Smaller Firms Gaining Share
It sounds worse than it is, but Independent Bank Corp. just got a divorce.
The Ionia-based bank has left its Big Four external auditing firm, the relatively new trophy partner with the Detroit office, KPMG LLP, and gone back to an old flame in Grand Rapids, Crowe Chizek.
“We decided we wanted to move away from a Big Four firm and Crowe does a lot of publicly traded banks,” said Robert Shuster, Independent Bank’s CFO. “And they have a large office in Grand Rapids, so they could service us much more readily.”
Plus, the fee structure on the second tier is cheaper. What KPMG did for $350,000 a year ago, Crowe Chizek will do for $300,000.
“Across the board, we’ve seen migration to more public company work for some of the smaller, mid-market companies,” said Bob Herr, managing partner of Crowe Chizek’s West Michigan office. “It’s somewhat a supply and demand issue.”
For the largest companies, the global brands that require global accounting firms, there are only four choices for external auditors: Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young. Given the increased volume created by the Sarbanes-Oxley legislation, and the additional rule that external auditors cannot provide other consulting services, the Big Four have found an unprecedented degree of work from a relatively small number of clients.
Ernst & Young, which counts Herman Miller, Wolverine World Wide and Universal Forest Products among its West Michigan clients, has experienced 25 percent growth here over the past three years, according to Dave Hoogendoorn, managing partner.
Locally, its portfolio has arguably the highest concentration of publicly traded companies in the region. But, oddly, no firm lost more clients than Ernst & Young last year, as it dropped 196 auditing clients nationwide, according to trade publication Audit Analytics.
“They’re focusing on the larger companies,” Herr said. “And some of the smaller ones are looking elsewhere.”
More than 78 percent of publicly traded companies changed auditors last year, according to a study by proxy advisory firm Glass Lewis & Co.
Crowe Chizek’s publicly traded client base has grown by 25 percent this year. Independent Bank marked a reversal of fortunes; not long ago, it decided it had outgrown accounting’s second tier.
Another top 10 firm has also been successful at wooing publicly traded clients, as BDO Seidman now boasts 15 publicly traded clients in West Michigan. Nationally, no firm picked up more publicly traded business, as BDO added 39 clients.
“There has been a reshuffling of companies with accounting firms,” said managing partner Tom Hiller. “Depending on where you fall in the hierarchy of firms, there are resource constraints.”
While Hiller said that the firm still cherishes its engagements with family owned companies and the nonpublic sector, the SOX-related work has proved its best growth engine. With its national insurance agency practice in Grand Rapids, BDO is locally attracting clients from outside of the area, including one insurance company from as far away as Alabama. Fremont Insurance is another key addition.
On the next rung, regional firms like Andrews Hooper & Pavlik PLC are finding the best of both worlds. From almost no presence here two years ago, the firm has picked up nearly 30 corporate clients.
Managing partner Stephen Miller has found clients by absorbing expanding businesses that have outgrown smaller firms, as well as with clients referred or dropped by the national firms.
“As the larger firms become busier with larger clients, there isn’t as much time in their schedule to deal with middle market clients,” he said.
Sometimes it is a joint decision, he said, with the larger firm deciding it should hand off the work.
“We try to make sure that we are well thought of by those firms that might be looking for a place to refer that type of entity,” Miller said.
Miller is not alone in that thought.
“We’ve hit the fallout from the national firms,” said Don Burke, managing partner of The Rehmann Group. Burke reasons that the upper tier firms would prefer to hand off work to a smaller firm, rather than allow a competitor to snatch it away. “I’ve met with national firms. We have nice, friendly relationships. We’re a resource for those firms.”
Bill Morgan, senior accountant at the five-employee Donald D. Morgan PC in Grand Rapids, jokes that his firm sits on the fifth or sixth tier. It, too, has enjoyed additional audit work.
“I hate to say it like this, but we’ve picked up several of what I think the larger firms see as nuisance accounts,” Morgan said.
The new clients are mostly medium-sized nonprofit organizations, each a significant catch for Morgan’s firm, but a barely profitable endeavor for a large firm.
“What’s happening is that everyone is cutting out their bottom halves,” Morgan said. “And everyone down the line is picking up business. That’s how you see companies like Crowe Chizek competing with Ernst & Young.”
That may even spread all the way down to single proprietors like Doug Zandstra, who recently opened a practice a floor above Morgan’s offices in the Amway Grand Plaza Hotel.
“There is a lot of small business out there, and every business needs compliance work,” Zandstra said. “I’m not out to un-establish relationships; I’m looking for ways I can add value.”