the standards that apply to public companies, auditors may have to supplement an old audit with new procedures. If the standards for private company audits are not elevated to the new level of public company audits, there will be a substantial litigation risk in defending a private company audit. A plaintiff’s attorney will look at the two sets of standards and say, “This standard is out here – why didn’t you do this procedure?” You could have a very difficult time defending your choice to ignore a standard merely because, technically, it doesn’t apply to private companies. So it might be wise for auditors, particularly in high-risk situations, to apply the standards anyway.
Patton: Boards of directors with private companies may look at what boards for public companies are required to do and adopt some of the policies, simply to eliminate the potential for some kind of accusation of misdoing or negligence. It could also act as a protective measure in case of lawsuits, along the same lines you’re talking about.
Hall: A big part of Sarbanes-Oxley is internal control. Many privately-owned companies have only one or two people running them. How can they create the controls big companies can?
Chavez: Cost/benefit could be out. Anytime you implement a control, you weigh the cost versus the benefit it’s going to provide. That may just be out now – you’ll need to do it because it’s the law.
Levy: In everything that comes out about internal controls and separation of duties, they talk about being practical and tailoring your system to the circumstances. They imply a small company doesn’t have to have the same controls as a big company, but when you get past that self-serving language designed to protect the standard-setter, you find it very difficult to find anything to enable you to escape any of the specific requirements.
Foley: Do you think these new rules and regulations will change the relationship you have with your clients? It seems like you might have to be a little more suspicious of their motives, or need to dig a little deeper to see if they are attempting some kind of fraud.
Wells: If we go through the process of adequately explaining to our clients, we don’t think it’s going to hurt a good relationship just because of something we’ve been asked to do by the profession.
Peters: I would think it probably could help strengthen the relationship you have with your client. Clients are going to turn to their CPAs with these new rules and say, “How does this affect me? How do we make sure we’re in compliance?”
Patton: Most businesses people, if they’ve been around any length of time, have a reasonably decent degree of integrity, so it’s really a communication issue. Good businessmen don’t have a major problem with you looking into their business, and if you find some kind of a challenge, they don’t have a problem correcting it. In fact, if you do find the challenge, that’s part of the reason you’re there – you can strengthen that business and strengthen those controls and provide some benefit.
Chavez: But then you have the entrepreneur who doesn’t want any control. Once management is established and the business is going under a management form instead of an entrepreneurial form, it’s easier, but in the entrepreneurial stage, it’s challenging sometimes getting them to follow any type of control.
Levy: The notion that you referred to, Kathleen, of doubting or challenging what your client tells you is called professional skepticism. It has always been a benchmark of the auditing profession from its very beginning. But we have had a trend in the past 20 or 30 years of auditors providing more and more services to their clients that they can bill for, and it’s now gotten to a point where somebody’s saying, “Halt. It’s too much. You’re in bed with your clients too much, you’re auditing your own work, and it has to stop.” And so now the gap between providing independent audit services and providing all these other business advisory services is widening, and it is now very wide in the public environment. It is not so wide in the non-public environment except for government, but it is likely to get narrower, and that is a fact of life that is necessary to protect the value of the attest function.
Foley: The next thing on the agenda is changes to the state tax system. What about the new payroll tax?
Chavez: What a mess. I tried to read that bill, and I couldn’t get through the first five pages of it without saying, “What?” I had it spread out all over a table, and it was a challenge. I’ve heard the Legislature may get back together next month, so that may clarify some things. I don’t think we’ve seen the full effect yet, because we haven’t done the returns.
Patton: The public hasn’t recognized the impact of some it, like the real estate tax. The impact of some of those taxes are still pending.
Anderson: You get an organization that is arguably a lending institution subject to the tax of 2 percent, but they use an employee leasing company that pays all their employees. So are they taxed at 0.7 percent or at 2 percent? Unfortunately, when these guys were putting this together at 4:00 in the morning, they weren’t thinking of all these various real-world elements, and so it creates a lot of uncertainty.
Wells: It’s going to take a while to sort this out, but it’s obvious it’s going to cost businesses more money.
Foley: What about staffing and recruitment challenges? How do you make your profession attractive to people who are choosing a major in college, and how do you keep the employees you already have?
Chavez: We are recruiting people into our profession a little bit faster than we were a couple years ago. I sit on the Accounting Alumni Board for UNLV, and the dean recently told me the enrollment is up significantly, and it’s continuing to go up. They are actually short of professors now.
Levy: Every time we see a headline about an accounting firm getting in trouble for failing to do what it was supposed to do, we lose potential people. [The American Institute of CPAs] is saying, “Look what we did for the profession since we bottomed out after Enron and the Arthur Anderson thing – rah, rah,” and then the next day there’s a big article in the Wall Street Journal about how three of the Big Four firms have been accused of over-billing their clients. With all that’s been said about recruiting, I don’t know anybody in auditing who would encourage his kid to join this profession, and that’s a sad statement.
