Executives from several of Nevada’s leading CPA firms gathered at the Four Seasons Hotel in Las Vegas on November 7 for a roundtable discussion of issues affecting their profession. The roundtable was a part of Nevada Business Journal’s monthly Industry Outlook series. Those in attendance represent both public and private accounting firms in both ends of the state. The group discussed topics ranging from the Arthur Andersen/Enron affair and its fallout, to the role of accountants as financial advisors, changing governmental regulations and the future of their profession.
Arthur Andersen Fallout
Connie Brennan (Nevada Business Journal): There seems to be a lot of confusion in the marketplace after what happened with Arthur Andersen, and we’d like to get your perspective on how that’s affected your industry.
Gary Johnson: Most of us here today deal with closely-held companies, and my experience has been that it hasn’t affected our relationship at all with our clients. The relationships we typically develop with the owners of businesses tend to be fairly intimate and close. They recognize the Arthur Andersen thing was a big firm with a public company and a lot of issues that we don’t typically deal with. Accounting Today did a poll last summer of closely-held companies, and 88 percent of the owners said their most trusted advisor is still their CPA.
Rachel Fletcher: I’d have to agree with that. We’ve not had any issues at all with our clients. The one place we did run into it was when my partner was doing a rate negotiation in front of one of the cities or counties that had a waste management district within it. The board asked him, “Are you the auditor or the consultant?” and he said, “Well, we’re both.” And they looked a little askance at him, because they felt one should be a little more independent. But they didn’t kick him out of the meeting. (Laughter)
Lance Bradford: I would agree. I think a lot of trust in the larger corporate America has to be won back over the course of time. But with the smaller to medium-sized businesses, I would agree with you, the relationships are about the same. On the bright side, it has brought auditors back on the map. People are finally realizing that they do have a purpose and some responsibility. For a long time, nobody was really interested in what auditors did in these public companies.
John Amundson: I do find myself a little more careful about making comments that someone might take out of context, in light of what has happened in the industry. I’m a little more careful about making a joke about how things are operating.
Brennan: Do you think consumers are going to more careful about shopping for a CPA now?
Dana Tompkins: I’ve noticed that in some of our new clients, the bar to gaining their trust has been raised, and it takes a little bit of extra effort and time to accomplish the trust component. They’re a little nervous of just going right in and trusting a CPA.
David Chavez: A lot of it is that business owners really understand what happened to Arthur Andersen, but the lay people have a bit more distrust now – they don’t really understand what our role is in the business environment and how audits actually work. People who understand how they work have the same level of respect they had for us before.
Bill Wells: I agree with everything that’s been said. Although we serve some public companies, the majority of our clients are closely-held businesses as well. But we are getting questions from some of our more sophisticated clients about our processes, about our quality control. But also, when we recruit on campus, we’re getting some of the students asking us a little bit more about what our standards are, our quality control and our review process. The industry is under scrutiny and we have to regain public confidence. It’s unfair that the focus was put on Arthur Andersen – they weren’t the only group that had a problem in the Enron deal. The board of directors was at fault, the audit committee was at fault, management clearly made terrible decisions, and poor strategy was applied, so even though Andersen is taking the brunt of this, they clearly did not take Enron down. Management did.
Brennan: I understand that there’s an Act – the Sarbanes-Oxley Act – that places new regulations on the accounting profession in the ways it deals with public companies. Are you concerned at all about how it will affect your business?
Bradford: The government is increasing the regulations now to try to take care of what it feels are some of the problems that took place with Enron and some of the other issues, and they don’t relate only to auditors. They also relate to audit committees, to corporate officers and to boards of directors. One thing that might come out of that is, with the increased regulations, over the course of 10 years [accountants will] probably see an increase in malpractice insurance. This means there will probably be an increase in fees for our clients, and accounting firms will become even more selective. We may even spend a little more time screening our clients.
Curt Anderson: What I am concerned about with this trickle-down effect is the legislative reaction, because these people (legislators) have no idea what it’s like to make business decisions. I would hate to see that come about in our profession – that suddenly the regulators think they know more about how to carry on business and do audits and other consulting-type practices than we do.
Chavez: I don’t think legislators understand the cost factor that goes along with some of these changes, and what they’re going to do to some of the small businesses. They will need outside help besides an audit. They’re going to have to get another firm and train that firm on their business so they can actually help them, and it’s going to cost them a lot more money.
Anderson: They’re misunderstanding completely the basic mainstay of our relationship with our clients, which is that consistency and history are what make us the most valuable. Changing audit partners every five years and doing this required change-out of personnel is totally inconsistent with good business practices – on our part and our clients’ part. The best thing our clients can do is find people like us who really care about them and their businesses and stay with us as long as possible. To break that relationship artificially into segments is ridiculous.
Brennan: Is the Nevada Society of CPAs doing anything to educate legislators on the state level?
Bill Luthy: At this point in time, we’re monitoring what’s going on. We have not heard that the state is going to do anything similar to what went on in California, so it’s just “wait and see”.
