IPA 100 Giants Jockey For Their Territory At The Top; Keep An Eye On KPMG, BDO Seidman, RSM...

Growth among the nation's largest local and regional firms is the most obvious statistic to emerge from IPA's 2005 Annual Analysis of Firms, but there's plenty of news keeping national firms in the

As IPA went to press, KPMG was negotiating with the U.S. Department of Justice over tax shelters it sold in the late 1990s that turned out to be, well, illegal. Sure, PricewaterhouseCoopers and Ernst & Young engaged in similar shenanigans, but those firms played ball with the feds early on: They didn't want the heat, so they got the heck out of the kitchen and are no longer facing the fire. Neither is BDO, which sold similar shelters. The investigation into its activities is in a state of legal limbo known as "administrative hold."

Which leaves us observing the KPMG-DOJ imbroglio with a mixture of amusement and horror. The feds are forced to structure KPMG's punishment in a way that avoids triggering its collapse. The firm will survive by enduring a fine, some oversight and much embarrassment. KPMG itself won't be indicted (or convicted) as Andersen was, even though top executives at KPMG knew about and blessed those tax shelters knowing that they pushed the envelope. Some of the execs, including KPMG's vice chairman, later lost their jobs as a result and may even be indicted as individuals, and the firm (and other firms) still must contend with civil suits brought by clients who believe they were harmed. But a death sentence for KPMG leaves the business world with a Big Three and makes for a punishment that does more harm than the crime. So while the government postures and preens like a young jay flaunting his feathered finery, we all know that its wings are really clipped.

... Are storms brewing at BDO Seidman? Depends on who you ask. BDO grew 21% in FY05 - only the second time in the last five years that BDO has posted positive growth. BDO has more new SEC audit clients than any other firm: a net gain of 71 (109 new clients minus 38 lost).

So life is good if you're a New York audit partner at BDO. Assurance now accounts for 62% of EDO's revenue, and the New York office accounts for 30% to 40%. But if you're not a New York audit partner, well, life might not be so great, insiders tell IPA.

Can BDO Keep Its Tax, Audit Partners On The Same Team?

"There's tremendous internal strife between audit and tax partners at BDO," says a source close to the firm who asked not be identified. "Tax partners are second-class citizens. In the short term, BDO will do very well, but in the long term, BDO is rudderless. Grant Thornton will eat their lunch."

Not so, says CEO Jack Weisbaum. "There are no second-class citizens at BDO," he says. "Every partner is evaluated on what he or she does and how well they reach their goals." The firm is also enjoying "tremendous effort" out of its offices in Houston, Dallas and on the West Coast, he says. "We have some real golden boys and golden girls who are not based in New York."

He's encouraging BDO tax partners to pursue the same strategy that assurance partners are using to grow business: "We're an alternative to the Big Four, and we're servicing the daylights out of [former Big Four] clients so they'll never want to leave. There is no reason that tax partners can't benefit from the same strategy." Translation: target competitors' audit clients on the well-founded assumption that many audit committees don't want their auditors doing their tax work. Weisbaum predicts continued growth in assurance services, but he also expects increased growth in the firm's tax and special services lines. Tax services currently account for 26% of revenue, and "special services" (such as litigation and healthcare consulting) make up 12% of revenue.

RSM McGladrey Hits One Out Of The Park With AmEx Deal

... Ever see a baseball player show up for spring training with a mysteriously bulked-up bod? RSM McGladrey is playing with new muscle as it absorbs its parent company's recent purchase of American Express Tax & Business Services. But ignore the mainstream media hype that the deal creates a new "Big Five," just because RSM revenue now exceeds $1 billion: these folks have no intention of vying for a GM audit. They're staying squarely in the middle market.

The deal gives RSM a greater market presence than it's ever had: approximately $200 million in Chicago and $150 million in New York, as well as a new market, Cleveland. "Clearly RSM is the leading firm in Chicago now. It owns that market," says a knowledgeable source close to the firm who asked not to be identified. "McGladrey is a behemoth there. And in New York, RSM McGladrey goes from not being anything - like, maybe $50 million - to really validating themselves as a leader in the middle market."

Price Reflects A Multiple Of Profit, Not Of Revenue

One of the more telling facts is the $220 million RSM's parent company, H&R Block, paid for AmEx TBS, which reported net revenue of $385 million for FY04. What seems like a bargain may in fact be a true reflection of accounting firm value, experts say.

"The $220 million price is a multiple of earnings, not a multiple of revenue," explains August Aquila, director of practice management at The Growth Partnership and former VP of acquisitions for AmEx TBS. Terry Putney, president of Accounting Transition Advisors and former managing director of mergers and acquisitions for RSM McGladrey, agrees: "Gross revenue had nothing to do with it. It sends a signal to the market about what accounting firms are truly worth. Sellers often think their firms are worth 1.0 or 1.5 times gross, but you must say, "What is the true value of this business?" Cleveland-based CBIZ is taking a value-based approach to its acquisitions nowadays rather than offering a multiple of revenue, says Len Miller, senior vice president of tax and accounting services. "I don't believe Block received a big discount based on the revenue of AmEx TBS. I believe the price was based on a multiple of profit, which is how it should be."

Miller welcomes the competition as CBIZ returns to acquisition mode. Conventional wisdom says RSM officials will concentrate their efforts on integrating AmEx, which itself is a huge challenge: "In Chicago, McGladrey and AmEx TBS are a bit like the Cubs and the White Sox," says Allan Koltin, president of Chicago-based PDI Global. "Now they're being asked to play as one team. The devil is in the details."

But Mark Ernst, CEO of H&R Block and a former senior executive at AmEx, doesn't rule out additional acquisitions just because a big new kid is being adopted into the family. "The reality is that there aren't a significant number of acquisition opportunities," he tells IPA. "We've been focusing on making our infrastructure really effective, but we would clearly choose to develop new markets. For example, Houston and Detroit are two markets where we don't have a strong presence, and even with this deal, we don't have the focus there that we'd like. We'd have to acquire to. get into those markets, but we'll be very patient and selective about the firms we acquire."

UHY Advisors, are you listening? The future of the Chicago-based company is the biggest question mark when observers speculate about the future of consolidators. It's often cited as the next logical acquisition for both CBIZ and H&R Block. Coincidentally - or not - two of UHY's largest, most profitable firms are located - can you guess?- in Houston and Detroit.