By Ken Tysiac
In an increasingly complex business and regulatory environment, some audit practitioners find that specialization reduces their risk while lowering their costs.
When she was about to open her own firm, sole practitioner Danielle Supkis Cheek, CPA, conducted many scenario analyzes with one question in mind: “Can I make money off this?”
She would ask herself this question as she crunched the numbers and considered what types of clients she could serve effectively and what services she could provide.
Cheek decided that specializing in serving small and medium-size businesses would be the best route for her clients and her firm. She performs various services, including financial statement audits, for clients of that size. Her specialty is designing effective internal controls for organizations that lack the resources for segregation of duties. Despite that narrow focus, her Houston-based firm, D. Supkis Cheek PLLC, has plenty of work. When prospective clients from outside her area of expertise ask if they can hire her, she refers them to other CPAs in her network—who in turn refer clients to her to use her specialty.
Sometimes potential clients are persistent, but Cheek is adamant about not taking work outside her area of expertise.
“It’s hard to say ‘no’ every time,” she said, “because you look at what the potential price of something would be, and it’s like, ‘Wow, that’s a nice project. But it’s not going to be worth it for me.’ ”
In a time of complexity, constantly changing standards, and increasing regulation, many CPAs find themselves settling into niches just as Cheek has. They find that it is too difficult to keep up with the entire spectrum of standards and rules required to do everything that a full-service CPA firm can do. Sometimes, they find that taking work outside their area of expertise can make them vulnerable to mistakes or regulatory scrutiny.
One objective of the AICPA’s ongoing Enhancing Audit Quality initiative is to have the Peer Review program address the risks posed by auditors’ performing high-risk and complex engagements. The risk of audit deficiencies increases when a firm performs such audits. These high-risk areas may include:
- Employee benefit plan (EBP) audits.
- Audits performed under Government Auditing Standards (including OMB Circular A-133, Compliance Supplement).
- Audits of federally insured depository institutions subject to the Federal Deposit Insurance Corporation Improvement Act of 1991, P.L. 102-242.
- Audits of broker-dealers.
- Examinations of service organization controls (SOC engagements).
Essentially, Cheek had the problem pegged when she conducted her scenario analyses. Can a firm make a profit doing a small number of audits in a specialized area that requires extensive expertise and expensive training? It is challenging for one partner to remain competent in multiple high-risk or complex areas because the individual would spend so much time learning that dollars would be lost in opportunity costs. But firms often aim to serve all the needs of all their clients, so it can be difficult for them to come to the decision to refer a specialized service to another firm.
Benefits of limited space
About six years ago, Scott Dufek, CPA, was finding it increasingly difficult to be a generalist as an auditor. From a day-to-day perspective, he felt he had no idea what kind of work was headed his way. He often encountered situations with which he had little or no experience, and often found himself scrambling to find resources and answers.
So he and his wife, Nancy Dufek, CPA, formed a firm that performs just EBP audits.
“Now, if my phone rings, there’s a pretty good chance I can answer a question on the fly versus having to say, ‘I’ll get back to you,’ ” Scott Dufek said.
Their Chicago-based firm, Dufek & Co. LLC, received a strong initial boost in its first year when a regional, full-service CPA firm in their area was looking to exit the EBP service area. The firm wanted to make absolutely sure that Dufek & Co. was doing just EBP audits and wouldn’t try to compete for clients’ business in other areas. Once assured of the Dufeks’ focus, it transferred its book of EBP business over to them. One-fourth of Dufek & Co.’s current business came from that transaction.
Dufek said specializing in one type of business has given his firm the ability to perform EBP audits efficiently and effectively. But some firms that perform EBP audits are not specialists, and a recent study by the U.S. Department of Labor showed a need for improvement in these audits. The study found deficiencies in 39% of 400 EBP audits by 232 firms from the 2011 filing plan year (see “How to Perform High-Quality EBP Audits,” page 60). In theory, the risk of engagement deficiencies might motivate firms that do not have sufficient competencies in a specialized audit area to refer this business to firms with more expertise in that area. In reality, this outsourcing can be difficult to do.
Take the case of a small firm that performs audit and tax work for small businesses whose biggest client crosses the threshold and expands to the point that it has a sufficient number of employees to necessitate an EBP audit. It may be difficult for that firm to recommend that its best client take even this small portion of its business to a full-service firm that regularly performs EBP audits. Even though the cost for getting trained for an EBP audit may exceed the revenue from that single EBP engagement, the firm may choose to go ahead with it for fear of losing the client altogether.
“That’s where relationships come in handy,” said Jim Brackens, CPA, CGMA, AICPA vice president—Ethics & Practice Quality. “There are firms out there that specialize in doing these audits, and they have no interest in your other business. Networking with your peers enhances your ability to serve your clients.”
The power of networking
Networking is the lifeblood of Cheek’s specialized practice. She estimated that more than 75% of her clients come to her from other CPAs in her network in the busy Houston area. She also meets CPAs through AICPA events and through the American Woman’s Society of CPAs (AWSCPA), which she serves as national association manager. She said that since she started her firm, she has seen other AWSCPA members narrow their focus. One practitioner works only with not-for-profits and specializes in attest work for churches. Another only works on personal international tax issues. Meanwhile, the stream of new clients Cheek gets from her network allows her to refer clients who outgrow her to other CPAs in her network.
That is a bittersweet moment, but if a client is contemplating an initial public offering, for instance, she tells the client that she needs to refer it to a PCAOB-registered firm three to five years before it goes public.
“I really am quite strict with my clients,” she said. “I only take projects that I can do confidently.”
4 tips for successful specialization
Know your strengths—and the demand for them. It makes sense to specialize in your core area of knowledge, but only if you know there’s enough demand for that expertise that you can profit from it, said Danielle Supkis Cheek, CPA, a sole practitioner in Houston who serves small and medium-size organizations and specializes in developing internal controls.
Know your limitations. “I spend a lot of time thinking, ‘Can I actually do this?’ ” Cheek said. “Because I have less overhead than a bigger firm, it allows me to make audits and reviews more cost-affordable for the size client base I’m going at.”
Be willing to say “no.” “I think people find that the hardest because they’re so eager to please,” Cheek said. Taking a project outside your area of expertise can subject a CPA to too much risk, she said, so it’s best to politely decline.
Get some of your training face to face. In addition to helping CPAs stay current on standards and professional issues, continuing professional education gatherings such as conferences are a great way to build a network to rely on for referral relationships.
About the author
Ken Tysiac is a JofA editorial director.
This article was originally published in the September 2015 issue of Journal of Accountancy.