ST'RATZV,Y'OW ACCOUNTING FIRMS CAN HELP THE SMALL BUSINESS OWNER'arel M. Wolk University of Tennessee at Martin Charles W. Wootton Eastern Illinois University ABSTRACT This paper discusses the types of services (hat ore offered by public accounting firms to the small business client. Some items to consider when choosing an accoimting firm, or deciding which type of service would be mosi appropriate, are also examined. The changing market for the services of public accounting jinns is addressed, along with how accounting firvns are actively pursuing small businesses as clients. INTRODUCTION Until recently, large industrial companies were considered the engine for economic growth in the United States. Today, while many of the country's largest corporations are busy downsizing to improve their competitive advantage, small and mid-size companies are busy creating jobs —almost six million new jobs between 1987 and 1992 (Byrne, 1993). Business Week (Byrne, 1993) reported that, in 1993, "small business [was] expected to generate an additional 1.7 million jobs, while companies with 25,000 or more employees [would] shed 300,000 people" (p. 12). A growing appreciation for the opportunities afforded by smaller companies has not eluded the attention of public accounting firms. Whereas in thc past, accounting firms sometimes focused their marketing efforts on larger corporations, accounting firms today are actively pursuing small businesses as clients. This article addresses three issues related to accounting firms and small business. First, the range of public accounting services available to the small business is discussed. Second, major factors to consider when choosing an individual accounting firm or specific services are reviewed. And finally, some of the issues in the consultant/client relationship are addressed. Previous research (c.g., Ctobeli & Seville, 1989) has indicated that the relationship between an accounting firm (or any consultant) and a small business client should be an mterface. That is, the small business owner must make the accounting firm aware of its goals and the services it needs. In turn, the accounting finn must strive to help the small business 'he authors would like to rhank the three anonymous reviewers for their helpful comments on earlier drafts of the paper. 19 achieve thcsc goals and ensure that thc small business remains compeiitivc. This idea is expanded throughout the article. WHY DOES A SMALL BUSINESS NEED AN ACCOUNTING FIRM? About two million ncw businesses are started each year in the United States. Of these, about 20% arc one or two person operations (O'Reilly, 1994). Although studies of small business I'ailurc rates come up with somewhat different findings, all agrcc that the I'ailure rate is very high (c.g., Vcrspcr, 1990; Phillips & Kirchhoff, 1988; O'eil k. Dukcr, 1986). A widely quoted rulc of thumb is that about half of the new businesses I'ortn&d each year will ccasc to exist in thrcc years. While a variety of reasons exist for business failures, "onc importani rooi cause is a lack of good management information —especially financial infionnation" (Gobeli k. Seville, 1991, p. 17). Thc imponance of financial inl'ormation was shown in a study of'mall business failures conducted by Gaskill, Van Auken. and Manning (1993).Speci( ically, 71% of small business owners discontinued their business due to financial dil'ficultics, compared to 29% that discontinued for personal reasons (health, conflicts, retirement). An important issue to inany businesses, there('ore, is how to obtain the Iinancial information that would help them avoid being one of the casualties. With liinited resources available to produce the quality inl'ormation necessary to attain success, many sinall businesses turn to outside consultants for assistance. Often, small businesses rely on accounting lions to fill this role. In fact, over 40% of small business owners in a recent survey (Hock, 1993) listed accountants as their most trusted outside source I'or business advice. Consulting or advisory services can bc of great bcncltt to thc small business-but only if understood and used appropriately. The role of, and services provided by, the public accounting firm should grow and change as the small business grows and changes. Initially, if thc company is quite small, without a full-time controller and ticcounting personnel, the public accounting finn can be called upon to serve as business advisor or part-time controller, handling hank and other linancing arrangements, giving input inio management decisions, and providing projections (Person, 1993). It should be emphasized that while ihc accountant scrvcs as a consultant, final decisions on all matters must bc made by managcmcnt. This initial con- sulting rotc can bc very important to getting a ncw business ol'I'he ground. Dirsmith and Kunitakc (1988) reported, for example, that in a study of 5,000 private companies, 69% of the chief operating officers (who often were the owners) had no financial or accounting back- ground. As thc business grows and a I'ull-time controller and accounting personnel are hired, the public accounting firm takes on a different role. More specifically, the accounting firm's role may involve a wide array of services and supports for the expanding small business. 20 Most large and inany smaller accounting firms have developed separate components of their practices to serve smaller clients, with personnel specifically dedicated to meet the unique needs of small businesses. Much of the personnel's training is directed toward dcvcl- oping small business specialists with the understanding necessary to help the small business client in all facets of the business. Upon completion of training, these small business specialists are assigned to an area often referred to by the accounting firm as the Emerging Market, Mid- Market, or Middle Market Area whose purpose is to attract and provide services to small busi- ness clients. PUBLIC ACCOUNTING SERVICES AVAILABLE TO SMALL BUSINESSES In a survey designed to identify the major problems faced by small business owners, Franklin and Goodwin (1983) classified problem areas into three types: external factors, internal factors, and financial factors. Eight of the top ten major problems reported by small business owners were related to external factors: inflation, government regulations, costs, taxes. Several financial factors were also perceived by small business owners to be major problem areas: cash flow. operating capital, and debt collection problems. Important internal problem areas for small businesses included: employee motivation, personnel training, and fringe benefits packages. Gobeli and Seville (1989), in an examination of the interface between small businesses and CPAs, asked small business owners/managers what services they needed from accounting firms. Nearly 100% of thc respondents stated they needed help with tax returns. Nmety percent wanted tax planning services while 85% wanted help with the preparation of financial statements. Seventy-five percent wanted financial planning services. The following sections discuss specific accounting services that can help the small business owner address many of these problem areas. The discussion is based on input from (as well as marketing information provided by) national, regional, and local accounting firms, in addition to a review of previous studies dealing with accounting lirms and small businesses. Potential issues that may impact the consultant/client relationship are presented in a later section. Accountin and Auditin Services Table I lists some of the common accounting and auditing services provided by public accounting firms. The service area that has traditionally provided the foundation for a relationship between the accounting firm and the small business owner relates to the company's financial statements. It is often a request for financial statements by a bank or other lender that prompts a small business to first seek the services of an accounting finn. There are three levels of financial statement related services: audit, review, and compilation. It is important for the small business client to understand the differences between the three types of service as well as some of the factors that should be considered in deciding what level of service is most appropriate in the circumstances. Choosing an inappropriate level of service can be a costly lesson for the small business owner. 2( An audit rcprcscnts the highest level nl'scrvicc. Only an imlcpcndcnt (not associated with the business) Certil'ie&f I'ublic Accountant can audit financial slatmnent and issue an opinion on them. An audit involves thc auditors collecting suff'icicnt evidcncc to support their opinion that the financial statcmcnts are fairly prcscntcd (I'rce of'ale&1&0 n1&sstalcments) and follow generally acccptcd accnunting principles. Thc cml product nf'n audit is the independent auditor's rcport that states what thc auditors did and thc. conclusi&m they reached. Although it is sometimes assumed by thc gcncral public, an audit docs not guaramcc or certify 100&% accuracy of'hc Imancial staiemcnts. Morcnvcr. &m