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Thursday, Mar 28, 2024

Succession Issues Prompt Restructuring

By THOM SENZEE Contributing Reporter The landscape of the Valley’s accounting industry is changing. And according to industry sources, the forces behind these changes are retention, regulations and succession plans or the lack of such plans. Mergers and acquisitions have made the most news in the past year but other more internal changes are expected to continue to shape firms in the future, sources say. Good Swartz Brown & Berns (GSB & B;), which has offices in Woodland Hills, merged with New Jersey national accounting giant J.H. Cohn. According to David Swartz, partner at GSB & B;, the primary reason for accepting J.H. Cohn’s offer was the opportunity the partnership presented in terms of accommodating growth by augmenting service, training, and manpower. But there was another reason the offer was attractive. That reason represents a dynamic that is becoming more prevalent, Swartz said, in the accounting field. “One of the reasons we accepted J.H. Cohn’s offer in the end has to do with a trend facing the entire industry especially in mid- and small-sized firms,” Swartz said. That trend, or more accurately that problem, is the worry over succession. “Definitely a trend that is being discussed in the industry is the question of succession because of the aging of Baby Boomers. For some smaller firms it will be a case of running it out until they shut down, or merge or find someone uniquely capable internally,” Swartz said. Sandwiched between the so-called Millennials and the Baby Boomers the two largest living generations is the significantly smaller demographic whose members are currently between the ages of 26 and 43. The oldest members of Generation X constitute one of the smallest generational subsets. Put simply, there are fewer people in their late thirties and early forties now than there have been in almost four decades, according to figures from the U.S. Census Bureau. In accounting, a smaller pool of people means fewer candidates of the usual age when successors are groomed. An increase in recent years in the number of students graduating with accounting degrees, however, may help alleviate the problem in the future. Swartz attributes a lack of sufficient numbers of qualified accounting professionals to demographics rather than to Generation X’s reputation as the “slacker” generation. “There may be a bit of a vacuum between the two biggest generations,” Swartz said. “But before we say people in their thirties and early forties are lacking in abilities I’d like to point out that before we merged, we gave up the reigns to a 42-year-old who is now running the place.” Fred Solomon, senior partner at Solomon, Ross, Grey & Co. of Encino, believes some CPAs fear that no other partner can take care of their clients and their business the way they have. The next best thing for such accountants, Solomon said, is to sell to a big firm. “There is an issue of CPA-firm owners retiring and they don’t feel comfortable with their exit strategy,” Solomon said. “They don’t feel comfortable with whom they’re going to leave their practice. It’s like having a car you love; it’s your baby, and no one else can take care of it like you.” In addition to worries about clients retiring, owners are also worried about their own security. “They want to be secure in their payout,” he said. “The practice is an important asset to them.” Solomon acknowledged there is a severe shortage of accounting professionals. “It takes significantly more man hours to do a tax return with Sarbanes [-Oxley],” Solomon said. “There aren’t that many people out there with the traits necessary to do this kind of work.” Personnel issues notwithstanding, some Valley firms are also looking to reinforce and amplify their range of products and services, employee training programs, and marketing efforts by re-branding and absorbing specialty or niche-market firms. SingerLewak is one example. Formerly Singer Lewak Greenbaum & Goldstein, the firm shortened its name this year. At the same time, partners set out to establish a robust enterprise risk management service (ERMS) practice by acquiring another Valley firm that specialized in digital forensics and information systems management. “Accounting changes the same way every other business changes by becoming more and more information-based and of course more digital. It’s not just desirable for CPA firms to become skillful with IT strategy, it’s absolutely necessary,” said SingerLewak partner Robert Green. Green came to SingerLewak as co-founder of INSYNC, the IT and digital forensics firm it acquired as part of its ERMS push. He is now on a national committee charged with the duty of setting standards for educating CPAs to become certified information technology professionals. However, some of the region’s accounting firms are defying the trend toward mergers, acquisitions and repackaging by keeping a decidedly low profile. Case in point, Tone, Walling & Kissinger, CPAs in Westlake Village. “We’re way too small to be a trendsetter for anything that affects the industry even locally,” said Tone, Walling & Kissinger partner Thomas Tone. By the same token, Tone said, his boutique firm’s independent streak is facilitated by its size. “We are able to serve quite a few firms with well over five-million dollars in sales, as well as quite a few with less than that by sticking to the highly personalized type of work we do. By staying small and not merging with a larger firm, we’re actually in a better position to serve our clients well,” he said. Tone admits larger firms may be able to offer clients a wider breadth of accounting and business services. But, he asserts, none can offer more depth in the niche of practice areas he and his partners give their clients. “There are a lot of firms in the area that could out-service us by offering a large client of ours a CPA to fill in for a sick controller, or to do collections when they have the need, or do systems work,” he said. “But we keep our clients by doing what we do better and more fairly priced than most competitors.” His firm specializes in tax accounting, financial planning and business planning. Clients include small to medium-sized manufacturers and distributors located mostly in Southern California, as well as very large medical groups. “The last client we lost of any size was quite a while ago, and that was due to a sellout to the Chinese,” Tone said. “The real trend that threatens small firms like mine is not mergers as much as it is the overload of new rules from both the tax world and the accounting world.” Tone points to an example of what he considers to be an onerous new rule known to the accounting world as Fin 48. Actually Fin 48 is an interpretation by the Financial Accounting Standards Board (FASB) regarding the term “effectively settled.” Some say the interpretation could put accountants in a position of having to predict the behavior (i.e., propensity to audit) of tax authorities such as the IRS as they attempt to quantify the values of so-called uncertain deductibles. A dissenting opinion published by the board suggested it might be possible that tax accountants who comply with Fin 48 as originally interpreted by FASB staff could actually trigger tax authorities to reexamine their clients’ taxes from past years. “That is not something any CPA wants,” Tone said. “That’s the kind of trend that worries me as a small firm, and that’s why some of us are talking about writing ‘decline to disclose’ in regard to Fin 48.” On the other end of the size spectrum is Holthouse Carlin & Van Trigt. A partner representing the firm expressed a differing opinion about the merger trend embraced by SingerLewak and Good Swartz Brown & Berns. “We’ve been pretty content with our organic growth,” partner Blake Christian said. “We’ve had 20 percent growth since our inception about 18 years ago.” Holthouse Carlin & Van Trigt has offices in Encino and Westlake Village and other Southern California communities. Yet mergers, Christian said, are fraught with as much potential downfall as they are ripe with opportunity for growth. “With mergers, we feel you get a mixed bag,” he said. “We feel very comfortable when we build the firm by bringing in people who we have worked with before. There are cultural, personality, and geographic differences that can effect your operation on a daily basis when two companies merge.” One thing just about everyone agrees on is that 2009 will probably bring more mergers and acquisitions to the local accounting industry.

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