A Major Boon for Accounting's Minor League
Grant Thornton and Arthur Andersen have never tallied numbers in the same league. Andersen is one of the accounting industry's Big Five. With offices around the world, a staff of 85,000 and $9.3 billion in global revenue, the Chicago firm audits the financial statements of some of the world's largest companies, such as UAL Corp. (UAL ), parent of United Airlines. With just $1.7 billion in revenues and 22,000 workers, Grant Thornton has been more of a triple-A player. Also Chicago-based, the firm caters to middle-market clients whose annual sales range from $100 million to $1 billion, such as sportswear maker Nautica Enterprises.
Moreover, when clients switch auditors, the movement tends to be all one way. Plenty of smaller companies have migrated up to Andersen from Grant Thornton and its rivals in accounting's second tier, particularly when they are getting ready to go public. But the door has rarely swung the other way--until Andersen got caught up in the collapse of Enron Corp., that is.
Now, with Andersen's 1,400 public company clients suddenly in need of new auditors, the traffic is starting to head in the other direction. Audit partners at smaller accounting firms say their services are in hot demand. In the past three weeks, Grant Thornton CEO Ed Nusbaum says his firm has taken on eight former Andersen clients and has fielded calls from hundreds of others. They aren't alone. BDO Seidman LLP, the country's eighth-largest accounting and consulting firm, has also snagged a number of Andersen clients since January. And on Mar. 19, it announced negotiations with Andersen to buy segments of its business, a prospect unthinkable just months ago. "The speed of change is mind-boggling," says Grant Thornton's Nusbaum. "We're in uncharted territory."
Indeed, as Andersen's prospects have crumbled, a surprising number of clients appear to be turning to the industry's second tier instead of its Big Five. Many chief financial officers are using the opportunity to rethink the need to go with the high-priced majors. "You will see significant growth in the next three years in the Grant Thorntons of the world," says William L. Wann, CFO at Offshore Tool & Energy (OFTEF ), which switched from Andersen to Grant Thornton in 2000. "If you can save 35% on your audit and get the same service, you're crazy not to."
That's a big change. Over the past 30 years, as business became more international, companies demanded accounting outfits that could allocate huge teams to audit their books worldwide and provide any tax or consulting services they might need. That forced a global consolidation, as U.S. firms paired up with foreign auditors and the industry shrank from the Big Eight in 1989 to today's Big Five.
But as Andersen's clients look for new auditors, many are rethinking what they truly need. According to Auditor-Trak, a service of Atlanta's Strafford Publications Inc., 41 public companies have dismissed Andersen as their auditor since Dec. 1, up from 21 in the same period last year. Five have not yet chosen a replacement, and 24 signed on with other Big Five firms. But a dozen--mostly smaller clients that didn't require Andersen's global reach--chose to cast their lot with the second tier. "There was no reason for them to be there other than the security of one of the big names," says Arthur W. Bowman, editor of Bowman's Accounting Report in Atlanta. "And that's not very secure anymore."
The scramble for Andersen's clients has left smaller outfits pitching their services just as fervently as Andersen's Big Five rivals. Marketing departments are writing its clients. Partners are calling on professional allies to get their names passed on to CFOs. "We're trying to be as aggressive as we possibly can," says Leland E. Graul, the head of BDO Seidman's audit practice. "You only get this kind of opportunity once in a blue moon."
Still, there are limits to how much the small fry can grab. Major multinationals aren't likely to sign on with a firm that doesn't span the globe. Of course, for a second-tier player, picking up even 10% of Andersen's roster would be a coup; that alone would almost double BDO's public audit business, Graul points out. It may not be the big leagues, but it's plenty big enough.
By Nanette Byrnes in New York