audii's major puiposc is not to detect fraud, although thc auditor is required to plan thc audit in such a manner as to assess the possibility ol'aterial fraud. Table I Audiiin 8& Accnuntin Services Audits Rcvicws If& Compilations Assistance With Accounting Iiunctions Dcvclopmcnt Ol Accounting &X& Control Systems Spccialixcd Internal Audits Regulatory Requircmcnts Compliance &X& Tax Planning Implcmcntation Of Accounting Sysiems Gcncral Ltalgcr I'rcparati&m Pcrsonncl Training In Accounting Or Bookkccping Depreciation b'& Amnrtixatinn Schedules Bank Reconciliations Payroll Prcparati&m An audit of'ts I'inaneial statements can he a tiinc consuming and cxpcnsivc undertaking I'r a small business. Howcvcr, an audit may nni hc rcquircd. In many cases a creditor or Icmlcr will hc satisfied with a lower level ol'inancial statement related service. Two other levels of service, a compilaiion or a rcvicw, arc dcsigncd I'or smaller, nonpublic colupailtes. A review of'inancial statements involves procedures which arc substantially less in scope than those required I'r an audit, hut morc extcnsivc than those required for a compila- tion. Thc accountant must umlcrstaml thc client's business and nature ol'ts transactions. In addition, a review involves making inquiries ol'anagcmcnt and perl'onning analytical procedures to dclcnnine il'anything in the fin;mcial statcmcnts looks "nut of'ine." The review report gives what is known as "ncgativc assurance" —stating that nothing came to the 22 accountant's attention which would indicate that any material modifications should be made to thc statements for them to conl'orm with generally accepted accounting principles. A compilation simply involves an accounting firm presenting the client's financial inl'ormation in financial statement foun. In a compilation report, thc accounting lirm does not express any opinion or assurance on the financial statements. The accountant should under- stand thc client's business and nature of its transactions and should be alert for (and follow through on) any obvious omissions or errors. As a general rule of'humb, public accounting lirms estimate that a review takes about half the time of an audit, and a compilation takes about a third the time of an audit (Dirsmith k. Kunitake. 1988). Il'the small business can gct by with a level of service below a full audit, it is certainly cost beneficial to do so. However, the small business owner should consult with prospective lendcrs before contracting for compilation or review services to veri('y these services will be adequate. Dirsmith and Kunitakc (1988) asked sixteen commercial hank lending officers to repon on the level of "comfort" they derived from each of these three levels of service. Using a scale of I to 10 (with IO being thc highest comfort), thc average score was 4.0 for compiled statements. 6.3 I'or revicwcd statements, and 9.5 for audits. So, the requirements of users ol'he linancial statements will tend to dictate the required level of assurance preferred. Often a new business is small enough that a lender or other user is satisl'icd with compiled financial statements, but as the business grows, revicwcd and then audited statements will be required. The reason for this is that as the business grows, its records and mtemal controls become more complex, and its investment in inventories and plant assets becomes more substantial, such that a more thorough examination (such as an audit) of the company is necessary. There arc three other considerations in regard to the audit; (I) auditors assume thc most legal liability for audited financial statements, (2) in addition to the audit rcport, auditors will provide a management letter, which makes suggestions for improvements, and (3) audited financial statcmcnts for the prior three years are required if the company decides to go public. In addition to the preceding services, a small busmess may use an accounting firm to review its mtemal control procedures and help it to implement or revise its accounting system. As small compames grow, it is not uncommon for them to outgrow their accounting system or their system of internal control. While auditors assess a client's internal control structure as part of the audit, the emphasis of this assessment is on risk and on how thc system will impact the type of evidence that will bc gathered. and when it will be gathered. Small businesses therefore often find it help(bi to cngagc the accounting finn to rcpon spetn (ical ly im their internal control structures from tnne to tnne. Here, the accountants will test and evaluate the