THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, January 8, 1996 TAG: 9601060344
SECTION: BUSINESS WEEKLY PAGE: 8 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, BUSINESS WEEKLY
LENGTH: Long : 157 lines
Over the years, Goodman & Co., L.L.P., pushed beyond its Norfolk home by absorbing accounting firms in Virginia Beach, Newport News and Richmond.
Another merger in October extended Goodman's reach to Petersburg and Colonial Heights.
Now the largest accounting firm based in Hampton Roads is working on a different kind of merger. In a sign of the mounting pressure on the accounting industry, Goodman is seeking to enter another line of business - selling information-processing equipment and advice.
Goodman has been negotiating to buy a small information-technology company in Hampton Roads and said it expects to complete the transaction later this month.
``We feel like there will be profound effects from the advances in information technology,'' said Donald M. Dale, Goodman's managing partner and chairman of the firm's executive committee. ``We want to get into the whole spectrum of information processing, from beginning to end.''
This quest for information-processing expertise comes amid growing realization by accounting firms that they have to make their services more valuable if they expect to hold onto clients.
``The firms that aren't doing this won't be here,'' said Arthur Bowman, editor of Bowman's Accounting Report, an Atlanta publication that tracks developments at the nation's accounting firms.
Because of fierce competition for clients and the rapid changes in technology, ``the accounting profession as we know it won't be around in five years,'' Bowman predicted.
For almost a decade, accounting firms have been slashing the fees they charge for a major source of business: auditing the books of companies, municipalities and non-profit organizations.
``Firms have been willing to pick up an audit client whatever the price,'' said Douglas E. Ziegenfuss, an associate professor of accounting at Old Dominion University in Norfolk. ``It's gotten so competitive that the audit is seen as a loss leader to get a company into the accounting firm.''
Once that client has been signed up, accounting firms hope to offset their losses on auditing by providing other services to the client.
At its most basic level, an audit involves independently testing those parts of a financial statement that can be verified and then reporting on their reliability.
By law, companies whose shares are publicly traded must have their annual financial results audited by independent CPAs. In addition, lenders and investors often require audited statements from privately held companies.
In the wake of some widely publicized financial scandals, federal agencies have required accounting firms to look more closely for fraud and management irregularities when they audit their clients' books.
In many instances, that has added to the cost of performing an audit, but accounting firms have difficulty passing on the added cost to clients.
Meanwhile, accounting firms are concerned that creditors, investors and other users of financial statements might devise their own auditing systems and reduce their need for audited statements.
The American Institute of Certified Public Accountants, an organization that sets professional standards and conducts research, responded to these concerns in October 1994 ago by launching a study of the auditing process.
Since then, the institute's Special Committee on Assurance Services has been examining the usefulness of information in audits and discussing ways that audits might be tailored to investors' and creditors' needs.
``We issue numbers, but people want a context for them,'' said Don Pallais, a Richmond CPA and executive director of the AICPA special committee. ``There's no lack of information, but people want to know, `How do I use it?' ''
In a preliminary report issued last October, the committee warned that if the accounting profession fails to change, ``it will inevitably lose market share in the information business, cease to be attractive to the brightest students choosing careers, and become less relevant in business and society.''
Goodman isn't waiting around for the committee's recommendations. By acquiring an information-processing company, the Norfolk firm wants to apply more sophisticated techniques to the ways it gathers and analyzes information for clients.
Dale said the company Goodman is negotiating with has annual revenues of $1.3 million but declined to disclose its name. The accounting firm's plans call for keeping the company's management in place after the transaction, he said.
Goodman's pursuit of information-processing expertise emerged from a five-year effort to improve the firm's productivity.
Organized in 1932, Goodman expanded the 1960s, 1970s and early 1980s with a string of mergers. But by 1990, its partners realized they had to do something about the firm's productivity. The solution involved trimming the size of Goodman's workforce.
``We found we had too many people,'' Dale said. ``In our business, the main expense is personnel.''
The firm accomplished part of its goal by shrinking in size and hiring 10 or so CPAs from December through April to meet the seasonal demand for audit and tax work.
Today, Goodman has 130 employees, which is down by about 30 percent from the firm's peak employment in the late 1980s, Dale said.
While reducing its workforce, Goodman spent hundreds of thousands of dollars on new computer software and equipment, including laptop computers that its accountants can take with them to clients' offices.
However, growth in Goodman's annual revenues stalled in the process. In 1993 and again in 1994, its revenues declined from the previous year. For the fiscal year ended last June 30, Goodman's gross revenues amounted to $13.05 million, a 7 percent increase from the previous year.
In its 1995 ranking of the nation's accounting and tax firms by revenues, the trade magazine Accounting Today put Goodman in 75th place. That was down three notches from 72nd on Accounting Today's list in 1994.
Sheppard Miller, Goodman's administrator, said the revenue comparisons don't adequately reflect the firm's performance. Because of improvements in efficiency, the firm has been accomplishing more work with fewer employees, he said.
Meanwhile, another key measure of performance - compensation per partner - is increasing, Miller said. He declined to disclose the compensation figures.
As part of its planned acquisition of the information-processing company, Goodman may open an office in Virginia Beach for some of its CPAs, Dale said.
And Goodman will continue prospecting for merger candidates, especially in areas of eastern Virginia where Goodman already has a presence, he said.
The acquisition of Petersburg firm Erny & Mason P.C. last October began with a suggestion from a Goodman partner in late 1994 that Dale meet with the firm. Goodman was already familiar with the Petersburg firm because the two had jointly worked on an audit of a client's financial statements.
Erny & Mason had 13 employees, including 8 CPAs, and $1.2 million of annual revenues. But it also had a problem common to many smaller firms: funding their partners' retirement compensation, Dale said.
Difficulties paying for partners' retirements, along with the need for smaller firms to broaden their services, will prompt many accounting firms to seek acquirers, Dale predicted. However, Goodman will continue weighing a firm's expertise, location and ability to fit into Goodman when considering merger candidates, he said. ILLUSTRATION: Color photo by Vicki Cronis/The Virginian-Pilot
"We feel like there will be profound effects from the advances in
information technology," says Donald M. Dale, Goodman's managing
partner and chairman of the firm's executive committee. "We want to
get into the whole spectrum of information processing, from begining
to end." Sheppard Miller, Goodman's administrator, left, and
Goodman, director of management advisory services, stand in the
backround.
Staff Graphics
Source of Revenues
Goodman & Co. L.L.P
[Breakdown of Company]
Revenues, 1990-96
Clients
For copy of graphic, see microfilm
by CNB