Midsize firms get new Sarbanes-Oxley surge

Accounting firms of all sizes have benefited from legislative changes brought on by high-profile corporate scandals, but midsize regional firms are reaping the biggest rewards.

They are landing the big-name clients let go by the Big-Four accounting firms, adding lines of business and treading into niches once reserved for brand name firms.

Consider Greenstein Rogoff Olsen & Co. LLP in Fremont. The 21-accountant firm has seen incredible growth in its tax consulting business in recent months. According to partner Alan Olsen, the firm has won tax consulting business from public and private companies and their top executives.

"Public companies are prohibited from using the same accounting firms auditing their books for consulting work," he said. "Individual corporate officers and companies now have to turn to independent accounting firms for their tax needs."

Consulting is the lucrative side of accounting, Olsen said. Before Enron's collapse was made public in 2002, he noted, the defunct energy trader paid its accounting firm Arthur Anderson about $12 million in auditing fees and $60 million in consulting fees.

"Consulting is the area that many midsize firms are now focusing on, and like us they are thriving," he added.

The Sarbanes-Oxley Act of 2002 limits the non-audit client services that auditors may provide public companies.

Consulting varies from firm to firm. Many midsize firms that abandoned auditing work for public companies because of its labor intensive nature offer Sarbanes-Oxley compliance audits. Public companies are required to hire independent firms to review their annual audits of internal controls.

Others focus on an even narrower area of the Sarbanes-Oxley compliance requirement. San Ramon's Armanino McKenna LLP, for instance, has entered the IT consulting business by providing Sarbanes-Oxley IT controls assessment.

The firm's 25-person group also offers services such as IT risk management, systems security, network maintenance and help desk tech support. Since the firm started marketing the service last year, it has signed big-name clients such as Pacer International Inc., Robert Mondavi Winery and Brocade Communications Systems Inc.

"We have only started focusing in this area and already it has grown a lot," said Managing Partner Andy Armanino.

The firm, which employs 150 people, grew 30 percent last year, he said.

"Normally we grow 15 percent a year, but the opportunities that we have right now are just tremendous," he said. "We are getting our foot in the door in areas that were previously closed to us."

Oakland's RINA Accountancy Corp., a 65-employee firm that focuses on private and family-owned businesses, has also benefited from the trend. Managing partner Jim Kohles said his firm now serves several private companies that used to be big-firm clients.

"Big accounting firms have decided to focus mainly on Sarbanes-Oxley compliance work and they have raised their prices 140 percent," Kohles said. "They are literally telling long-term clients that they would rather do compliance work for big public companies than auditing private businesses."

A survey conducted by consulting firm Corporate Executive Board found the average increase in audit fees among the big four accounting firms was 100 percent. A Massachusetts firm that tracks auditor changes, AuditAnalytics, reported in November that the nation's seven largest accounting firms either resigned or were dismissed by 526 clients in the first nine months of 2004.

Kohles said his firm has won virtually all of the beauty contests it has entered in recent months. If the market continues, Kohles said, his firm will probably not be able to handle all the work.

In the long term, the accounting market likely will be transformed by the changes in the law, Kohles said.

"Our hope is that privately held business will see the benefit of being with a firm of our size and stay with us," Kohles said. "I think Sarbanes-Oxley work is going to peak and start to decrease in the next 18 months and I am not sure firing your long-term clients is a good strategy at all but that is essentially what the big accounting firms are doing."