Wells: People considering going into the field have to consider some new things. Yes, there’s clearly more risk in being a CPA than there used to be. Look what happened to the individual partners in Arthur Andersen. Additionally, more stringent requirements and more hours are needed to become a Certified Public Accountant than there used to be. Then there’s the image issue, which may or may not remain. In the future, there will be fewer people of top-notch quality going into accounting. Recruiting will be much more of a challenge, and it will drive salaries up. Our firm is starting to do a lot more regional recruiting at the top schools so we can continue to maintain the quality of the individuals we hire.
Peters: In Las Vegas, we have a lot of competition with the gaming world. It’s hard to keep CPAs in public industry when they could earn so much being controllers of larger gaming companies.
Johnson: We used to tell people, “When you come to work for a CPA firm, you’re going to work, work, work, and then you’re going to work some more.” We can’t do that anymore. Now we have to say, “We’re going to let you have more of a balance and a quality of life. We’re going to pay you more and share more of the pie with you.” We have to do that to keep people in.
Anderson: All of us baby boomers to some degree have the same issues our new hires do. We’re trying to get this quality of life thing figured out – the balance of time for family and other pursuits versus just working to the nth degree. We can tell our new people, “We’re 30 years older than you, and we’re trying to make up for past mistakes. We want you to have a balanced life, because that helps you empathize with clients and understand their concerns about running their businesses and raising their families.” A lot of our clients are family-held businesses with multiple generations, so you’re dealing with family issues as well as the business issues in succession. Our industry has a lot to offer people. They can get good grounding, and they can go in a lot of different directions once they get through this process with us. So I’m still optimistic.
Levy: A big part of the problem in the auditing area is that we have tended over the last 40 or 50 years to attract the wrong kind of people, and they have a total misconception of what we do. They are what I call process-oriented people. They want to be given a checklist and check off boxes in order to accomplish an audit. But, your audit has to be a thinking process. We have to get more people in auditing who can think their way through an audit rather than a checklist. That’s something that has to be addressed at the college level before people decide on a profession.
Patton: It’s not unusual to hear, “My son is really great with numbers, so I’m steering him into accounting.” Nothing could be further from what we do. Yes, we deal with numbers, but it’s really a people business, whether it’s assessing risks or determining what a person is trying to accomplish or visualizing what’s going on in their business. You need to communicate very intangible and complicated ideas to your clients. People skills are critical to being a good auditor, being a good business consultant or being a good tax person. We need to look for people who can deal with other people and communicate, as well as being critical and creative thinkers.
Chavez: Just like any service business, our business centers around communication. If we go back and look at problems and issues we have within our own firm, probably 90 percent of them center around communication.
Johnson: In our firm, we set up a committee of staff people and asked them, “What are your needs?” And we’re trying to answer those. We have a training curriculum for the first five years – over 100 hours a year – because that’s what they want. They want to be constantly learning. They want to feel like they own a piece of the firm, so we share financial information, and they get a percentage of the bottom-line profits. I’m not saying it’s the right thing for everybody, but we’ve seen some good results from that. It’s generating some excitement in the staff we recruit.
Foley: Is that your professional staff or your office staff?
Johnson: Everybody. From our receptionist up through partners, everybody gets the same information.
Chavez: We’ve started sharing revenue, and it’s helped significantly. I think I got the idea from something that was said at last year’s NBJ roundtable. It’s improved our retention significantly. We base bonus structures on that too.
Anderson: I think we’re all struggling with trying to run our practices as businesses, rather than professions in the classic sense. It’s hard to go to your staff people and say, “You need to help our clients run their businesses” if they don’t understand ours. They also need to understand how people in business are motivated, and how employees in our client organizations determine whether they are being properly compensated. That is difficult if we don’t have some method of acquainting them with that same concept in our firms. We’re pretty frank with our staff about what does and doesn’t work, what revenues and profitability are.
Foley: Have you found that the people working for you want to be a little more entrepreneurial than they were in the past?
Anderson: Absolutely. I’m hoping every single person I hire has a little entrepreneurial spirit.
Hall: It goes back to what Howard said about needing thinkers. You have to have someone who can go out, think through the process, and be motivated to get the job done.
Levy: A lot of young people may choose smaller rather than larger firms because they perceive that opportunity to be part of the entrepreneurial team early in their career.
Hall: Our whole philosophy is to build from within. One of our big recruiting tools has been the ability to tell people, “If you want to become a partner, you have that opportunity here, and we’ll help you do that.”
Foley: When you’re dealing with clients who have succession issues, you can give them advice. But, what kind of succession issues do CPA firms have?
Levy: You have to train younger people to be leaders of your professional firm in order to have an orderly succession without losing a lot of clients, which can frequently happen after a sale of a practice.
Johnson: You make them feel they are a part of it, all the way along in their careers. And then don’t create a disincentive for them when they become partners by making them face a huge buyout with the senior partner. That’s one way we can really kid ourselves. We expect to get these huge buyouts from the value of our firms when we leave, but a young partner with half a brain is going to say, “Wait a minute – why should I buy into that? I’m not going to take on that kind of liability.”
Peters: In small or mid-sized firms, your clients are also interested in what your succession plans are, because they want to know that, when you hit retirement age, there will still be someone there they know and trust. They are looking to your successors to work with their successors, who may be their children, and just continue on.
