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Stephen Chipman, the CEO of Grant Thornton, talks about the firm's attempt to stick to its knitting and the nation's quest for a more rational financial reporting system and tax code.
David M. Katz, CFO.com | US
August 10, 2011
Eight years ago, when Arthur Andersen surrendered its license and the Big Five accounting firms became the Big Four, many independent auditors began a migration to smaller firms. One big beneficiary was Grant Thornton, a second-tier audit and advisory outfit that's seen its revenues and workforce triple in the years 2002 through 2010.
Over that stretch, the firm picked up 60 partners and other employees from Andersen, as well as others from the other audit giants. To be sure, Stephen Chipman, Grant Thornton's chief executive, thinks the firm's receptivity to new accountants and advisers and its ability to screen for the right talent amounts to "a pretty good story" of business integration. Still, there were questions about the firm's focus after all that growth.
Although Chipman plans to maintain Grant's growth through acquisitions, his aim now is to home in on the firm's target focus: privately held businesses, small to midcap public companies, and private-equity portfolio companies. In an interview with CFO, he discussed the firm's strategy, as well as the nation's accounting and tax policies. An edited version of that conversation follows.
Do you care about Grant Thornton not being equivalent in size to the Big Four?
Not really. We are not interested in trying to become the smallest of a new Big Five. We think that's a losing business strategy. However, we would like to get significantly bigger, not for the purpose of rankings but to take a leadership position in the markets that we want to be prominent in. To do that, we'd like to have more scale and critical mass.
How are you going about doing that?
We have a very aggressive structure, which includes a significant focus on mergers and acquisitions to pursue growth. We have not been a firm that's had a strong pedigree of M&A. This is a fairly significant change for us, but it's an important part of our strategy going forward.
We've had two major recent transactions. We acquired the disputes and investigation practice of Huron Consulting Group's Disputes and Investigations practice [in October 2010]. That was about 60 professionals, primarily in Chicago and New York. And [in April 2011], we acquired about 27 partners and 250 professionals from LECG, a tax and advisory firm out of Philadelphia, New York, and one or two other locations. Those are two pretty significant deals for us. And we have other irons in the fire.
Will you continue to maintain your traditional focus on midmarket clients?
We want to focus on the attributes rather than the size of clients. We put a really big focus around what we describe as dynamic organizations: companies that are growing, doing mergers and acquisitions, raising capital, going international. They're on the move. We see ourselves, in fact, as being on the move: dynamic, growing, expanding.
What are their specific needs?
High-quality audits that enable them to raise capital. Tax advice when they're expanding exponentially. Transaction advisory support when they're doing an M&A. Restructuring if they have to deal with a certain part of their business that's not performing.
Is this a big shift for Grant Thornton?
It's more a matter of bringing additional clarity to our traditional heartland. We are making a declaration, for example, that we are not going to pursue the audits of the Fortune 100. We're not going to build a firm to audit GE. That's not what we're about.
How involved will you get in the capital raising of your clients?
One of the things we've championed is to address the problems of the IPO market and the decrease in the number of IPOs that have been occurring in the United States. Basically it's a game for the big boys these days, and these dynamic emerging companies are being all but shut out of the IPO market because of the way the IPO market is structured today.
What's your position on the convergence of international financial reporting standards and GAAP and the possible adoption of an IFRS-only system in the United States?
Our position has always been that it's in the U.S.'s public interest to move toward a single set of high-quality global standards, and that should be the end game. That would be best accomplished with a date certain — you pick a date far enough out in the future for people to get ready, and you switch.
But at heart we're pragmatists. We recognize that the level of indifference among preparers and users on this subject within the United States was making it increasingly unlikely that that approach could ever be adopted. So as a firm we've sought a middle ground that allows you to get to the end game in a pragmatic, cost-effective way. And I think the SEC may have cracked the code on this with the concept of "condorsement."
They're saying, let's continue the convergence process with the existing standards. Then all new standards in the future would be promulgated by the International Accounting Standards Board, although the rules would have to be endorsed by the FASB.
You'd keep U.S. GAAP in place. But through a process of converging existing standards and endorsing new international standards it would, over a period of time, align with IFRS. And then you put a date in the sand for effective adoption of IFRS.
Do you see the transition as a major source of revenue?
I really don't. Certainly there's going to be an opportunity for us to provide support and help to our clients, but this is not Sarbanes-Oxley part 2, or anything like it. This isn't a big adrenaline shot of work.
What's happening in the tax services side of your business?
State and local taxes are big areas of growth for us. The states are all getting unbelievably aggressive because they don't have any money. International tax is the fastest-growing part of our business. Related to that is transfer pricing, another big area of growth for us, as in dealing with uncertain tax positions. It's huge.
What's your position on corporate tax rates?
We do think we need to lower corporate tax rates, and it needs to be for all entities, not just one portion of the corporate world. But you need to distinguish between loopholes and tax, and develop a policy that is truly beneficial to the economy and the public interest. For example, we wouldn't call the R&D tax credit a loophole: we ought to be encouraging innovation. And you can lower the tax rates and still keep an R&D tax credit. But there are other allowances that are politically motivated that clearly got into the tax code as a [sop] to a particular lobbying group.
Oh, I'm not going to go there. I've just heard about them.