Wells: The attitude is that [legislators] think it’s easier to regulate the accounting industry than it is to regulate management. We are concerned about the cascade effect the Sarbanes-Oxley Act will have if they take that template and run it parallel on federal and state regulations. California and several states have already started implementing some of the provisions of the act. We’re concerned as to what impact it will have, because it’s a bit of a runaway train.
Diversifying Services
Brennan: CPAs are not what they used to be – we all know that. Everyone is expanding into different markets. How many different products are you offering now?
Bradford: We like the approach of the one-stop shop – to use that simple term – with everything that relates to the financial planning. A lot of our clients are high-net-worth individuals and business owners, so they’re pretty well integrated with their company. Over time, we have become very heavily involved with their insurance planning, investment planning, estate planning and these types of things. Although we have become more involved in doing that type of service for our clients, we really don’t market it. We just try to do as many of the services the client needs that we have the expertise to do. Since we’re able to see the whole picture, we think it’s a great thing. I think the trend will continue for more and more firms to expand and take advantage of all their expertise and their relationships with their clients. As you learn more about them and how they think and what they want, you can help them get what they need in investment advice, insurance advice and that type of thing.
Marianne Reeves: Things are kind of born out of necessity – the client comes to you and says, “This is my problem – how do I fix it?” Whether it has to do with investment or insurance or office management, you have a trusted relationship built over time, so you try to fill in with whatever they need to help them succeed in business. So, in essence, a CPA firm is now more of a business advisor.
Tompkins: We view ourselves more as a business consultant, and when the client – because of the close relationship – asks for advice, we may refer out for investment advice in our firm. But, we’ve also moved our firm in the direction of litigation support, business valuation and more performance measures. We also can bring in an outside consultant to meet with the client.
Johnson: We have concentrations in construction, real estate development and automobile dealers. We don’t do any financial services and don’t plan to. Yes, we’re providing other services as they may relate to our basic core services of auditing, accounting, tax planning, succession planning and estate planning. We’re doing that kind of service. But when it gets to products like life insurance policies or investment management, we’re not going to be doing that – because our feeling is that there are experts out there in this community who are much better than we could ever be, because that’s all they do. If we can’t do it better than the guy down the street, we’re just not going to do it. We’ll set up a strategic alliance instead, because we think that’s the best thing for our client.
Fletcher: We actually brought in a financial advisor from Dean Witter, and he has a separate firm – it’s Park Freeman & Williams, and all the Freeman & Williams partners are also partners in Park Freeman and Williams. But, we don’t actually do the financial planning. He does all the financial planning for our clients.
Brennan: Is adding more services a trend you see continuing, considering the additional regulations that are going to be placed on the industry?
Chavez: I think we’re being forced into the financial planning market a little bit. Clients are asking for it, and we have to respond to that. We can’t just sit back and say we’re not going to do anything. We’ve just started something similar to what [Freeman & Williams] are doing – we’ve brought somebody in from the outside.
Amundson: It wasn’t that long ago that our industry wasn’t even allowed to advertise, but now they’ve loosened up on that and you see advertising all the time. I think it won’t be that long before firms do start venturing into it – if not providing services, then having alliances set up with various providers of these other outside services – insurance products, investment products, and the like, so they can keep up with the competition.
Anderson: We try to balance client service with what’s best for the client, because most of our clients have existing relationships for insurance, investments, and things of that sort. We don’t want to say, “Dump those relationships and come with us,” because it looks as though we’re trying to use our client base as a distribution system for some other type of product. Varying firms have gone into it in differing degrees, and I don’t think you can just do nothing – competitively, that’s dangerous – but I don’t think you can go out and become so caught up that you lose sight of being a professional and the sort of independent who looks at things and balances things out, because we lose our objectivity, which is what our clients value the most.
Chavez: I agree with that. I like what you just said.
Wells: We’ve adopted the philosophy of not taking a sales approach, but trying to fill a client need. If there’s a need that’s not being fulfilled by some other provider, then we’ll give some input on that, but we’re not out peddling and selling services.
Recruitment for the Future
Brennan: According to the Nevada Society of CPAs, there are not enough people coming up in the profession to fill the demands for the future. Are you concerned?
Tompkins: We are starting to see the effect of the new 150-hour requirement that came into effect a few years ago, and there is a real demand for accountants. Some of the accountants we have interviewed have no intention of pursuing the public accounting track. They are going back and switching their major. The concern, with the recent Enron and Arthur Andersen news, is that the pay scale in the accounting industry is just not worth the time commitment.
Chavez: The rule states you have to have 150 semester hours before you can get your CPA license, and 120 credit hours no longer suffices. In the early ’90s when this was first proposed, a record number of people was going into college and entering the accounting profession, but that has flipped around in the last 10 years. When I graduated from UNLV in 1992, there were 260 people who graduated [in accounting] and now they are down in the 100s. Things have changed, and now we are stuck with this law from what was happening in the market place 10 years ago as opposed to today.
