AUDITING
Is it fair to say a small-cap company is out of its league when it dares to use a Big Four accounting firm? Last week, Catapult Communications said it was able to find huge savings by going with a regional auditor ranked 67th among accounting firms by revenue size — the company expects to save as much as 49 percent in accounting expenses this year by making the switch from Deloitte & Touche to Stonefield Josephson.
CFO.com reader Kunal Ganguly wrote us to say a company of Catapult's size, with its $102 million market cap, shouldn't have been using a giant like Deloitte anyway. A local firm would be a better fit because it likely has more experience handling companies of a smaller size, he thinks. Adds accounting professor Zafar Iqbal: "[Smaller] public accounting firms have more experience with, and better knowledge of, the needs of smaller clients. Thus they are in a position to add more value."
It's an interesting point considering the Big Four began shedding some of their smaller clients after Sarbanes-Oxley was put in place because of the higher risk of working on the small caps' financials and the firms' expanding workloads. Of the 37 SEC-registered clients let go by the four largest auditors in 2007, more than half were smaller businesses, according to data provided by Audit Analytics to CFO.com. Maybe the accounting biggies were doing the little guys a favor.
Of course, as in Catapult's case, the relationship goes both ways: 62 companies with a market cap of $110 million or less dismissed their Big Four auditor in favor of a smaller tier firm last year (compare that finding with the 143 smaller companies that did so in 2005).
Posted by Sarah Johnson | January 10, 2008 10:15am | Comments (4)
As a former alumni of the Big 4, I agree that Small CAP's are better served by a regional accounting firm. The profit margins shrink and resources are tied up for the big 4 and its just to plain costly for the Small CAP.
Posted by Luis Rodriguez | January 10, 2008 12:48pm
The Big 4 all have strategies that focus on their top clients and the top part of the market. Almost by definition, small cap entities are going to be excluded from those strategies. The Big 4 will accept them as clients when the risk profile is manageable and to increase overall revenues, but they are not crucial to their business. As such, the level of service that a small cap can expect from a Big 4 audit team is not going to be the same as that of a top tier client, even if on a size adjusted basis the small caps will have as many if not more difficult issues and be coping with a lack of resources. Smaller firms, which are often times today part of larger international networks and often are the refuge of ex-Big 4 auditors, will be able to better service these accounts.
The capital markets need to understand that a change to a smaller auditor is generally not associated with trying to hide something, but instead with trying to balance the cost of the service with the quality of the provider.
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