Hottest New Area In Accounting and Why The Big 4 Will Miss Out

What’s the hottest new area of expertise in the accounting world?

I’m thinking of something other than bankruptcy, IFRS expertise or fair value accounting, which are on the horizon, looming.

Let me give you some hints:

“In January 2005, management substantially expanded its internal review and engaged FTI Consulting, Inc., who have extensive financial experience and expertise in generally accepted accounting principles (“GAAP”), to supplement management’s efforts.”

“…In addition, there are some who feel that (external) auditors have taken the independence issue to an extreme by decling to assist their clients on difficult accounting issues. The next step in this
evolution will be for registrants to adjust and fill the void created by this shift. This can be accomplished by adding resources internally or by hiring new service providers as consultants.”

New 2006 Material Weaknesses”>”Management has determined that the following additional material weaknesses in its internal control over financial reporting existed at December 31, 2006.

Insufficient numbers of personnel having appropriate knowledge, experience and training in the application of U.S. GAAP at both the Company’s operating locations and corporate headquarters, and insufficient personnel at the Company’s corporate headquarters to provide effective oversight and review of financial transactions. The Company’s controls over the selection and application of generally accepted accounting principles as applied in the U.S. (GAAP) are ineffective as a result of insufficient resources and technical accounting expertise within the organization to resolve accounting matters in a timely manner. Furthermore, accounting for transactions is performed across multiple locations that are not adequately staffed or are staffed with individuals that do not have the appropriate level of GAAP knowledge, resulting in non-timely completion of various accounting and financial reporting requirements. Additional personnel and oversight is needed within the Company to ensure timely completion of financial reporting requirements and to review the accounting for transactions to ensure compliance with GAAP.”

Item 9A. Controls and Procedures

The Company’s finance and accounting resources were insufficient in number, insufficiently trained, and authority and responsibility were not properly delegated as of December 31, 2006. Accordingly, in certain circumstances, accounting control activities were not performed consistently, accurately, and timely, and an effective review of technical accounting matters was not consistently performed…”

This business will be dominated by independent firms, such as Huron Consulting and FTI Consulting. Why? Because the companies that need this expertise are either too small for the Big 4 or are too big. When they are really big and have significant issues such as restatements, SEC investigations and adverse opinions on their internal controls, they often already have a Big 4 firm as an external auditor, another one as an internal audit co-sourcer, and perhaps another supporting them in tax and M&A issues. The Big 4 are “independenced” out of the running.

These experts are not born under a cabbage. The pedigree, in one way or another, is usually originally Big 4, since they are the firms that can afford the expensive training and research departments that allow a young professional to develop into a technical expert. However, given the changes that occurred when Arthur Andersen collapsed and the restrictions on certain services after Sarbanes-Oxley was passed, the firms divested themselves of many very interesting and valuable service areas, given their fear of independence issues and their overall lack of ability to manage niche practices and unique individuals.

Huron Consulting is a phoenix from the ashes of Arthur Andersen. As an independent (non-audit) firm, they have the Big 5 pedigree, one they share with another independent service provider, Protiviti.

FTI has an interesting history, starting small and niche and slowly buying up boutique firms as they became available, but always staying focused on their areas of strength. Their big breaks came after SOx was passed:

“2003 – In 2003, FTI made three key acquisitions-SEC investigation specialists, Ten Eyck Associates; the Dispute Advisory Services Business of KPMG; and economic consulting powerhouse Lexecon – giving FTI unmatched depth and breadth of expertise. The acquisition brought the FTI headcount to over 1000 in 23 cities including London.

2002 – FTI acquires PricewaterhouseCoopers Business Recovery Services division, the leading provider of bankruptcy, turnaround and business restructuring services to corporations in the United States. The acquisition added an additional 371 talented professionals including 49 partners in 15 offices across the country. ”

You have to bet that the Big 4 wishes they hadn’t sold those businesses now. Although some firms, like E&Y, have made a policy decision not to provide GAAP consulting, even when they theoretically could. Too risky…

In fact, once non-competes expire, the others are starting these practices all over again, albeit with very strong competitors already in the market and one arm tied behind their back with independence restrictions. Unfortunately for them, the market for any consulting practice in the Big 4 is limited, significantly, to only companies where they do not provide external audit services or are not an “auditor-in-waiting” or are not performing another service like internal audit or Sarbanes-Oxley co-sourcing that may put them in violation of independence rules.