Corporate Scandals of 2002 Have Effect on Small and Middle Market Companies That No One is Talking About: Dallas-based CPA Firm Among First to Address Issues.

Business Editors

DALLAS--(BUSINESS WIRE)--March 4, 2003

The landscape of the accounting industry has changed forever. While there have been endless discussions about what all this means for the country's large public companies, there has been little said about the effects all these events will have on America's small and middle market public and private companies.

Owners of both publicly held and privately held companies are paying close attention and making contingency plans. Hard decisions the public sector face are: how to put into place internal control processes, what to do about the rotation of the audit partners on their audit, who to turn to for other services currently provided by their audit firm. Privately held companies are waiting to see if their state legislatures adopt any of the provisions of Sarbanes-Oxley and apply them to the private sector.

With these factors weighing in on them, middle market and emerging growth companies face another hurdle. They may find that they are no longer a fit for their Big Four or large national accounting firm. The fact is that with the demise of Andersen, the remaining international firms are divvying up the Fortune 500 clients left in the lurch. At least theoretically, the Big Four each gained 25% market share in 2002. The year 2003 is expected to be the year when this market change shakes out. The expectation is that the large international and national firms will be looking at the clients at the bottom of their client lists and deciding which ones might be a better fit for a local or regional firm. These large firms need to keep their most profitable clients happy and to do that they have to manage their resources appropriately. Two more factors are affecting this shift. One is the continuing trend of a reduced labor market with fewer accounting majors entering the profession. Another is the belief that many small local firms who audit one or two small public companies will be forced out of the practice by new regulations of Sarbanes-Oxley. According to Allan Koltin, an accounting industry expert who was named this year as one of the 100 most influential professionals in the industry, there are approximately 900 CPA firms performing SEC audits in the United States today. This number is expected to shrink to 200 within two or three years.

Koltin and other industry analysts believe these factors will result in a national trend of accounting business consolidations such as the one taking place in Dallas effective March 1st. Public and private companies in Dallas/Fort Worth, Texas have an alternative to the Big Four and the large national firms. Dallas-based KGA Group and BDA&K Business Services merged to form a new firm, KBA Group LLP effective March 1, 2003. Koltin, who is president and CEO of Chicago-based Practice Development Institute, believes this "is a model we'd expect to see nationwide. They just happen to be one of the first to have figured it out and executed it."

Larry King, Managing Partner and CEO of the new KBA Group LLP said the combined firm targets middle market and emerging growth public and private companies. "We've seen a trend coming out of the Big Four in the last few months of fee increases along the line of 20% to 30%, and among private companies this is coupled with delayed scheduling of the audit. We are positioned perfectly with our services to provide for those clients who find themselves looking for a firm that has a depth of audit experience, strong tax consulting expertise and the ability to provide those services to that market with a high degree of responsiveness."

Both firms offered a full range of accounting services, but the mix of services blended together looks like two puzzle pieces coming together. KGA Group's service offering was composed of 60% audit, 30% tax and 10% other. BDA&K's service offering was composed of 30% audit, 60% tax and 10% other. The combination brings to the market place a viable alternative for the companies that will face the shift of priorities of the large accounting firms that is the result of the corporate scandals of 2002.

Bob Baggett, with BDA&K said, "Both our firms have enjoyed an excellent relationship with the Big 4. We have received significant referrals from all the Big Four and the national firms and we expect that to continue. This new order of things is in no way a reflection on the ability of the larger firms to provide the highest level of expertise to their clients. It is, in fact, that very commitment that will cause this natural adjustment in the marketplace. We are positioned to step in and provide the services needed to this important sector to our country's economy, the small and middle market businesses that keep our economy moving."

KBA Group LLP is a combination of two equal firms, with no exchange of money in the deal. The new firm is comprised of 9 partners and principals, 54 professionals and a total of 62 employees. KBA Group audits 20 public reporting clients and serves more than 100 private entities, with the tax advisory practice expanding to more than 1000 private companies and individuals. KBA Group's audit practice is the leading provider of audit services to publicly held operating entities among all Dallas-based accounting firms.

The new KBA Group LLP effectively merged March 1, 2003. The firm's partners and principles are: Tony Adams, Barry Adamson, Bob Baggett, Eric Drews, Bill Griffin, Tim Jackson, Larry King, Robert Kipp and Michael Martin.