Coping with a changing marketplace.

• Position: Accounting firms

Whether or not they audit public companies, small and midsize firms need to be alert to events that will have an impact on how they provide services in the future. In a conversation with The Practicing CPA, James G. Castellano, Immediate Past AICPA Chairman and managing partner, Rubin, Brown, Gornstein & Co., LLP, St. Louis, predicted how CPA firms may be affected in the future and offered advice on how they can cope. The following is based on that conversation.

"Small and midsize firms should carefully observe the PCAOB (Public Company Accountancy Oversight Board), its actions, and its decisions," advises James G. Castellano. Even though their practices won't be directly affected if they are not registered with the board, if they're not doing public company work, the likelihood of what Castellano calls "marketplace cascade" is very real. "I can imagine various entities that aren't subject to the PCAOB will follow its guidelines," Castellano said. Such entities, he explains, would most likely be the more significant public interest entities such as financial institutions, nonprofit organizations, and pension funds. Although they are not considered public companies subject to the PCAOB, they may be the first group to look to the guidance of the PCAOB in their governance structures.

"Beyond that, we could expect that the marketplace may drive some of these changes as they would relate to nonpublic companies. Financial institutions that are lending money to private companies, for example, might begin imposing some of the requirements of the PCAOB in loan agreements and similar transactions."

Castellano adds, "I can also imagine accountants defending themselves in litigation being held to some of the standards that the PCAOB establishes even though they wouldn't be applicable. My advice is 'Don't ignore it. Be a careful observer of what the PCAOB actually does.' "

Small and midsize firms that audit one or two public companies, Castellano said, need to evaluate carefully whether they continue that line of service because it's going to require a serious commitment and would subject the firms to a regulatory risk in addition to the market risk they've always had in auditing public companies. But Castellano thinks there are several opportunities for small and midsize firms. Publicity has caused the public to focus more on the audit and to ask questions to get a better understanding of what an audit is. He said, "There's probably never been a better...