Feature Stories - January 2005

Industry Focus: Accountants

Calculating How to Succeed

by Kathleen Foley

Executives from several of Nevada’s leading accounting firms gathered at the Four Seasons Hotel in Las Vegas on November 8 for a roundtable discussion of issues affecting their profession. The roundtable was a part of Nevada Business Journal’s Industry Outlook series. Connie Brennan, publisher of Nevada Business Journal, acted as moderator. The agenda for this meeting included increased governmental regulation, challenges with recruiting and retaining accounting professionals, and the changing role of CPAs in the post-Enron era. Participants were first asked to introduce themselves and give an overview of some of the challenges they face. Following is a condensed version of the roundtable discussion.

Craig Mackey: Kafoury Armstrong & Company is a six-office firm in the state of Nevada. We’ve been around since 1941. Our main office is in Reno and we’ve been in Las Vegas since about 1972. My practice is mostly tax and small business. My challenges are recruiting and retaining qualified staff and determining how much to pay them and what type of benefits to provide. I am willing to listen to any of your ideas today as to how we can work together to create more interest in public accounting and maybe bring back those people who have dropped out of the system and get students energized about being CPAs.

James Main: I grew up in Las Vegas and have practiced here for over 20 years. Main Amundson has recently lost people. They didn’t leave the profession, but they moved out of town because of escalating housing prices. Losing staff causes concerns about how well you can serve your clients. We’re now trying to drag people back from industry – working for construction companies or developers – into our business. They add the dimension that they’re not just public accountants, but they also have expertise in running a company. It is a challenge with the amount of money that we have to spend (to lure them back). We have to spend money to keep our staff, but how much of that cost can we pass on to clients and not charge them so much that it scares them off? The last couple of years have been challenging times.

Michael Micone: I am the owner of Accountants Incorporated, born and raised in Reno. I opened up an office there in 1996, and moved to Southern Nevada in 1998. I bring a different perspective to at least one of the topics: recruiting and hiring. I’m not an accountant. I try to supply accountants for CPA firms so you can continue to grow your business with the demands of everything that’s going on.

David Hall:  LL Bradford & Company is a local firm. We’ve been in Las Vegas about 13 years, but do a lot of global work. We do a lot of public-company accounting work, so the new regulations have really affected us, as has our ability to find and get trained people. We really struggle trying to keep up with the growth we’ve had because we’ve expanded so quickly over the last couple of years into the public-company area. We’re finding for the first time we’re having to outsource work in order to keep up with it. Part of that is in other states and also using technology to be able to keep up. It’s a very exciting time and a yet a very challenging time.

Howard Levy: Piercy Bowler Taylor & Kern is one of the largest local firms in Southern Nevada, and we have a substantial audit practice as well as a large tax practice. We also engage in litigation support and special evaluation work within the gaming industry. A lot of the pressure I see is coming from increased work that must be done in order to meet the new regulatory standards, what I call "standards overload," particularly for the smaller non-public companies. The largest firms have been paring down their client base and "firing" clients, because they are spread so thin they don’t have enough people to do all the work. Those clients have been coming to firms like mine, so our work has been increasing, but not the staff, and that’s a problem.

Bruce Patton: PattonStevens is a local firm established in 1986. Our primary client base is small to medium-size, privately held companies and their owners. Our primary emphasis is to work with those owners to increase their profitability, develop sustained growth, and hopefully help them find some balance and quality of life so they can enjoy some of the success they have achieved. We provide a wide variety of services: reviews, compilations, tax work, tax planning, technology and communication, and business consulting. We don’t do audits. The biggest challenge we’re seeing is the entire spectrum of change, not just accounting complexity because of Sarbanes-Oxley, but we have two tax law changes this year, we have issues with terrorism, outsourcing to India, and a wide variety of changes that affect us and also our clients. We believe the important thing is to really know our clients, and that’s where we place our emphasis. We’re running into the same situation with staffing as most of the people here. We’ve looked at a variety of innovative solutions, including using part-time people. The good part about that is that we’re not footing the bill for them all the time. We’re trying to do more and more using connectivity, where folks work at home and we use remote-access tools to help bind our firm together. The Internet has had a major impact on our ability to find and keep high-quality people. If you have people who check monster.com first thing every morning, you know you’ve got to stay on your toes.

