POSITION YOURSELF.

To call the economy's growth over the past 10 years anything less than an explosion would be an understatement. Although America has experienced periods of high economic growth before, what differentiates this expansion is the unprecedented wave of transactions between small businesses. A small business is one that employs less than 500 people, according to the Small Business Administration. With this as a benchmark, more than 98 percent of businesses in the greater Los Angeles area are considered small businesses. So, it's safe to assume that the opportunities available for professionals to work with small businesses are numerous.

Here's an interesting fact: When small business owners were asked in a Harris Poll who they rely on the most, the CPA was rated as their number one adviser--ahead of attorneys, insurance brokers, money managers and investment bankers.

If CPAs are small businesses' most trusted advisers, why is it that when our clients sell or purchase a new company, our fees are traditionally the lowest of all the professionals involved? Typically, attorneys, investment bankers and even business brokers earn two to three times what the CPA does on such transactions. It's an issue of client perception and the CPA's role in the business transaction. Fortunately, perceptions can change, as can the CPA's role.

PERCEPTION

As CPAs, we understand and cherish our role of independent watchdog. However, in many ways, the marketplace fails to compensate CPAs and other watchdogs to the same degree as other professionals. Let's look at some related examples: a police officer with 10 years experience earns about $55,000 per year while a law school graduate with no experience commands around $120,000. Similarly, an Army sergeant earns about $30,000 per year, while a Web designer with one year's experience could pull down as much as $75,000 plus stock options. Or closer to home, a CPA firm's audit fee might be $30,000, while an investment banker takes in around $500,000 for closing a deal.

Clearly, society does not economically reward the enforcer of the rules as highly as the designer. CPAs traditionally have been perceived as the enforcers who say, "No, you can't," not the individual who masterminds the plan for getting the job done. To expect change, we need to reposition ourselves as managers of transactions, not just monitors.

POSITION YOURSELF

To maximize our economic potential, it might be time for some of us to drop the role of independent watchdog and become client advocates. This is a leap. To do this, you wouldn't be able to issue audits, reviews or unqualified compilation reports, although someone still needs to perform the independent attest function for the financial markets to work. But if you are willling to take the risk, the financial and personal rewards of client advocacy can be enormous.

IMPLEMENTATION

Ideally, to implement this change, firms would model themselves after the Big Five and establish separate, free-standing consulting companies with independent ownership, staffing and facilities. Of course, for most small firms this would be an unbearable economic burden. Therefore, an alternative model based on client by client independence is a viable solution.

Firms can choose which clients they wish to serve on an independent basis and which ones on an advocate basis. For example, a new Internet start-up company might be a perfect client for you to serve on its management team, rather than as an independent observer. Under the advocate model, your firm could trade services for an equity position in the new organization. Services could include helping to negotiate bank loans, performing tax planning and preparation, and assembling the work paper package for the independent CPA firm.

The CPA in the role of advocate isn't a particularly new concept, as many accountants already perform these types of services. However, CPAs who work as client advocates often must walk the fine line of independence while executing these services. Rather than try to perform the attest and advocate functions at the same time, CPAs should cross over fully on a client by client basis and either maintain the independence function or become a true advocate of the client's position. As the time-honored saying goes, "Nothing gets a person's attention like a tug on their wallet." If you and your client's interests are economically aligned, then you'll be highly motivated to fight for the last dollar in every deal.

RETRAINING 

Refocusing your practice will require retraining existing staff or hiring new staff with different backgrounds and skills. For example, instead of hiring accounting staff with six years of audit experience, your firm will be in the market for former bankers, investment brokers and even attorneys.

Additionally, your firm's new direction will require the principals to change their focus. Most small to medium-sized firms will have to designate one or two partners to assume the client-advocate role, and substantial resources will be required to either retrain or upgrade the new client advocate's skills. For example, instead of concentrating your CPE on audit updates, you would attend classes on the latest techniques for placing Internet advertising or performing business valuations for magazine publishers. Your renewed skill-set focus should be aimed at increasing your knowledge of specific client products and services, not just general accounting.

Generally, most partners will have many of the required skills as a result of prior professional experience. Other skills that are in demand can be obtained through continuing professional education classes offered by CalCPA, the AICPA and other providers. Clearly the old adage that it takes money to make money applies here, but just like the large investment that firms made in computer technology in the '90s, this investment will pay off in the long run.