Fletcher: At UNR, one of the folks in the accounting department told me the number of people declaring an accounting major was down 50 percent last year.
Luthy: One of the things that may be encouraging in Nevada accountancy is that the number of candidates sitting for the November exams is 50 percent more than for the May exams. The chair of the accounting dept at UNLV spoke at the State Board of Accountancy here and stated that they saw the same thing in Kansas when the bill first went in. Experienced practitioners came in there and wanted to grab the graduates because they needed them, but once they went through the transition, these same practitioners were encouraging them to get that extra education. .
Anderson: I also want to state that the 150-hour requirement is accenting something that is really not where the profession is going. It is accenting all these real technical things, but we’ve been talking today about the people aspect of our businesses – trying to handle the day-to-day problems our clients deal with, and also getting into marketing-related things. What we actually ought to be doing is having people take humanities, not technical subjects. Some of our current problems come down to basic moral and ethical issues we are not training people to consider. People say, “I’m going into public accounting because I like math.” But – you are dealing with people.
Chavez: What we should be teaching is more communications, learning how to ask questions properly and develop answers for them. In public accounting, we spend the majority of our time dealing with people.
Tompkins: In addition to that, once the 150-hour requirement is met, the individual has to work in public accounting for two years. The feedback we are getting is, that is a lot to go through to become a CPA, when the person could take another route and, for the same time commitment, become a doctor.
Luthy: California did not enact the law, but around 44 states have it.
Chavez: We are the strictest, along with Florida. Florida and Nevada are the two toughest states to get certified
Anderson: A lot of little things discourage people transferring into the industry.
Brennan: What would motivate them?
Anderson: We need to stress the idea that it is a profession, and you are not going into it to get rich.
Chavez: What interests people in this profession, is that we are in a special place. We get to learn everything about a business – we don’t just learn accounting aspects, we learn operational aspects, because we have to understand the operation to be able to get it into the financial recording of the company and we have to know how operations work. That is really where the value of this profession comes in. You can do anything in business after that.
Amundson: In spite of that, the perception is that we are sitting in a back room with our eyeshades on, crunching numbers. Our business is people. You are out and about, meeting with people and dealing with their personalities, their ups and downs.
Johnson: Our problem is after that two years [in public accounting], when they get that ticket, they go out into industry. We can’t find people with experience, and the only way we are finding them is if they move from out of state.
Taxation Issues
Brennan: Do you have any tax advice for our readers?
Amundson: The one thing that is constant, is that there will be change.
Chavez: I think you are asking about federal taxes, but what’s more interesting now is the state issues with taxation. That is more of a concern for us and our clients than anything else. Any type of tax enacted by the Legislature is going to impact business in a negative way. People come here to do business here because of our tax structure.
Reeves: We’ve done a great job of promoting the fact that we don’t have a state income tax. If we start taxing small businesses, I think we will see a huge exodus of small businesses leaving the state of Nevada, and that will be very bad for our economy.
Chavez: People don’t understand that the consumers are the ones who are going to pay for it.
Bradford: But something is going to have to happen. We have a budget deficit in this state and something has got to budge somewhere.
Chavez: There are other ways to get around it, and one of them is not a politically correct answer, and that is to embrace Yucca Mountain and get some money from the federal government to help us. I know that’s not a popular thing to say, but it is better than instituting taxes, in my view. The Yucca Mountain project is coming, whether we want it here or not – it is already being shoved down our throats. We have to live with that reality.
Wells: Unfortunately, the state has deferred these revenue problems for so many administrations, and what we really need to do is have some broad-based answer to the revenue shortfall.
Johnson: I’m scared of the gross receipts tax, because I don’t think it can be fairly implemented. If you go to a retailer whose margin is 1 percent or 3 percent before all those operating costs, the effect on him is significantly greater than it is for someone like us. They are trying to get around the word “income tax”, but to be honest, an income tax would be more fairly spread out than a gross receipts tax.
Chavez: The whole problem with the gross receipts tax is that we have to make exceptions for different groups of people who claim it would be unfair for them. We start this long complex thing, and it is going to end up so cumbersome and so complex. They are telling business owners they won’t have to hire an accountant to do this – it is going to be simple. Simple? They are going to have all these exemptions, and it is just going to get worse and worse, because that is the way the legislative process works. It becomes so hard for a small business owner to sit down and try and figure it out. He will have to go to his accountant. That is great for us in the accounting industry, but it is bad for business in the long run. I am more interested in the business end of it than generating a few dollars processing a silly form.
Fletcher: They should call it the “Accountants Full Employment Act”.
Wells: The gaming industry says they have carried the burden for so many years, but actually they are paying less than other jurisdictions.
Chavez: And what do they do with the money they are saving in Nevada? They open casinos in other places so they can pay higher taxes in those places. There is no easy solution – I just think that there is a lot of money wasted in our system.