(general laughter)

Dianna Russo: Houldsworth Russo & Company is a local 17-person firm that has been around for eight years. We concentrate on non-profits and compliance work, especially for large mortgage companies. We also do a lot of consulting work for small to medium-sized businesses in the business-development side of our organization. We’re not a big tax practice. One challenge for a small practice is staying in compliance (with regulations), because a small firm doesn’t have anyone who actually specializes in compliance issues. So we aligned with BDO Seidman, which is the fifth largest accounting firm in the world, and that’s allowed us to start expanding, because we now have access to large-firm expertise. We do have staffing problems, but the good thing is we have managed to retain the people we have. We’re just having a hard time hiring and recruiting enough additional people to do the work. I also had to do an across-the-board pay increase just to retain some of my staff, based on some of the phone calls we were getting from headhunters to try to get them to go somewhere else. That has caused us to take a look at our fees and increase them. The problem we’re running into is that there are a lot of sole proprietors who don’t want to follow the standards we’re trying to set within our profession. Therefore, they’ll underbid us and undercut us with prices so low I don’t understand how they can do it. We’re struggling to stay competitive, but still do what we have to do within our professional standards.

Steve Comer:  Deloitte & Touche is an international firm that has offices in Las Vegas and Reno. In Nevada we have an audit practice and a tax practice. The audit practice is between 55 and 60 percent gaming. The tax practice is spread across the board, but it’s principally corporate. Our biggest challenge is dealing with internal-control provisions and SEC reporting, and I foresee that continuing for the next year and a half. In the current year we have 10 to 12 accelerated filers we’re working with and, as Howard indicated, that has caused us to push away from a lot of clients who just weren’t paying us the fees that would be required for us to pay our people and still make a profit. We’ve had three pay increases for our people in the last eight months, just trying to hold on to them.

Curt Anderson: Fair Anderson Langerman is a local firm with an office of about 30 people. Our client base goes back to the mid-1970s. About 40 percent of our practice is audit and review, so we have all the same issues everyone’s talking about in terms of compliance with pronouncements on audit quality and risk. Keeping staff is also a continuing battle. I think it’s a generational issue in part; as we baby boomers are getting older, there’s less of a group coming up behind us. We typically have clients hire our staff away from us, but it’s been even more aggressive in the last couple of years. We try to pay competitively, and we think we’re keeping up with the market, but one of our people recently got a 100 percent pay increase to go work for a private company – that’s how badly they wanted somebody.

Gary Johnson:  Johnson Jacobson & Wilcox is a local firm of 23 people. We do 60 percent tax work and 40 percent accounting and auditing. Our clients are all closely held businesses – no governmental or non-profit clients. The biggest issue for us, without a doubt, is finding people. We can usually keep them, but we’re having a tough time recruiting them, especially at the manager level.

Tim Koch:  I’m a shareholder with Chavez & Koch, CPAs. One of the bigger challenges, especially over the last couple of years, is finding the right people to do the work we want to do. In some cases, we actually shift the work we do to focus more on the skills we have. It’s sometimes easier to find people in certain industries or with certain skill sets. What we’ve been ultimately challenged with over the last couple years is spending a lot more time finding the right people. Hiring slow and firing fast is something we’ve learned. If someone’s not working out, we are quick to make a change, because training costs are very expensive, especially to a small business like ours.

Connie Brennan (Nevada Business Journal): Are you having problems with retention?

Koch:  Retention has been a pretty difficult task. People tend to think the grass is greener on the other side of the fence, even though they usually find out it really isn’t. We’ve had to come up with some creative ways to keep people in our firm, such as bonuses and promotional tracks. Keeping them informed of their performance and communicating how they’re doing seems to be a very big factor, especially with younger professionals, who want to see how they measure up against their peers. They have friends in other firms, and by talking with them we try to find out what they think is being offered in other places, and in some way implement similar programs within our firm. We get a lot of good ideas that way, so just talking to them helps a lot.

Brennan:  A couple of you mentioned Sarbanes-Oxley, and for the benefit of our readers, it would be beneficial if someone could explain what it is and what it does.

