Section 404 of the Sarbanes-Oxley Act (SOX) requires public companies to document and report annually on their corporate internal controls. SOX also requires executives to confirm the accuracy of their company’s financials. SOX compliance usually requires the outsourcing of the audit function to Big Four accounting firms but that has changing since the act was enacted in 2002.

The Big Four are Deliotte, Earnst & Young, PricewaterhouseCoopers, and KPMG. The most important feature of SOX facilitating competition outside of the Big Four firms is the provision that prohibits a single accounting firm from providing consulting and auditing services to a client.

With the Big Four auditing 90 percent of revenues generated by public companies according to the Indianapolis Star but have not been able to provide proper service, consultation, or attractive pricing for the extent of their services offered across their client bases. Second-tier accounting firms such as Crowe Chizek and Co., Grant Thornton, BDO Siedman, and RSM McGladrey have capitalized on the relative shortcomings of the Big Four and picked up 417 ex-Big Four clients since 2003 according to the Indianapolis Star.

SOX compliance has increased the cost of of an average corporate audit from $1.6 million in 2001 to $4.2 million last year according to a study completed by Foley & Lardner cited by the Indianapolis Star. Section 404 compliance required Independent Bank Corporation to spend an additional $600,000 last year, said their CFO Robert Shuster speaking to the Indianapolis Star.

Second-tier firms have increased their staffs to be able to provide the level of expertise and service required but at a lower cost. These firms outside of the Big Four are also concentrating on specific industry segments to allow them to keep smaller, more efficient staffs.

Hiring has become more important for second-tier accounting firms as well as the Big Four. Compensation is rising. Employees are being offered more flexible work arrangements to attract the necessary expertise to attract and keep clients.

“The demand continues to outstrip the supply,” said Tom Bourne, president-elect of the Washington Society of CPAs.

“It’s really turning into more of a candidate market. The cadidates are much harder to find and companies are willing to pay a much higher fee to remain competitive,” said Jill Ratner, the Pittsburgh director for Robert Half Finance and Accounting’s permanent placement division speaking with the Pittsburgh Business Times.

Firms such as Crow Chizek have developed software tools to outline client compliance options easier. They have also released a Section 404 guide to help clients and potential clients get through first-year compliance according to the Indianapolis Star

Firms are also acquiring other firms to have the expertise to be competitive and even specialize. A good example is RSM McGladrey purchasing American Express’ Tax and Business Services. The acquisition raised the ranking of their Business Services subsidiary to the top five accounting and business services firm and the largest firm serving mid-sized companies specifically.

A good measure of how second-tier firms are doing against the Big Four might be seen in the 2004 Audit and Tax Firm Performance Study completed by J.D. Power. The study ranks Grant Thornton and BDO Seidman first and second respectively among audit firms servicing clients with revenues up to $1 billion. Grant Thornton ranked second highest among tax firms.

“My sense is that there will continue to be CPA firms of all sizes and varieties. Just as there are businesses whose needs vary from one end of the spectrum to the other,” Bea Nahon, CPA and member of the AICPA board of directors told the Puget Sound Business Journal (Seattle).