whole system and ol'I'er suggestions for improvement. It is quite common for a new small business to contract with an accounting finn to keep its hooks and prepare its financial statements. Nearly all accounting firms, regardless of size, have service divisions that will prepare payroll, reconcile the bank statements, prepare and post general ledger entries, as well as prepare the financial statcmcnts for the company. In this 23 way, a small business can avoid the cost of'establishing an accounting departmmit and help ensure that it will meet the I'iling deadlines ol'tate and federal regulatory bodies. Tax Services Today, most small businesses employ accounting lirms to help theta with preparation of their federal, state, and local tax returns. This assistance can range I'rom answering spccilic questions on a complex tax issue to thc actual preparation of the tax return itself. Table 2 summarizes some popular tax-related services offered by accounting firms. Table 2 Tax Services Preparation Of Federal & State Income Tax Returns Family & Estate Tax Planning Comprchcnsive Business Tax Planning Compensation & Retirement Tax Planning Acquisition & Disposition Tax Planning IRS Ruling Requests Compliance Assistance Flexible Spending Cafeteria Plans Deferred Compensation Plans Family and estate tax planning is an imponant area in which small businesses should seek tax advice from their accounting lirm, tax attorney, insurance agent, or banker, I'or the vast majority of small busincsscs are partnerships or closely held corporations. In I'act, 90% ol'all V.S, businesses arc family controlled (Francis, l 993). In these cases, the death of an owner of the business can result in an immediate and often massive tax liability to thc estate. Therefore, business owners should ensure they have minimized their estate's future tax liability when the business is organized. Periodic reviews and updates of these tax plans should be undertaken to rellect changes in the tax codes. Accounting firms also can help the small business owner in the area of employee compensation. As tax laws become more complex and tax rates increase, proper compensation plans for employccs can mean tax savings for both the employee and einploycr. Many accounting firms can help a small business establish its own 401(k) or similar retirement plan. One tax service area in which many firms offer help to small busine: ses is in establishing flexi- ble cafeteria plans for their employees. These plans provide einployees more flexibility in deciding how their tax-free income is spent. Small businesses often use accounting firms for comprehensive tax planning for the business itself as well as for its top executives. Accounting firms can assist in all aspects of compliance assistance, as well as preparing Ruling Requests 24 from the Internal Revenue Service, in which the small business requests the IRS's opinion on the tax implications of a prospective transaction. Mana ement Advisor Services The service area that has provided the greatest growth for accounting firms in rcccnt years is management advisory services (MAS). Many of the more popular services offered are listed in Table 3. Today. most accounting firms provide a wide variety of MAS services to small businesses. These small business services normally fall into four categories: (I) information and technology consulting, (2) financial consulting, (3) operational and productiv- ity consulting, and (4) human resource consulting. The MAS area that has been demanded most consistently by small business in recent years has involved information and technology issues. Thousands of small businesses have relied on accounting lirms to assess the adequacy of'heir present computer systems and/or to recommend a new one. In addition, accounting firms often install and activate these computer systems. Accounting firms are very involved with small businesses in hardware and software selection. Several firms have developed their own specialized payroll or accounting packages that they make available to smaller businesses. Moreover, many firms conduct on-site person- nel training programs for small businesses on the usc of computers and software. Small businesses that employ accounting firms traditionally have used thcsc firms to help them develop long-range financial forecasts. As these businesses increase in size, accounting firms often are employed to develop a pension and/or profit sharing plan for them. A growing service area that several firms provide involves helping small businesses identify sources of financing. Accounting firms can