The Impact of Consulting Services on Small Firms.

• Author: Mastracchio, Nicholas J.

During the Securities and Exchange Commission's (SEC's) public hearings on its proposed rules for accountants' independence, concern was expressed that the restrictions on consulting services could be a blow to the smaller accounting firms and their clients. The concern was that the SEC rules would "trickle down" through the various state boards of accountancy and result in new restrictions on small firms and their clients. It was pointed out that smaller firms are in a unique position to know more about the operations of their clients than anyone else. Their clients look to them for assistance, and often they are the only resource for the client.

During the comment period, SEC Chairman Arthur Levitt made numerous comments about his respect for the small accounting firms, calling them "the soul of America's accounting profession" and "the very glue of the local financial community." He pointed out that the SEC rules did not apply to these firms and their clients and rejected the trickle-down theory as a consequence of the SEC rules.

In the January 2001 issue of the State Board Report, Chairman of the National Association of State Boards of Accountancy (NASBA) John B. Peace, CPA, Esq., urged state boards to proceed cautiously. He argues that what may be good regulations for auditors of publicly traded companies may or may not be relevant for auditors of nonpublic companies. The NASBA Ethics Committee has been asked to assist in appointing a special task force within NASBA to study the new SEC rules and provide guidance to the state boards. The task force will focus on the rules dealing with consulting services for audit clients.

How important is consulting to the smaller CPA firms? Would there be a significant impact on CPA practices if some of their consulting revenue were to disappear? An analysis of these and related questions was undertaken from the 1999 AOMAR/AICPA survey, gathered informally at a Practitioners Symposium. This was not a statistically valid survey, but it does lead to some interesting insights.

The 109 firms in the survey had a significant amount of consulting work (one firm was deleted because the distribution of services did not add up to 100%). Only 11 firms reported no consulting and the amount at one practice was as high as 59% of gross fees per owner. Both the mean and the median of the practice revenues per owner coming from consulting services were 15%.

One of the issues examined was whether consulting services...