Picking Up Pieces

Now that the Big Eight have dwindled to four, are viable alternatives emerging from the horde of smaller accounting firms? The second-tier firms would like you to think so.

Sensing an opportunity to lure unhappy clients of the Big Four, the largest of the second-tier firms have been quietly gobbling up pieces of Arthur Andersen, along with divested operations of the remaining four. For example, Grant Thornton, the country's fifth-largest accountancy, bought parts of Andersen's practice in Florida and the Carolinas.

Accounting firms have also been merging. New Jersey­based J.H. Cohn LLP and The Videre Group LLP recently joined to create the 13th-largest accounting firm. In addition to strengthening its hold on middle-market companies, the combined firm hopes to snare some bigger clients. "Initially, Andersen clients went to the Big Four, but many are unhappy and are looking for alternatives," says J.H. Cohn COO Dom Esposito. "We want to go after clients that aren't being properly serviced by the Big Four."

But does any of the maneuvering by second-tier accounting firms create a real alternative for large companies? Probably not, says Jack Ciesielski, who writes for the Analyst's Accounting Observer. The Big Four have tens of thousands of employees and extensive overseas operations, both essential features for multinationals. And it's hard to exaggerate the yawning gap between the smallest of the Big Four and the largest of the next tier: KPMG has $3.2 billion in annual revenues compared with $433 million for Grant Thornton. "I'm not sure that the smaller firms' hopes of competing with the Big Four are much more than a pipe dream," says Ciesielski.

Still, for large companies with a regional or domestic-only business, the smaller firms may be an attractive choice. Esposito argues that these firms can offer greater attention from audit partners, deep regional expertise, and often lower prices. And "because [the] Sarbanes-Oxley [Act] requires the Big Four to choose between certain services for their clients, CFOs may want to look at the superregionals for their internal audit work," adds Arthur Bowman, editor-in-chief of Bowman's Accounting Report. "But few of these firms have the resources to start doing SEC audits for big clients." —Don Durfee

D-School

Call them "Masters of the University." In April, students enrolled in the Master of Science in Financial Engineering (MSFE) program at Kent State University began trading derivatives on a simulated trading floor, using real-time information.

"Everything is real except the profits and losses," says Michael Persico, CEO of Tekom Inc., which built the first-of-its-kind simulator.

The floor, just like those at Morgan Stanley and Goldman Sachs, gives students hands-on experience at trading derivatives, says program director Mark Holder. "Seeing the mathematical principles in action is much different than sitting and working through formulas," he notes.

The students also learn the perils of derivatives trading. A related course covers the blowups at Enron, Orange County, and Barings Bank. "There are dangers, but 'financial engineering' doesn't have to be a dirty word," says Holder.

Holder predicts the trading experience will give students an edge when they look for jobs. "The message from investment banks and the Fortune 500 was, 'We don't want quants who can't trade,'" he says. Now, the next generation of traders can make their mistakes before they make — or lose — their millions. —Joseph McCafferty

Feds Fail Again

Can you guess which recently released annual report warns readers that "amounts reported in the consolidated financial statements and related notes may not be reliable"? Hint: it isn't Tyco's.

Once again, the Financial Report of the United States Government failed to pass muster with its auditors. That news may simply add insult to injury for private-sector CFOs, who compiled their reports under a slew of new government regulations this year.

"Government should lead by example," insists U.S. comptroller general David M. Walker. "We should be as good or better than those we are regulating." Uncle Sam's books are slowly improving, but the example it sets is still mixed at best.

Of the 24 agencies required to produce audited financial statements under the Chief Financial Officers Act of 1990, 3 more managed to receive clean opinions for fiscal 2002, for a total of 21. The Department of Defense, the Small Business Administration, and the U.S. Agency for International Development didn't receive the unqualified stamp.

Many clean opinions still result from manually intensive "heroic efforts," a practice Walker predicts will end once accelerated reporting deadlines of 45 days (faster even than the new 10-K reporting deadlines) become effective in 2004. Both the Department of the Treasury and the Social Security Administration met the new deadline for fiscal 2002. "There are other areas where we are ahead of the curve," says Walker. For example, the General Accounting Office has audited in- ternal controls for several years and promulgated independence standards for auditors well in advance of the Sarbanes-Oxley Act of 2002, he notes.

• 1
• 2
• 3
• 4
• next »