provide the initial contact with banks or investment companies that are potential sources of capital. Furthermore, they can help small businesses put together a business plan (including linancial statements and growth forecasts) to present to potential lenders. Along with management consulting firms, many accounting lirms I'urnish consulting services related to the production phase of the business. They are hired by smaller busincsscs to conduct production and efficiency studies of their operations. Often, these firms are involved in developing and implementing an appropriate cost accounting system for a specilic production process. And as computers become crucial to thc production process, accounting firms can analyze and recommend appropriate equipment for computer assisted manufacturing. 25 1 Tahlc 3 Mana cmcnt Adviso Services Information & Technology Consulting Microcomputers & Networking Management Information Systems Hardware & Sol'twarc Selection hnplcmcntation Of Co&nputcr System Pcrsonncl Training On Computers & So(&werc Analysis 0( Co&nputer & Information Systems I inancial Consulting Identification Of Sources Ol'Capital Financial l.orecasts &. Budgeting Cash Management Credit & Collection Policics Pension & Prot'it Sharing Plans Appraisals &. Valuations Invcstmcnt & Risk Managcmcnt Bankruptcy &. Trouhlcd Company Assistance Operational &. Productivity Consulting Production &. Inventory Control Production & El'ficicncy Studies Cost Acct&unting Systems Marketing & Distrihution Plans Computer Assisted Manufacturing Productivity Improvcmcnt Plans Implcmct&tation Ol Production Proccsscs Human Resource Consulting Organization Planning &. Analysis Managetncnt Developmmu Executive Search & Stafl'ing Assistance Pcrsonncl Policics Succession & Strategic Planning Compensation Programs Pcrfonnancc Evaluations Organization Efficiencies Studies 26 Of the four MAS areas, the one in which businesses may be the most reluctant to utilize accounting firms is human resource managcmcnt. Business owners tend to think of accounting firms as providers of numbers or technical support. However, over the last few years, many accounting firms have devclopcd an array of human resource services they can provide to the small business. Today, businesses rely on accounting firms to find needed personnel for their company, especially when technical expertise is required. Other small businesses rely on accounting firms to establish traimng and perfomiance evaluation programs for their employees. THE RELATIONSHIP BETWEEN ACCOUNTING FIRMS AiVD SMALL BUSINESS CLIENTS Accounting I irma are only one of many sources avai fable to help thc small business owner. Accounting firms can provide a strategic benefit, howcvcr, in thc array ol'crviccs provided. Specifically, il'hc accounting firm helps the small business develop an effective accounting system, that firm is probably in a better position —through its knowledge of'hc client's financial information nccds-to expand into other areas, such as tax planning and the implementation ol' new computer system. Accounting firms of'tcn employ personnel other than accountants (BDP specialists. tax attorneys. etc.) to provide thc breadth of talent necessary I'or service beyond traditional accounting. Strategic use ol'ccounting fiona, as with any consultants, involves the small business owner taking an active part in communicating his or hcr needs, and in providing inputs inio ihe decision at hand as well as I'eedbacl. to the consultant. Accounting firms have bccn consistently ranked hy small businesses as their most frequently used external consultant (Fields, 1993; Smeltzer, Van Hook, g: Hutt, 1991; Arnold. Cherry, Diamond, k Walker. 1984) and often cited as their most trusted advisor (Hock. 1993; I.iclds. 1993). Recently. however, there have been some majoi criticisms leveled at the service provided to small business by accounting firms. especially the Big Six firms. In a tvidely cited front page article in Thc Wall Strcct Journal. Benon (1994) rcportc&l that an increasing number of smaller clients were complaining about the decline in the level of scrvicc they were receiv- ing from the Big Six accounting fiona. Many of these businesses werc iurmng to non Big Six firms for their accounting needs. Among the complaints werc rising accounting fees, frequent turnover among the accounting personnel assigned to work with them, and a belief that thc major accounting firms were concentrating on their larger clients at their cxpcnse. Moreover, in a 1994 study of the responsivcncss ol'major industries (c.g., airlines, hanks. telecommuni- cations) to the needs ol'small business, accounting firms rankc&I ninth among the twelve indus- tries surveyed ("Big Firms." 