CHOOSING THE RIGHT CLIENT

Whether or not this is the correct approach for you and your clients depends on your skills and your clients' needs. For example, if your client is a profitable, stable company in a slow growth mode with no designs on expansion, you probably will want to maintain your current relationship. The same holds true for a client that provides you with substantial fees on attest work. On the other hand, a dot-com company with significant growth potential would make a great client for you to consider providing with advocacy services.

As an advocate, you can offer clients a variety of services, including taking the lead in selling a business, obtaining bank financing, establishing accounts receivable collections policies and preparing cashflow projections. These are not new services for CPAs, but rather ones being offered in a new light For example, we often help clients negotiate bank loans, but as an advocate we can act as the client's representative as opposed to the independent watchdog.

The following are two case studies that demonstrate how the CPA functioned in the role of client advocate as opposed to that of independent watchdog.

INTERNET INC.

Internet Inc. is an Internet startup company located in Southern California's Marina area that specialized in Web site development. II's business plan calls for a limited life cycle of 2-3 years before it sells to a competitor for a big payout. The company has three principals, none of whom have strong accounting or financial backgrounds. II's principals have about $100,000 in the bank as startup capital and many interested investors.

II offers the CPA firm a choice of roles. II anticipates its sale in the near future, so they will require audited financial statements. Since there are not many transactions, the CPA firm estimates that the audit fee will be $30,000-$40,000 per year. With the addition of tax preparation and some general business consulting, the total projected fee for two years reaches $100,000.

Instead, the CPA chooses to assume the role of client advocate. In this role, the CPA firm takes a 5 percent equity interest in the company and acts as its chief financial officer. The firm's main responsibility is to help negotiate the company's sale to its largest competitor. In addition to its equity position, the firm receives a fee of 1 percent of the total selling price for its efforts. The firm locates and hires a controller, goes over the internal monthly financial statements and prepares the audit work paper package along with the tax returns. It negotiates bank loans and office leases, and helps to develop the employee stock option plan. The firm has a vote on II's Board of Directors and heads up the committee in charge of selling the company.

In 30 months, the company sells out for approximately $10 million. The firm receives $500,000 for its equity position and an additional $100,000 transactional fee for a total of $600,000 vs. $100,000 for the traditional arrangement.

HOLLYWOOD PRODUCTIONS

Hollywood Productions is a television production company with several long-standing shows on two networks and a half dozen deals in the pipeline. The sole shareholder is bored. He has hired great talent who handle all of the company's day-to-day operations. He plays golf and "does lunch" four times a week. One day at lunch with his longtime CPA, he starts discussing selling his business.

The CPA is presented with the choice of following the traditional role of auditor and tax planner, or becoming Hollywood Productions' advocate. The traditional approach would yield the accountant approximately $25,000 for tax planning fees and assisting the buyer in the due diligence process.

Instead, the CPA chooses the client-advocate role and suggests rather than selling Hollywood Productions to a competitor, the client sell to his employees. The client likes the idea a lot but has no idea how to proceed. The CPA suggests an employee stock option plan, offers to hire the attorney, prepare the documents and find a bank to finance the transaction. The client accepts.

The CPA firm locates and hires the attorney, interviews and hires the bank to fund the deal, and helps select the investment advisers who will invest the funds from the sale of the company. Additionally, the CPA helps to present the new plan to the employees at a company-wide meeting and ends up working with the new owners on how to manage their new company. The CPA bills $80,000 for all of the services relating to the transaction, and retains the client after the deal closes.

WORTH THE RISK

There may be substantially more risk as an advocate and a potential co-owner with your client, as compared to a provider of attest services, but the returns are substantial. The key is to choose the right client in the right industry at the right time. Specific factors to review are the type of industry and the client's position in it; the company's rate of growth and financial success; management's desire to improve; and how you fit into the company's overall business strategy. As with all professional services rendered by CPAs, the advocate role requires that the CPA remain objective, but objectivity will be welcomed by your client even if you're no longer in the watchdog role.

TO LEAP OR NOT TO LEAP

Crossing the enormous chasm from independent watchdog to client advocate is a difficult one. It is more of a leap than many CPAs will be willing to take. However, with the right combination of people and situations, the results can be spectacular.

Adrian B. Stern, CPA, is the partner in charge of the consulting services practice of Encino-based Clumeck, Stern, Phillips & Schenkelberg, and COO of On The Scene Productions, an electronic public relations company in Los Angeles. Stern is chair of the Education Foundation Cashing in Conference: For the Client and You.