There's no accounting for rulings on Jefferson Wells.

When is an accounting firm not an accounting firm?

If the company is Jefferson Wells International Inc., one of the fastest-growing accounting and consulting firms in the U.S., the question seems to boil down to semantics.

The Milwaukee-based firm, which has expanded rapidly in Los Angeles, is restricted from calling itself an "accounting firm," even though it provides accounting services and the majority of its employees are certified public accountants.

The firm debuted last year on the Business Journal's list of top accounting firms at No. 5. But this year it is not on the list, not because it has shrunk but because it is no longer officially an accounting firm. (The list of accounting firms begins on the following page.)

Jefferson Wells even had to change its name three years ago--it was formerly known as AuditForce--because it ran afoul of regulators in Texas, and feared it would encounter the same problems in California, where it does a brisk business.

Ironically, the name change came at the same time that it experienced a surge in demand for its services because of the passage of the Sarbanes-Oxley Act in 2002.

"When Sarbanes-Oxley came along, it was a silver platter for us," said David Gennrich, Jefferson Wells' managing director for the Southern California region, and a former partner at now-defunct Arthur Andersen.

Unlike the Big Four accounting firms, Jefferson Wells specializes primarily in internal audits, which are independent appraisals of a company's operations that became the missing link in the financial reporting scandals of the past decade. The Enron Corp. case and the demise of Arthur Andersen were the direct result of accounting firms taking over the internal audit functions of some clients, while also providing external audits--meaning they were effectively auditing their own work.

Jefferson Wells' niche in internal auditing just happened to play into the new legal requirements of Sarbanes-Oxley. Specifically, section 404 of the Sarbanes-Oxley Act requires that public companies have a separate, outside auditor who can attest to, or certify, its internal financial controls.

As a result, many of the Big Four accounting firms that put their stamp on financial statements sent to the Securities and Exchange Commission started referring their own clients to Jefferson Wells for internal auditing work. After all, though Jefferson Wells is fast becoming the No. 5 accounting firm in the U.S., it isn't viewed as a direct competitor of the Big Four because it does not do external audits. Consequently, it can't legally call itself an accounting firm.

"The reason we don't sign the opinions is it costs a lot of money and exposure and headache to do that," said Gennrich. "There's a niche for us in this space of internal audits because there are already so many folks who do external audits."

In Los Angeles alone, Jefferson Wells' growth has been dramatic.

Its Southern California offices posted net income of $8.7 million in 2005, on $30 million in revenues, a seven-fold increase in three years. More dramatically, the number of its accountants and consultants in Southern California skyrocketed to 230 last year, up from just 19 in 2002. This year, the number of employees has dropped to 160, though Jefferson Wells is hiring again because of increased demand.

"When Sarbanes-Oxley came out, the market stomached it and bore the costs and then things started to stall in the third quarter of 2005," Gennrich said. "Now companies are focusing on it again."

Internal vs. external

William Treacy, executive director of the Texas State Board of Public Accountancy, which regulates accountants, said Jefferson Wells paid a $30,000 fine in 2002 and changed its name from AuditForce because the word "audit" in its name was misleading.

Moreover, the company does not meet the requirements to call itself an accounting firm in Texas, or in many other states, because accounting firms must be majority-owned by CPAs and structured as a partnership.

Though Treacy said Jefferson Wells proved to be "very cooperative" with Texas regulators, he said their work "won't pass muster" with the SEC.

That is just fine with Jefferson Wells, since other accounting firms are signing off on its own internal audit work.

The company has never certified financial statements, nor does it plan on doing so in the future. In fact, the main problem it has encountered is that state regulators insist it cannot advertise or market itself as an accounting firm.

On the Web and in marketing materials, Jefferson Wells calls itself a "professional services firm that specializes in financial controls."

"We offer internal auditing, which is helping companies audit their own results so they can, with confidence, offer them to a CPA firm for attestation or certification," said Debbi Frazier, a Jefferson Wells interim managing director. "It was something we never wanted to do anyway, and we've always thought there was value in a company offering internal audit services that were free of conflict."