Levy:  Sarbanes-Oxley is legislation that was crammed down our throats as a result of Enron and the other scandals from a couple of years ago. It was a hasty reaction by Congress to plug up the weaknesses they saw in financial reporting and auditing, and it has put a lot of regulatory pressure on those of us who are involved with SEC registrants as audit clients. It has also had what one might call a "cascading" or "trickle-down" effect in various states. I call it "bandwagon legislation," where people who regulate the accounting profession have looked at the provisions of Sarbanes-Oxley and said, "Oh, that’s a good idea. We should make CPAs do that," even if it’s not for a public client. This creates pressure on non-public companies to elevate their standards and requirements to those of Sarbanes-Oxley. There has been pressure in a number of states for not-for-profits to have audits and internal control reports they can give to their constituency. I don’t know how likely it is to happen in Nevada. At the moment in Nevada, Sarbanes-Oxley technically affects only public companies, but there have been attempts to expand it into other areas of practice.

Brennan: Clearly the big topic is employee retention and recruitment. Mike, you know about that. Where are you getting the people?

Micone:  In the past month, we made more placements in public accounting than we did in the last four years combined. There is a large gap right now between supply and demand. People are leaving public accounting firms to work for clients who are creating internal departments to satisfy new reporting requirements. People are coming from other states, but not as often as we’d like. Those people usually have four or five offers within their first week of searching for employment, and that’s being conservative. Unfortunately, there’s been a slowdown of people moving here because the economy in other states is now starting to pick up. Universities are enrolling more accounting majors now, and that has increased 10 or 12 percent over the last year, according to UNLV statistics, but we’re not going to feel those effects for another four years. In the meanwhile, to fill the demand, we’re finding candidates among accountants who are retired and may want to get back into a part-time situation. We’re also recruiting professionals who left to be stay-at-home moms or to go into another business.

Brennan:  Is the shortage national or just in Nevada?

Micone:  I would say national. Our company has 90 offices nationwide, and we have executive recruiters who work around the United States. We may call them to ask for assistance in recruiting a management-level person for a public accounting firm. They usually tell us, "If I find somebody, I have 15 clients of my own where I can place them, so I’m not going to refer them to Nevada."

Comer:  One of the drivers of demand is the internal control provisions required by Sarbanes-Oxley. I would estimate they are costing companies here in Nevada between $20 million and $40 million annually, and that’s basically staffing cost. That’s the equivalent of 100 to 150 full-time people, and these are experienced people. So you’ve got the larger public companies drawing off people, as well as public accounting firms looking for people who can do this work, and this is happening nationally. That’s what’s creating a large part of the demand. In my estimation, this situation is going to continue for another year to a year and a half from a staffing standpoint.

Brennan:  Is it as bad in the northern part of the state as it is in Southern Nevada? 

Comer:  Yes, I think so. There are other factors people are dealing with in the northern part of the state, but many public companies are based there, so it’s hard to find people there also.

Brennan:  The first item on the agenda is the escalating complexity in accounting standards. How difficult is it, and are the regulations and complexity increasing?

Anderson: We’re kind of in a Catch-22 situation, in that we don’t profess to go out and look for fraud, but yet, because of the Enron debacle, we have to spend a lot of time procedurally setting up our files and documenting the motions we went through to show that we did at least consider fraud. I’m not sure we’re any more effective in finding fraud than we were before. A lot of these responses to governmental influences are very difficult to charge for. They run up our fees, and I’m not sure there’s any real benefit to the client. When we bill our clients, we have to try to explain in our pricing mechanism what we’re doing and why we’re doing it. At the same time, we have to disclose that we’re not really here to catch fraud in all cases. You’re kind of talking out of both sides of your mouth when you get into that discussion. So it’s really a tough period to be in audit accounting.

Levy:  The standards overload has been an issue that has been kicked around for 20 or 25 years, and it’s been argued that many of the complex accounting standards coming out of the FASB shouldn’t be applied to small businesses or privately-held companies under a certain size, and the FASB has resisted that notion for all that time.

Brennan:  Will you explain what the FASB is?

Levy: The FASB is the Financial Accounting Standards Board. It sets most of the accounting standards we are obligated to follow in preparing or auditing the client’s financial statements, and those rules are getting more and more complex every day. This results in a tremendous risk on the part of practitioners who do not have the ability to keep up with this stuff; they may be missing standards by not even knowing about them. And the rules are so complex that unless firms have technical-resource people they can rely on, they often can’t understand them. All of these increasing complexities add to the argument that small companies shouldn’t have to comply with all the regulations designed for large public firms. There’s an AICPA (American Institute of CPAs) committee looking into it again, but it is really a sleeping dragon.

