Accountants Survive Big 8 Invasion by Specializing
One local accounting firm thrives by keeping doctors out of bogus tax shelters. Another has formed an international network to broaden its reach. A third firm is moving out of the San Fernando Valley to grow faster.
Six years after the first of the Big Eight accounting firms arrived in the San Fernando Valley, the dust has settled on ledgers and the area’s independent accounting firms appear to be doing just fine.
The Big Eight were lured here by the Valley’s economic growth and abundant cheap office space. The octet, which includes Peat, Marwick, Mitchell and Arthur Young, are to accounting what IBM is to computers.
It was feared the Big Eight would dominate the accounting business in the Valley.
Big Eight Brought Change
Granted, the presence of the Big Eight inevitably brought change. The Valley’s biggest accounting firm is now Arthur Young, with 84 professionals and 13 other staffers. And seven of the Big Eight--all but Coopers & Lybrand now have Valley offices--are clustered like blackbirds in Warner Center. Together they have 335 accountants, consultants and other professionals.
But the indigenous firms for the most part continue to thrive. For all the Big Eight’s financial clout, they still make up only a small portion of the Valley’s accounting firms--600 in all, according to the California Society of CPAs.
The Big Eight did intensify competition for clients among Valley accountants, but the initial competitive frenzy, marked by intense wooing and lowball pricing on audits, appears to have eased in the past year.
Merger Offers Rebuffed
Plus, the local firms have fought back. When the Big Eight started their invasion, they approached a number of the larger local firms about possible mergers. Coopers & Lybrand made a proposal to Gish, Seiden & Sharon, a 22-accountant Sherman Oaks firm that has been in the Valley for 30 years. But Gish, Seiden managing partner Edward Fidelman said his company wasn’t interested.
Instead, Gish, Seiden helped organize a network called Accounting Group International that now has 13 U.S. firms, plus two in Canada, six in Europe, and one each in India, Nigeria, and Saudi Arabia.
Local firms also say they compete by charging less, except for audits. Edward White & Co., for example, an independent, 23-accountant firm in Woodland Hills, charges from $45 an hour to $225 an hour, depending on who is working the account. By contrast, the Big Eight firms charge $45 to $65 an hour on the low end, up to $250 per hour on the high end.
Lower Prices
But Jake Jacobs, managing partner of the Peat, Marwick Valley office, insisted that the Big Eight are actually cheaper. He said small-firm clients are often unwilling to question their accounting bills, and that the Big Eight can supply lower-priced associates to cut the cost of grunt work.
A key for local accountants is to try and cultivate an ongoing consulting service for their clients, by stressing financial planning, tax services, and inventory controls.
“We can work closer with a company’s management,” said Michael Blue of Plat, Blue & Lucove, an eight-accountant firm in Woodland Hills. Because small companies are more important to them as clients, he said, “you have more seasoned people working the engagement.”
One Encino accounting firm, Kaufman & Enzer, keeps the Big Eight at bay by specializing in doctors, psychotherapists and dentists. Those professionals account for 70 to 75% of the company’s business.
For firms like Kaufman & Enzer, the new tax law will add up to higher billings. Accountants generally agree that a small business might end up paying the same tax, but arriving at that number will require far more accounting work.
The new law also imposes tough scheduling changes. With few exceptions, for example, professional practices will all have to end their fiscal year on Dec. 31, starting in the 1987 tax year. That will produce two fiscal years in calendar 1987 for some clients and intensify the seasonal crunch that is the bane of accounting.
The rivalry between the small and the Big Eight firms, while not as ferocious, remains competitive. Partners at several of the locals said they believe most of the big firms in the Valley will try to take any client paying more than $10,000 or $12,000 a year in accounting fees.
Increase in Cooperation
Still, there is more cooperation among Valley accounting firms. Melvyn Kohn, managing partner of Kirsh, Stein, Kohn & Oster in Encino, says his firm will hire Peat, Marwick when it needs more expertise in a particular business area, and has also used Peat, Marwick to provide the Big Eight imprimatur on a public offering.
“We have to be aware of what we don’t know,” Kohn said. “The nationals look for work from smaller firms. They have down time.”
Another reason for continued prosperity is that neither the national nor the local firms have restricted themselves to Valley business. Some of the Big Eight firms work on Westside accounts from their Valley offices. And Gish, Seiden says only 20% of its practice is actually in the Valley.
Despite the influx of the Big Eight firms, the Valley apparently does have limitations for an accounting firm that wants to grow.
Partners Split
What was the 40-accountant Sherman Oaks firm of Block, Good & Gagerman (probably the biggest independent firm in the Valley) is now a smaller Good, Gagerman & Berns. The firm, which plans to move to West Los Angeles in July, will be going without Gerald S. Block, two other partners and three additional accountants, who will remain in the Valley as the new firm of Block, Plant & Eglin.
Block and former partner Melvin Gagerman said they split over how fast the 10-year-old firm should grow and whether it should move. Both said it had nothing to do with competition from the Big Eight.
“First of all,” said Gagerman, “most of the big business is on the other side of the hill. The other thing is, we get a lot of pressure from bankers and lawyers to be where the action is.” And finally, he added, “For some reason, to many people there is still a stigma associated with the Valley.”
BIG EIGHT ACCOUNTING FIRMS IN THE VALLEY
Arrival Firm Date Accts* Arthur Young 2/84 84 Arthur Andersen 7/83 75 Deloitte Haskins & Sells 2/84 60 Price, Waterhouse 1/83 50 Peat Marwick 12/80 40 Touche Ross 1/86 15 Ernst & Whinney 8/85 11
* Figure includes consultants and other professionals.
