VideoAudit-firm consolidation and—in the case of Arthur Andersen—extinction will result in higher fees, along with less competition, says a recent study by the General Accounting Office. But midsize companies, according to some finance executives, are already feeling the pinch.
"If we were to do an auditor search again today, we might not solicit bids from the Big Four," says the finance chief of a technology firm that recently switched from one Big Four auditor to another. The CFO, who asked not to be named, fearing auditor retaliation, says that with only four major firms left, midsize companies can't get a good deal on auditing. "There is still plenty of competition among the Big Four for big accounts, but we're not a top-tier account for them; we're a take-it-or-leave-it account."
Another problem, he says, is that Big Four firms are so risk-averse that they often turn down new business. And that's what really hurts the ability of small and midsize firms to achieve competitive Big-Four audit pricing. In fact, the GAO study predicts that increased risk aversion will begin to affect the ability of larger companies to convince the Big Four to bid for their business.
Of course, there are second-tier auditors, but the report finds that most lack the industry knowledge, geographic presence, and reputation to bid successfully for large accounts. One problem, the study indicates, is the lack of a middle ground: there's a big gap between the Big Four and the second tier.
To make sure the Big Four doesn't turn into the Big Three, the GAO report also suggests a return to previous enforcement standards in which partners and employees, rather than entire firms (as was the case with Arthur Andersen), are sanctioned for wrongdoing. "It is important that regulators and enforcement agencies continue to balance the firms' and the individuals' responsibilities when problems are uncovered and to target sanctions accordingly," the study notes.
Earlier this year, the Securities and Exchange Commission announced a new enforcement model in which it planned to hold an entire audit firm responsible for a partner's actions. —Kris Frieswick
Spin-off Insurance
In early August, the Internal Revenue Service officially stopped issuing private letter rulings (PLRs) for tax-free transactions. It's a dramatic shift. The yearlong pilot program, which could become permanent, may lead companies to scuttle any potential spin-offs without a solid business purpose beyond the tax benefit. That's because executives wouldn't know whether a spin-off meets IRS standards until it's audited—up to three years after closing.
The danger of getting it wrong, says Cravath, Swaine & Moore tax attorney Lewis Steinberg, is that the IRS could hit a company with a huge retroactive tax bill if a spin-off's stock appreciates and the deal is stripped of its tax-free status.
Some companies are purchasing tax-opinion insurance policies, which generally pay tax penalties, fines, and interest if a spin-off fails the tax-free test. In June 2001, Georgia-Pacific purchased $500 million worth of coverage to protect the spin-off and later merger of The Timber Co. with Plum Creek after the IRS refused to issue a PLR. Says Lehman Brothers's Robert Willens: "Since the IRS stopped issuing PLRs, companies are looking for other means of protection." —Marie Leone
Time Flies
Tired of commercial flights but unwilling to shell out big bucks for fractional jet ownership? There's an alternative: Marquis Jet Partners Inc., Sentient, Delta AirElite, and others let members pay a flat rate for a set number of flight hours on a variety of airplanes. "Our market is midcap companies, not the Fortune 500," explains Marquis executive vice president Kenneth Austin.
For around $100,000 and $300,000, depending on aircraft type, Marquis customers buy flight time in 25-hour increments. Much like a phone card, an annual prepaid travel card allows time to be subtracted. Only actual flying time is deducted, plus six minutes for each takeoff and each landing.
New York-based Marquis must be on to something: first-quarter revenues and flight activity rose more than 350 percent and 320 percent, respectively, from the same time period in 2002.
That news doesn't surprise Joseph Moeggenberg, president of Cincinnati-based Aviation Research Group/US Inc. "Companies are getting smart about how they use corporate airplanes," he says. Although the program is more expensive than individual commercial airline tickets, membership offers much more flexibility and convenience. The planes can be available on as little as a few hours' notice, 365 days a year, and can use airports that commercial planes can't. And unlike with chartered flights, customers pay only for time they use.
Marquis customer Jimmy de Castro, former president and CEO of AMFM Inc. (now part of Clear Channel Communications), says the arrangement has "the benefit of ownership without the tax implications." Clients don't own an asset, as with fractional shares, so membership is a T&E expense, not on the balance sheet. "The only negative," adds de Castro, now CEO of Chicago-based holding company Nothing But Net, "is how fast I burn through the hours." —Joan Urdang
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