Brennan: How much of a problem was Enron for your profession?

Hall: As far as developing more work, it was a very positive thing, but the other side is trying to find the people to help you keep up with it. Another concern is that there are a whole lot of small public companies that are just getting started. Collectively, they spend millions and millions of dollars trying to comply with regulations, and that’s preventing a lot of these small companies from ever getting to the point where they can go on to be profitable businesses. 

Main:  What happens is the pendulum swung, and we got caught with our hands in the cookie jar from an accounting standpoint, and so it’s swinging back to visible compliance issues. As Dianna [Russo] mentioned, there are some firms that really just don’t pay attention to what the rules are. When you add another layer of complexity to the rules, you’re going to have more of those firms that just look the other way. I think more and more you’ll see alliances between firms, such as Dianna mentioned, that would help take some of the sting out of the compliance measures. We’re experiencing 30 percent increases in our fees as it relates to handling some of these issues, and small business clients will naturally try to seek more competitive fees. Hopefully, the group in this room won’t reduce themselves to cutting each other’s throats. We’ve got to stick up for the standards and get rid of the clients who really don’t care about the quality of our work. We try to pass on as many of the costs as we can, but it does affect our bottom line as business owners. I think we’ll see a reduction in our income over the next couple of years because of this.

Levy:  Enron is probably the largest single event contributing to all the problems we’ve discussed so far. It has caused an increased police mentality among regulators trying to satisfy the public demand for more regulation; it has caused the increase in work level, the standards overload to a large extent, and staff shortages. Michael mentioned that there have been a reduced number of college graduates available to recruit from, and while I think that may have begun before Enron, the publicity and regulations that followed Enron caused young people to say, "Hey, being an auditor is too risky. I don’t want to do that. I want to do something safer, something that isn’t going to take all those hours of work and won’t have me worrying about getting sued."

Brennan:  Do you think the pendulum is starting to swing back now? The public generally has a pretty short memory.

Levy:  No, I don’t think it’s starting to swing back. Regulators have a long memory. They continue to press on, and the problem is going to be with us for a long time.

Patton:  It’s not just a matter of complexity in accounting standards and professional standards. Surveys all indicate the public basically expects CPAs to get it right. It’s a pretty simple standard – get it right. These are some pretty simple client expectations: we’re recorders; we have lots of documentation and hopefully we don’t shred documents too often; we have high integrity; we don’t have independence issues; we don’t do deals with our clients and then go audit them. Regulators are trying to do good for the public so there’s some benchmark the profession can use to help people understand what we do. What we do is not so much a science as it is an art. It’s really experience and having the nose for it that allows us to find fraud and things of that nature. A lot of what we’re doing in the industry is trying to set standards and guidelines, but I don’t think the bottom line has changed. The clients’ expect us to get it right, and if we don’t, we’re going to have a problem.

Levy:  A fundamental change is going on in the audit environment that affects both small and large companies that have audits. That is a push for greater and greater independence of the auditor, discouraging the auditor from performing other services for the client in order to protect his objectivity. The more you do to help your client, the less you’re going to be viewed as an objective auditor, and this is particularly important in the small business environment, where people who do audits are also business counselors and assist clients in many areas where they could be viewed as crossing the line. This is very difficult, especially when clients have little or no expertise in the area for which they hired their accountant.

Comer. I’m not sure independence rules are that much different than they were before Enron. There are more interpretations, but theoretically, the rules are the same. I find it hard to believe that the relationship between a normal small business and an accountant is going to change all that much, unless they’re subject to some type of special regulation.

Levy:  I don’t think it’s going to affect the client relationships when all you’re doing is helping them keep their books, because independence is not an issue then. But when you’re issuing compilations, you’re supposed to be independent unless you say you’re not. It’s the mentality of the standard-setters, the regulators and the peer reviewers who are part of the regulatory process that is going to push harder and harder for strict compliance with this new interpretation, which is significantly different in that it requires a documented understanding between you and your client as to who is responsible for what. I would expect the handful of clients who actually read what you put in front of them and ask them to sign, to balk at some of that. And that could cause problems.

