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SMART ANSWERS
By Karen E. Klein

1.13.00
Does a Big Five Firm Have to Audit Your Books?
Local firms cost less, but the Big Five cachet may reassure your company's future buyers


Q: We are a growing manufacturer with $25 million in revenues and plans to sell five years from now. Do we need to use a Big Five accounting firm as an auditor to reassure potential buyers? Or can we choose a less-expensive regional firm that might be more responsive to our needs? Going public is probably not an option.

— J.W., Baltimore

A:  In terms of technical ability and quality of work, the Big Five accounting firms (Ernst & Young, Arthur Anderson, Deloitte & Touche, PricewaterhouseCoopers, and KPMG) are probably no better at performing company audits than solid regional firms. And if you're not planning to go public (if you are, it's de rigueur to use a Big Five firm), the main advantage is the cachet of a marquee name.

A reputable regional financial-services firm can do a good job, will probably cost you less, and give you more attention than a firm with global reach. "Companies in the $25 million-to-$50 million-in-sales range are our bread-and-butter," says Barry Garfield, CPA, a partner in the Long Island (N.Y.) firm of Holtz, Rubenstein & Co. "A company like yours would be an important client to us." Look for a firm with 50 or more CPAs on staff, separate departments for information technology, tax, business valuation, and other specialties.

Another consideration is where you plan to seek buyers for your company. If you think you'll be selling to a local party, there is nothing wrong with using a regional firm. Ask your banker, attorney, and other business contacts for referrals. Interview several firms. Make sure you ask them how many audits they do annually and what percentage of their revenue base they attribute to this business area. It's also a good idea to ask how many manufacturing firms they audit. If you have out-of-state operations, ask if they will send their own auditors or contract with affiliate firms in other cities for out-of-town work. Check out the affiliate firms, as well. Garfield's firm is part of DFK International/USA Inc., an association of independent accounting firms that has members in about 25 U.S. cities and connections with international firms. Its U.S. Web site is www.dfkusa.com.

You can also get referrals from your state society of CPAs or from the AICPA (American Institute of Certified Public Accountants). Its Web site (www.aicpa.org) lists accountants by specialty and provides other helpful financial-services information.

Frank J. Aquilino, CPA and chairman of the accounting department at Montclair State University in Upper Montclair, N.J., suggests that you ask firms you interview for copies of their peer reviews. "There is always constructive criticism given in the peer review. We just changed auditors, and we found the reports very useful in choosing a new firm," Aquilino says. "If a firm doesn't want to give you their peer review, you might ask yourself if you really want to use them."

If you foresee marketing your company nationally or even internationally, a Big Five name on your audits can lend credibility. If you don't want to hire a heavyweight now, you still have choices, says Gary S. Shamis, a CPA and chairman of the AICPA's committee on managing accounting practices. "You could switch auditing firms as you get closer to the sale, or have a regional firm conduct your audits now and a Big Five firm sign off on them. Just make sure you don't double-pay for that service," he says. His company, SS&G Financial Services of Cleveland, has strong relationships with local offices of some Big Five firms. Sometimes, SS&G does most of the audit for a particular company, then the larger firm completes it, and signs off on the opinion.

Once you get close to selling, you can hire a Big Five firm to reaudit the books for previous years. "It shouldn't be very difficult or extremely costly to do that if your regional firm has done a good job with the past audits," Shamis says.


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