In response to a spate of financial scandals at major U.S. corporations, the federal government has greatly increased auditing requirements for public companies, most notably through Sarbanes-Oxley. A growing number of these companies are pulling their non-SEC work from the Big Four, entrusting it to more regional firms. About 75 percent of Tofias’ revenue growth is coming from work formerly handled by the Big Four. Following on the heels of a merger with a New Bedford accounting firm, Tofias, two years ago, merged with Rooney Plotkin & Willey, of Providence. In addition to its Boston office, Tofias has about 60 employees at its offices in Providence, Newport and New Bedford.
PBN: For you, what has been the impact of Sarbanes-Oxley?
GALLAGHER: Most of the changes that have resulted have come as a result of public company work and the federal government stepping in, post-Enron, to say: ‘We need stricter standards with regard to auditing. We are going to establish a board of overseers that will test and qualify the audits of the publicly traded companies.’ There have been a lot of stricter standards that have resulted in more internal work in preparation for the audits, on a quarterly basis, on the part of the companies themselves. There is an enormous amount of cost associated with that. The demands on the remaining Big Four, after the demise of Arthur Anderson, have dramatically increased. It’s had a trickledown effect. In the past, the large national firms would service not only publicly traded companies, but also large privately held companies. As you can imagine, it’s difficult to have two standards. One which you apply to publicly traded companies and one which you apply to private companies. So they’ve instituted one approach to both businesses. In the case of privately held companies, it’s not really needed.
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PBN: So this is good for your business.
GALLAGHER: It’s tremendous. They’re saying: ‘Do we really need one of the Big Four signing off?’ And the answer they are coming to in many cases is no. That said, they are still looking for a degree of sophistication that perhaps a really small firm isn’t going to be able to offer. It’s tough these days for the smaller firms in the public accounting industry.
PBN: How do you characterize a small firm vs. a larger firm?
GALLAGHER: It’s in the eyes of the beholder, of course. You have the Big Four, which includes Deloitte & Touche, KPMG, Pricewaterhouse Coopers and Ernst & Young. After that, there are several large, national players. They include Grant Thornton, BDO Seidman and American Express, although American Express recently sold its interests to McGladrey, another national firm. After that, you have large regional alternatives. We’re one of the main players in that market. We have just shy of 200 people in the firm. Our volume this year will be in the $35 million range. For New England, that’s a large regional. For other places in the country, like the Midwest, we would be a smaller firm. It really depends on your location.
PBN: What was behind the scandals at places like Enron?
GALLAGHER: There was a fundamental flaw. As the nationals grew, the amount of services they were providing to the publicly traded companies grew to a degree that it was almost greater in terms of fee income than the amount they were making on the audit. It was fraught with potential for conflict of interest. If you are one of the Big Four and you’ve got Enron as your client and they’re paying you $35 million a year for your audit, but $70 million for your consulting services … at times, they’re going to come into conflict. Unfortunately, the industry set itself up by providing all of their services to a client and not wanting to let anyone else in the door. So the independence of the audit could become potentially impaired. But you’ve got to put it in context. There are – I don’t know how many – audits done on an annual basis and most of them are clean, by the book. It’s worked for years. As a profession, we do a pretty good job of policing ourselves. Unfortunately, in very few cases … you had people that were not doing the right thing.
PBN: What should companies look for in an accounting firm?
GALLAGHER: You have to look for quality. You have to make sure your firm has passed the standards that the industry applies to itself – that they have had peer reviews every three years and they have passed those reviews with flying colors and clean opinions. It’s like any other professional service. They should also look for depth of service. The sophistication and rules associated with accounting and with tax … for a smaller firm to be able to provide the expertise in all areas of accounting and tax is difficult. What a larger, regional firm offers is a little more depth, where people within the firm can specialize. And obviously, the continuity of the staff on your engagement is critical. If someone has been working with you for several years, they gain insights into your industry. Hopefully, they provide not only a financial statement – but a financial statement that helps you run your business.
PBN: What is the climate these days in terms of hiring new accountants out of college?
GALLAGHER: I’ve been in this business for 21 years and there was never a point where I thought I would be saying that the accounting industry is really sexy. But it’s the hottest major on college campuses now. Kids are being brought to it in droves. Compensation is going up big time. They know the demand is there. Later in their career they can go into forensic accounting or consulting. It’s a great base for whatever else you may want to do.
PBN: Is Providence a draw for you when you’re looking for new accountants?
GALLAGHER: When we first did the merger and came into Rhode Island, I thought we would see several young people out of the Rhode Island office who would want to transfer to Boston. It’s been just the opposite. There are three people in this Providence office today that transferred here from Boston, because of the housing and the quality of life. We’ve also been able to recruit a number of people out of the nationals. It’s an attractive city.
