When Frank Lordi started getting calls from accounting giants PricewaterhouseCoopers and KPMG, he knew he was onto something big.
Lordi’s small financial consulting firm, Lordi Consulting in West Chester, Pa., had developed an expertise in helping companies comply with the Sarbanes-Oxley Act. In the fall of 2002, the phone started ringing.
"They were asking us to come help their clients because they didn't want the other big firms to make inroads with them," Lordi told the New York Times. "We realized there was going to be a huge opportunity to be a second source to these companies."
Lordi’s firm is one of many small accounting businesses that have taken advantage of the new regulations to attract big clients with lower prices and specialized accountants. The result, the Times reports, is that small firms are winning a significant portion of the Sarbanes-Oxley compliance business.
The law, sparked by mammoth accounting scandals at Enron and WorldCom, requires tight internal controls over financial reporting, but the law prevents companies from using their auditing firms. Big Four firms are reaching out to small businesses to write accounting policies and implement accounting rules — work they can’t do anymore.
Lordi’s client list now includes Cephalon, Crown Holdings Inc., GlaxoSmithKline, and Rohm and Hass. Lordi employed five full-time employees in 2001; now he has 36. Its other business unit, a placement agency for temporary accounting staff, merged with Lordi Consulting in January 2003. Lordi now expects the company to do about $8 million of business this year, versus $500,000 in 2001.
Similarly, CPA David Landau projects that his firm, David Landau & Associates, in Roseland, N.J., will increase its revenues by 450 percent this year. He estimates that his fees for Sarbanes-Oxley compliance are about a third less than the Big Four.
"It's competitive out there," Landau said, "but what I'm beginning to see is that a lot of the chief financial officers are reluctant to spend big dollars on this because they just see it as a compliance cost. They're looking at alternative cost situations where they can get the same work done at a better price."
According to a recent study by Financial Executives International, public companies expect to spend an average of nearly $2 million in the first year to comply with the new rules.
Harry Mumma is the director of internal audit at Crown Holdings Inc., a Philadelphia-based maker of packaging products. Lordi Consulting cost the company half as much a national firm would charge to do the compliance work for Crown's Americas division, he said.
Why did he choose the small firm? "They had practical experience. They were already doing this with another significantly large company," Mumma said. "They focused us on the approach and how to do it, and they had already worked with our external auditors at another client, so the auditors had already signed off on their methodology."
And Mumma said he knew that if there was a problem, he could go "right to the top" with Lordi. "These guys are a little hungrier."