Russo:  The problem with our state is we don’t have a mandatory peer review process. We need to change how we’re regulating ourselves, because currently there are no mandatory regulations, and that’s why unscrupulous firms can come in and underbid us.

Levy:  Undercutting by other professionals (or would-be professionals) who don’t comply with the standards is the main reason we’re unable to pass our costs on to our clients. It’s not that the clients don’t want to pay fees. It’s that the clients don’t want to pay the fees if they can get the work done more cheaply by somebody else. The profession is hurting itself by failing to regulate these people who would undercut and take shortcuts with the standards. The responsibility falls upon the profession and its regulators. The very same regulators who are asking us to do better and better are refusing to enforce their own rules on a segment of the profession.

Anderson:  While I agree in general, I find it difficult to believe that a huge percentage of practitioners is lacking in professional skill and attitude. The vast majority of the 300,000-plus CPAs in this country operate in practice units of 10 or fewer people. It’s just like with Arthur Andersen; 28,000 people were massacred by the acts of a few people. Arthur Andersen was a quality firm with great people. A few people lost sight of some things and took the firm down and hurt a lot of people in the process, but that doesn’t mean that the other 27,814 people in Arthur Andersen were bad professionals. I think the professionalism of our industry will overcome this. We have some self-regulation we’ve got to get through here in terms of peer review locally, but from a practical standpoint, you cannot impose these regulations designed for large public companies to the rest of the population – it just doesn’t work, and we’ve seen that over and over again in government regulations. They get all wound up and then they pull back and say, "Oh, okay. I guess I understand what you’re saying. We can modify this." I think we’re still going to see the pendulum swing a bit more, but we will eventually get back to the center. I am optimistic in terms of where our profession is going and about the caliber of our people. One good thing to come out of this is that people have realized the importance of accounting. They know that numbers are important, and that’s raised the visibility and the image of our profession.

Main: Yes, now accountants can charge more than lawyers do.

Brennan:  As a small business owner, how do you distinguish the people who are applying the standards from the people who aren’t? What questions do you ask to find a reputable firm?

Patton: You could certainly ask if they are members of the American Institute of CPAs.

Main: Ask if they had a peer review.

Russo:  Educating the public is important. In addition, the state board is trying to pass a regulation for mandatory peer review. We have to start with the regulatory agencies here within the state to make it a mandatory thing.

Micone:  They could ask the firms for referrals from clients. I would also suggest they interview several firms to make sure they’re a good match for the size of the company and what type of business they do.

Main:  I would suggest they interview some of the internal people they’ll be working with, rather than just a partner in the firm. Find out who’s actually going to be working on your account, not just the person sending you the bill. 

Johnson:  I think references are probably the best thing: existing clients, bankers who deal with that accounting firm, bonding agents. If the accounting firm is willing to give you good references and they check out, that’s probably the best thing a business can do.

Brennan: The last item on the agenda is the need to increase fees.

Johnson:  I think most of our clients are astute enough to understand the effects of Enron and WorldCom and all the new regulations, and how they have affected us. They understand it’s harder to find good quality people and you have to pay them more, so the price is going up. If you just communicate well enough with your clients, they’re going to understand the price is going to increase. I don’t see prices being an issue right now for us, as long as we communicate with our clients. As long as we take care of them, they’re willing to pay fair fees.

Mackey: I agree. The additional work necessitated by these standards has really added to the time it takes to get things completed the way they are supposed to be done following the standards of practice. There is the difficulty of finding managers and it’s a long-term process to grow those people internally to be able to fill management positions. We’re raising fees 20, 30, 40 percent or more in some cases. Are the clients happy? Not necessarily, but they understand what’s going on.

Brennan:  Is Nevada a good market where you continue to see new clients walking through your door?

Mackey:  We have six offices around the state. Las Vegas is the biggest one, but we’re also in Reno and some of the smaller towns. Offices in smaller communities are tied to the local economy, whether it is agriculture or mining. A lot of these areas are not growing as rapidly as the larger cities, and their need for personnel and their involvement with some of the other issues we’re talking about is different, but overall, the firm is doing well.

Main:  I think we all agree we love our profession. Nevada is a great place to do business. There are some challenges to deal with, but we’ll get through them.

Kathleen Foley
Kathleen Foley is a freelance writer based in Southern Nevada.