1994). What seems to bc called I'or is an appreciation of the appropriate "1st" between the accounting finn and the small business client. The responsiveness of accounting firms as well 't should he noted that a CPA finn is re&furred to rerram from perrormmg the rollowmg MAS for its SEC audit clients: esecuuve recrunmcnt, psychologicat tesung, puhhc opmion polis, merger arxl acttutsttton asststnnce for a lirxler's ree and actuarml services to insurance cornpnnies Similarly, a CPA tirrn cannnr provide hookkeeping services anrl conduct an aura& rot the same SEC chcrtt 27 as thc quality and inix ol'services they provide varies. As with any corn&nudity or service, the business owner nccds to shop around to find thc accounting firm that supplies thc mix of scrviccs and pcrsonncl that most directly matches the need of his or hcr small business. There arc over 45.000 accounting firms and sole practitioners in thc United States (AICPA, 1994), so some general guidelines to narrow the search are provided. FACTORS TO CONSIDER IN SELECTING AN ACCOUNTING FIRM There arc dil'I'crcnt sizes of accounting firins: Big Six, national, large icgional, small regional, as well as local I'inns and sole practitioners. Thc Big Six I'inns (Ernst k. Young, 13«loittc k Touche; KPMG Peat Marwick; Arthur Andersen; Price Watcrhousc; aml Coopers k I.yl&raml) arc international firms who count their rcvcnucs in ihc billions. National I'irma have olliccs in m&xst major cities throughout the United States. Liirgc regional I'inns h;ivc ol'liccs in major cities in several states. Small regional and local lirms have one or a fcw offices employing relatively few professionals. Thcrc arc scvcral factors to consider before deciding whcthcr to go with a large or a sliiilll ilec&iunting limi. Firsi ol'all, thc smaller linn will tend to charge lower li:es. For example, ~A» i T a: tpn.: 1991hi. k a i o99(l. y hi a i dix& I a a% r hourly billing rates I'or partners were as I'ollows: $235 for Big Six, $ 202 I'or national, $ 150 lor large regional, and $ 142 and $ 117 I'or medium and small local, rcspcctivcly. Rcmcmbcr, these arc cstimatcd billing rates for partners. Most accounting scrviccs arc handled by non partners, so actual billing rates usually are lower. While smaller firms may have a lower Ibe structure, they someiimcs may not be able to provide thc full range ol'services required by the small business. Many smaller accounting firms have csiahlishcd numagcmcnt advisory services I'airly rcc«ntly, and some I'irma do not have thc personnel (or want to take on the potentinl legal liability) rcquircd I'or «&mdu«ting linen«ial statcmcnt audits. Some of'he very small accouniing linns may, thcrcl'orc, restrict the scrviccs ihcy ol'fcr to tax and bookkeeping scrviccs. Thc Alii«I&cillt Institute ol'CPA's (AICPA) has devclopcd an MAS data base, which provides smaller accounting I'irma the opp&irtunity to exchange managcmcnt consulting inl'onnation and scrviccs. This may help bridge the gap between thc range ol'crvic«s offered hy small an&I large accounting I'irms. Also, some smaller I'irms arc a«tivcly specializing in re- stricted services (i.c., carving out a "niche" that gives them a competitive advantage with certain types of clicnis or certain types of scrviccs). Some small businesses preter a smaller accounting lirm because of perceptions of morc personalized service. As previously mentioned, there have been instances where small business clients felt that increased competition ainong the Big Six fimis had rcsultcd in a dcclinc in thc Icvcl of scrvicc provided (Berton. 1994). Overhll, howcvcr, thcsc major firms have made a conccrtcd clyort to ovcrcomc pcrccptions that they pay less ancntion to their small clients. Moreover, many large fiona have focused their marketing strategy on thc concept ol'crsonalizcdservice and ready access to personnel at the partner level. 