A Good Year for Outsiders

Not surprisingly, Group B firms appear to be playing up the service angle when courting Big Four clients. Still, partners at the top-tier firms dispute the argument that they spread themselves too thin to provide good service to all but the largest of clients.

"What's new in that?" asks Mike Ascolese, a spokesman for PricewaterhouseCoopers. "The smaller firms have been making that argument for years."

A Thinning Out
Maybe so. But this is the first time that second-tier accounting firms have actually made inroads into Big Four territory.

And make no mistake, it's tough turf to crack. According to Bowman, some 97 percent of the 15,000 to 16,000 publicly traded companies and mutual funds registered with the SEC are audited by Big Four firms. Of the remaining 1,200 members in the AICPA's SEC practice section, only two (BDO Seidman and Grant Thornton) audit more than 100 publicly traded companies.

Below the ranks of the ten largest auditors, the number of publicly traded clients thins out. By Bowman's count, the seventh-largest auditing firm in the United States, Minneapolis-based McGladrey & Pullen, has only 95 publicly held companies on its client roster.

What's more, say some current clients of Group B accountancies, there are trade-offs in not using a Big Four firm. Take Memry Corp., which makes shape-memory alloys used in components of medical devices. According to Bob Belcher, CFO at the Bethel, Connecticut-based company, Memry's management has at various times looked at cross-border acquisitions.

Each time, he says, the company's management and board have discussed whether Memry would be better served by a Big Four firm that operates globally. Like other Group B accountancies, McGladrey & Pullen has a very limited international presence.

"We've struggled with that," says Belcher. "And if we buy another firm, we would make that move."

Itzhak Sharav, an accounting professor at Columbia Business School, says the global reach of the marquee accountancies is a big selling part to audit clients — particularly to managers of multinational corporations. "That's where the Big Four have an advantage," Sharav asserts. "That's a handicap to the smaller auditors — and they'll have to overcome it."

They'll also have to overcome a lack of sway on Wall Street. Notes Belcher, "If you're a public company looking to go public, or a public company looking to get sold, there's some perceived value to using a Big Four auditor."

Even Group B auditors readily acknowledge the massive resources available to each of the Big Four auditors — resources that dwarf the capabilities of smaller firms. In fact, admits Nusbaum, partners at Grant Thornton would not even consider bidding for the business of a General Motors or General Electric.

Client Server
For managers at some publicly traded companies, though, bigger is not necessarily better. In fact, a number of CFOs at midsize public companies — that is, companies with $500 million to $1 billion in annual sales — prefer working with local auditing firms.

Take Freehold, New Jersey-based Foodarama Supermarkets, with $945 million in revenues. In 1996 the grocer switched to Amper Politziner & Mattia, a Edison, New Jersey-based accounting firm. Previously, Foodarama had used a top-tier auditor for most of the company's 50-year existence.

CFO Michael Shapiro explains the move: "We felt we were better off being a big fish in a small pond than being a little fish in a big pond. Otherwise, you don't get the attention you need."

Memry's Belcher has similar feelings. Currently, Memry still has most of its operations in the United States and therefore doesn't require a lead auditor with a large overseas presence. Moreover, he says, the smaller McGladrey & Pullen is a good fit for the company, which recorded sales of $32 million in the fiscal year ending June 30, 2002.

Concedes Belcher, "We would just be a tiny, tiny client of a Big Four firm."

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