The substantial demands of complying with a key provision of the Sarbanes-Oxley Act are stretching the Big Four to their limits and spilling over work to other accounting firms.
“My sense is that the Big Four are out of capacity, and that’s forcing them to shed some clients to handle the ones they want to keep,” said Mark Bagaason, managing partner of the Irvine office of Chicago-based Grant Thornton LLP, a midsize accounting firm. “We’re seeing opportunities from all of the Big Four.”
The spillover is coming despite hiring at the Big Four and a shifting of workers to focus on Sarbanes-Oxley compliance work.
“We’re aggressively recruiting new people into the firm at all levels, primarily for audit-related work,” said Sally Anderson, managing partner for the Irvine office of Ernst & Young.
Behind the crunch is Sarbanes-Oxley’s Section 404, which requires annual reports to detail and evaluate a company’s financial reporting controls and procedures. Bigger companies have to show they’re in compliance with Section 404 in their year-end results.
Part of the problem for big accounting firms is finding experienced people to handle the onslaught.
“It’s become clear that there are not enough people out there to meet our needs,” said Dean Samsvick, managing partner of the Costa Mesa office of KPMG LLP.
KPMG isn’t looking to pick up clients because it’s already so busy, Samsvick said.
Ernst & Young’s Anderson said her firm expects to boost its hiring of accountants and recent graduates by 30% this year.
“We’re looking to hire people who have tried private industry and now want to come back to public accounting,” she said.
Smaller firms also are hiring with a surge in demand that can’t be met by the Big Four.
Santa Monica’s Stonefield Josephson Inc. has 21 people in Irvine and is looking to hire 10 more, said Steve Rapattoni, head of the company’s OC operation.
“The Big Four are scrambling to serve their clients,there are so many public companies that they manage,” Rapattoni said. “But there is a shortage of time and talent to be able to get the Sarbanes-Oxley work done. The result is that firms like ours are seeing a lot of that coming down to our level.”
But smaller firms are feeling the squeeze, too, according to Rapattoni.
“We are running at almost 100%,we’re trying to hire as well as meet the requirements,” he said.
Most new clients at Stonefield Josephson are midsize public companies that weren’t getting the attention they wanted at the Big Four, Rapattoni said.
The Big Four dominate the accounting sector here as they do nationally. KPMG, Ernst & Young, Deloitte & Touche LLP and PricewaterhouseCoopers employ about 1,500 people locally.
The crunch poses a challenge, according to Robert Grant, managing partner of the Costa Mesa office of Deloitte.
“There is pressure on big firms to retain some of their smaller clients, because there’s so much work on the larger accounts,” he said. “We aren’t losing a lot of existing clients, but we are being more selective on new clients.”
Deloitte has hired 40 people in OC this year, Grant said, many to do Sarbanes-Oxley work. Deloitte, the only one of the Big Four not to split off its consulting business, now counts some 800 local workers.
“Resources are tight and we’ve been aggressively hiring experienced people to cope with Sarbanes-Oxley,” Grant said.
Comarco Inc., a maker of electronic testing and measurement devices, recently switched from KPMG to the Costa Mesa office of Chicago-based BDO Seidman LLP. Officials at Comarco, a smaller public company with a recent market value of $50 million, declined to comment on the move. BDO Seidman also declined to talk about Comarco.
Joe Johnson, a partner at BDO Seidman’s Irvine office, said the firm has been hiring to meet added demand.
“We increased our college-level hiring last year because we knew this would happen,” he said. “And we increased external hiring, too.”
BDO Seidman has added 20 workers this year for a total of 100, according to Johnson. Hiring has been heavy in its assurance unit that handles Sarbanes-Oxley work, he said.
For companies, the situation means bigger-than-expected accounting bills.
Hoshi Printer, chief financial officer at Irvine-based car buying Web site Autobytel Inc., said he expects Section 404 compliance to cost $2 million this year, up from an earlier projection of $600,000 to $800,000.
Autobytel uses Pricewaterhouse and KPMG to do 404 internal control compliance work, he said. Sarbanes-Oxley requires companies to have separate firms do auditing and internal controls work.
Grant Thornton’s Bagaason said the price of an audit this year is about double what it was last year.
“Part of that’s driven by salary increases in the marketplace,” he said. “And audit rates also are higher because you’re charging for additional work that needs to be done.”
Grant Thornton has bolstered its local staff from 70 to 90 people in the past several months, Bagaason said.
“We’re working as hard as we can to add people,” he said. “We don’t have the capacity to deal with all the opportunities we’re seeing.”
The good news: Things should cool down next year. Much of this year’s work involves one-time costs to put systems in place.
“The work will be half of what it was this year,” Autobytel’s Printer said. “But it’s not going to go away next year and beyond. It will be more on a maintenance basis and become part of normal procedure.”
The challenge for smaller firms: keeping clients cast off from the Big Four.
Stonefield Josephson’s Rapattoni said he still sees plenty of work ahead.
This year’s deadline is for public companies with market values of $75 million or more. Public companies worth less than that have to comply by the end of 2005. That work likely will go to smaller firms.
And bigger companies that complied this year will have to fix problems and evaluate their systems next year and beyond, he said.
“Remediation and continued evaluation of controls will be ongoing, and that may limit the Big Four in coming back into an arena where they’ve decided to disengage from a number of their clientele,” Rapattoni said.