28 Some small businesses like to stan out with a smaller accounting Iirm, where they feel more valued, and then change to a larger lmn when they nccd a morc comprehensive array of services. Others I'eel that changing accounting firms as they grow is not cost beneficial because of thc "start-up costs" of bringing new accountants up to speed in familiarizing them with their business. In addition to size considerations. it is very important that thc small business owner usc an accounting firm that is knowledgeable in his or her industry. In a survey of more than 500 owner/managers, Arnold et al. (1984) found that the expertise of thc accounting firm was cited by thc owners as the most iinportant I'actor m their selection ol'an accounting firm. Word- of'-mouth references from members of thc business community, especially those m the same industry, are an important method of'ocating high-quality I'irms with specific industry cxpcrtisc, Local bankers and attorneys are also good sources I'or rccommcndations. After the search has bccn narrowed to about a half a dozen possibilities, written proposals and in-person interviews should be requested from each firm bef'orc a decision is made. Six iinportant issues to ask about are: l. QualiTications of those who will be providing services Most firms arc willing to supply resumes of the partner and manager level personnel that will bc providing services. These individuals should give some indication of their availability to answer questions throughout thc year and how much time they will bc spending, personally, on thc specific engagement (having u well qualif'icd partner in charge ol'our audit, for example, is of little value to you, if you rarely scc that individual). 2. Types of support services available The availability of suppon services is an important issue if you are considering going with a sinaller accounting lirm. It is helpf'ul to try and project the types of scrviccs you think you might need over the next five years, and then make sure that you can obtain those services from the firm you arc considering. Small businesses sometimes engage a I'inn initially to maintain their hooks and prepare periodic financial statcmcnts. Howcvcr, it is not too long bef'orc they find they also need help with tax planning or assistance with a computer system analysis. If the accounting I'irm does not off'er this variety ol'ervices, the company will need to consider changing firms or plan to work with different firms, which may not always bc the most ef'ficient alternative. However, soine small businesses prcl'cr to use two or morc fimis. with one accounting lirm rcsponsiblc I'or onc area (e.g., the audit) and another finn responsible I'or another area (c.g., MAS). 29 3. Result of most recent peer review Thc AICPA has established a Quality Review Program to monitor adhcicncc to professional standartls regarding audits, compilations,;mil rcvicws. In order to hc a member of'ICPA aml practice public accounting, an individual must practice in u I'irm that is enrolled in this Quality Rcvicw Program. An accounting I'irm should bc willing to disclose when their last pccr rcvicw was perl'ormcd, who thc peer firm was, and whether thc rcport of'hc review team was unqualified, qualified, or adverse. If'he firm is noi willing to sharc this inf'onmuion, it inight indicate some problems with their procedures I'or assuring quality and adherence to professional standards. 4. Prior or pending legal actions The popular and business press has done an excellent joh at kccping thc coumiy inl'onncd about thc liability crisis that is faced by public accounting I'irma. A record number ol'awsuits have hccn I'iled, and many arc still pending. Michael Knight in Inc, magaxinc (I raser, 199 la), recommcmlcil that thc small business owner should hc sensitive to the financial viability of an accounting I'irm bcforc cntcring into what is expected to hc a Inng-term relationship. Hc, suggests asking il'hc firm has ever been suctl and what thc outcome was aml il'hcic arc;my outsmnding legal claims against the I'il lit (especially any dealing with malpractice). 5. References Asl the accounting I'irm I'or thc names ol'some of their clients wlumi they consi&ler comparable to you —cspccially thc numcs ol'irms in your imlustry. Contact those rel'crcnccs aml ask about their satisfaction with thc services they have received. Although all inl'ormation provided to an;u:counmni is cimfidential, a I'ew busincsscs chixisc not to hc audited by an accounting lirm who audits a compctiior. 6. Fees It is imponant to gci a good understanding ol the fee structure of thc firms that are under consideration. This avoids unpleasant surprises later. Ask I'or a detailed breakdown of'hc cstimatcd hours and billing rates I'or thc per- sonnel that will bc perl'onning the required service. Pay particular aucntion to the amount ol'ime that thc accounting lima includes for partner aml man- agement level personnel. Inquire about other items that will bc included in thc I'ee structure, like thc accountants'ravel time, telephnne expenses, and charges t'or advising and consultation throughout the year. As mcntioncd piuviously, choosing an accounting firm, like many other business decisions, tends to comedown to a "lit" of'thc pcrsonalitics involved The rr lationship bctwccn 30 the small business and the accounting firm is most beneficial to both if the parties feel comfon- able with one another. Many small business owners recommend including key management personnel in the selection process (Frascr, 1991bh These are the people that will often be working most closely with thc accountants. They will feel more comfortable, and bc morc cooperative, if they feel they had input into thc decision. CONCLUDING COMMENTS Over thc last half century, potential services oft'cred by accounting firms to help the sinall businesses have expanded dramatically. From once olfcring only accounting and tax scrviccs, accounting liims now provide a full complcmcnt of management and financial services to small businesses. However. accounting linns are only onc of several outside sources availahlc u& help small business owners. Other sources include: small business development centers. sinall business institutes, consulting firms. individual consultants, bankers, auorneys, stock brokerage firms, software spemalists. insurance agencies. and college l'acuity meinbers. Each of these outside resources olfcrs a different mix of cxpcrtisc that can give the small business owner a grcatcr chance of success during the critical cai ly years of operation. Whichever type is pret'erred. it is important to engage the consultant bel'ore major problems arise. Quite of'ten, small business owners fccl they cannot afford an outside consultant in thc carly stages of their business. However, it is in the early years that l'ailure is most likely to occur. Hiring someone after linancial problems have dcvclopcd is often too late. Thc good news i» that as accounting firms and other consultants have I'ocuscd on the small business client, thc market has become significantly morc ci&mpctitivc —which, hopelully. will drive ilown thc cost of services. 31 REFERENCES A(CPA (A»ITA I t I ~ f C If d P hll A- ). (1994). T~h ~ S A'' I C.d'«dh 9 df Phd A'' iAR ':-1994.N* York, NY: AICPA. Arnold, J. L., Cherry, A. A., Diatnond, M. A., k Walker, J. A. (1984). Small business: An area ripe for practice development. Journal of Accountanc 158 (2), 74-82. Bcrton, I.. (1994, April 21). Big accounting firms, striving to cut costs, irritate small clients. Thc Wall Street Journal pp. AI, AS. Illp II » ' .'.' .'p . I . (1994 A I . 17) ~phil A I 9 9» IS (IS) S. Byrnc, J. A. (1993).I:ntct)nisc: How cntrcprcncurs arc rvhhaping thc cc(momy-arnl what big companies cats learn. (Special issue, November). Businchs Wcck 10-18. Dirsmith, M. W., f(k Kunitakc, W. K. (1988). How to choohhc CPA services for thc growing company. Business 38 (4), 13-21. Ficldh, W. C. (1993).Small business client satisfacti(m with outside cshictancrs Mid-American Journal ol'usiness 8 (2). 45-51. Francis, B. C. (1993). Family business succession planning. Journal ol'Achcountanc 176 (2) 49-51. I ranklin, S. G., c(k Goodwin, J. S. (1983).Problems of small busif)L'ss t(t)tl s(TUS'ccs ol ttss(stat)cc: A survey. Journal of Small Business Mana emcnt 21 (2), 5-12. Icraser, J. A. (1991a).Thc accountant safety test. Inc. 13 (5). 99-100. I rascr, J. A. (199 1 b). Shopping for a new accountant. Inc. 13 (10), 196. Ciaskill, L. R., Van Aukcn. H. E., (1'c Manning, R. A. (1993). A I'actor analYtic study of thc perccivcd causes of small business failure. Journal ol'mall Business Mana cmcnt 31 (4), 18-31. Gobcli, D. H., k. Seville, M. A. (1989).The small business-CPA intcrl'acc. Journal of Small Business Mana cmcnt 27 (4), 8-16. Gobcli, D. H.. I('c Scvillc, M. A. (1991). Small business: Ptoblcms and opportunities I'or accounting firms. Thc Woman C.P.A. 53 (4), 17-21. 9 I S (199),Sp uh d)S llhsl ...I h I CPA.'.A~iT I: 7((7), pp. I, 30. O'Neil, H. M., A. Dukcr, J. (1986). Survival and I'ailurc in small husinchs..loun)al ol'mall Business Mana cmcnt 24 (I), 30-37. O'Rcilly, B. (1994, May 2). Thc new face of'small business. Fortune 129 (9), 82-88. Person, S. (1993). CPA I'irmh can help manage clients'usinchscs without losing their imlcpcndcncc. Journal ol'Accountanc 175 (5), 91. Phillips, B., ffk Kirchhofl, B. (1988). An anal sis of new finn survival and rowth. Bahson Entreprcncurship Rcscarch Conl'erence, Calgary. Smcltzcr, L. R., Van Hook, B. L., k Hutt, R. W. (1991).Analysis ol'hc usc of advisors as information sources in venture startups. Journal of Small Business Mana ement 29 (3), 10-20. Vcspcr, K. H. (1990).New Venture Strate ies (Rev. ed.). Englewood Cliffs, NJ: Prentice Hall. 32