Alternative Firm Structures in 2000 and Beyond . An Interview with Gerry L. Golub By James L. Graig Jr. In Brief

It's All About Capital, Talent, and Stock Options

It has been a year and a half since Goldstein Golub Kessler & Co. P.C. sold its nonattest assets to American Express Tax & Business Services (TBS) and the firm's managing partner, Gerry L. Golub, became chair of TBS. In this interview, Golub explains what has changed and what has stayed the same since that landmark consolidation.

Some will be surprised to learn that no former GGK partner or employee has sold a financial product or earned a commission because of the new structure. That was not the reason the firm made the deal. According to Golub, it was about serving clients, obtaining capital, providing for firm continuity, utilizing technology, attracting and retaining talent, and growing the organization.

Golub is upbeat about the future for his organization and the profession as a whole--if it remains focused on the client.

In the summer of 1998, the New York accounting profession was shocked when Goldstein Golub Kessler & Co. P.C. sold its nonattest assets (and the business related thereto) to American Express Tax & Business Services (TBS). It was a devastating development--one of the most successful, admired, and respected local firms had "sold out" to the enemy. The deal also put TBS and the consolidation movement on the radar screen in the northeast. It was a bold move by GGK managing partner Gerry L. Golub to bring the consolidators into the Empire State.

The transaction turned regulation of the profession in New York on its ear. While developing a protocol for TBS and the new GGK LLP partnership to follow, the State Education Department's Office of the Professions realized that its only jurisdiction over the CPA profession was in the area of financial statement services. This opened the door, in the opinion of some, for CPAs to accept commissions and fees for work done for clients for whom they did not perform these regulated financial statement services.

Other major developments in the consolidation movement have brought a sense of legitimacy to it and TBS. Both H&R Block (through its acquisition involving McGladrey & Pullen) and Century Business Services (through its aggressive acquisition program) have helped put the GGK transaction into perspective and have brought a sense of respectability to consolidators.

There were some setbacks in 1999: Century Business Services recently saw the market value of its shares decline and, with the decline, the announcement that it was seeking ways to enhance shareholder value, possibly including a sale. And after spending months on the SEC registration process, the Centerprise Advisors, Inc., roll-up and public offering, which would have included the Urbach Kahn and Werlin firm in Albany, N.Y., was called off.

Nevertheless, the alternative forms of practice used by consolidators in one form or another are here to stay. Their leadership is committed to a path of growth that will make the consolidators a major force in local firms' traditional market.

CPA Journal Editor-in-Chief James L. Craig, Jr., met with TBS Chair Gerry L. Golub to discuss the progress and the future of alternative firm structures.

Reflections on Consolidation

The CPA Journal: Gerry, it has been almost a year and a half since your firm became associated with American Express Tax & Business Services (TBS) and you became its chair. The regulators have forced commercial companies seeking to tap into the accounting industry, such as TBS, to operate in the form of a two-headed monster--allowing nonattest services in the corporate form but requiring attest services to be provided in a partnership wholly owned by CPAs. An awkward way to do business, to say the least. How is it going? What have been the high points?

Gerry L. Golub: The client acceptance and support of the transaction has been especially gratifying. Naturally, there was much curiosity and a lot of questions at first, but we have had 100% client support. And staff retention has improved dramatically. What we did at the time was to raise the concept of consolidation in the profession to a new level, creating value to accounting firms across the nation. This has been a very positive thing, in spite of the recent announcements about the withdrawn public offering of Centerprise Advisors, Inc., and the drop in value of Century Business Services stock. The economic model of providing accounting services in these structures remains sound and will lead to the continued growth of the consolidators.

CPAJ: You say that clients have accepted the new way of doing business. But now they are dealing with two organizations instead of one. Isn't that cumbersome?

Golub: Once the client understands our administrative requirements of separate billings and separate engagement letters, there are no major differences between the old way and the new. The client deals with one partner (or managing director, from the TBS side) and basically the same staff for all the work. It is not unlike bringing your suits and shirts to the dry cleaner and, at pick-up time, getting one ticket for the shirts and another for the suits. Would you object, as long as the dry cleaner did quality work? It has not been a problem.

CPAJ: What about the concept of one-stop shopping, the big motivation to join a financial conglomerate? Has it happened in your operation?

Golub: The New York State rules have not officially been relaxed in the areas that are thought of as being part of a one-stop shopping firm. I'm not sure, however, that our clients are champing at the bit to buy financial services products from us as envisioned in the one-stop shopping concept. I know that clients want the expertise available in their firms to give advice on insurance, mutual funds, and investment opportunities, but I am not quite sure they are ready to purchase those products from an accounting firm. Having said that, I think the profession is changing and the mindset of the public will change over time. But in our New York marketplace, there is a plethora of capable professionals in the financial services area. This is not true in all the markets that TBS serves.

We did not join TBS because of any desire to sell products. There are many other reasons why we felt this was a superior way to operate our traditional business.

CPAJ: But didn't GGK have a strong financial planning practice?

Golub: We have a significant financial planning practice. My partner Stuart Kessler, a past chair of the AICPA, was instrumental in building the AICPA's personal financial planning division to what it is today.

Financial Products

CPAJ: Is the New York office of TBS or GGK licensed or registered to sell financial products?

Golub: We hold no licenses and are not registered under any of the Federal or state securities laws and regulations. Our financial planning is incidental to our primary work as a traditional accounting firm. There has been no change in that regard.

CPAJ: What if in the process of providing accounting services you find that a client can benefit from financial advice and a diversification of financial holdings? Do you then invite her to walk down the hall to an American Express Financial Services advisor who will take care of her needs?

Golub: We have no such resource resident in our office. There is no activity at the present time in what might be called product sales. This is not necessarily true at all TBS offices, especially those in states where the rules are more clearly articulated or where other resources are lacking to meet client needs.

I am very interested in the appetite our clients will ultimately have for finding these services in our offices. Right now, they do not seem to be hungry for them.

CPAJ: Then, why did you make the deal?

Golub: We went for the opportunity to strengthen our traditional client service areas with benefits in mind for our four constituencies.

First and foremost were the benefits I saw for our clientele. Our clients have a growing need for an expanded array of services that we felt are and will become available in the TBS organization. I am not talking products; it's a broader service capability that attracted us. Our clients see this and have fully supported our move.

Second were the potential benefits to our staff, which now numbers more than 500. The combination of the entrepreneurial style, energy, and passion that the partners and members of the staff exhibited in the GGK firm with the benefit plans and special perks that exist in the American Express organization has produced, in my view, the single best place for an ambitious accounting professional to be. What was missing in the CPA partnership form was the opportunity to accumulate wealth from profit sharing and pension and stock option plans, which have now become available under the American Express umbrella.

CPAJ: Did I hear the words 'stock options'?

Golub: Yes. As TBS chair, I recently announced that we can offer stock options in American Express stock to senior staff and managing directors. It is a watershed event in terms of attracting and retaining the best talent for our organization.

The third group for whom the transaction had to be evaluated was the GGK partners. The economics of the deal was attractive to them, and the partners saw the prospects of being able to solve our long-term capital needs.

The fourth group to be considered was the future staff and partners of the organization. They are the ones with the biggest home run. Relieving future partners and managing directors of the economic burden of compensating retiring and withdrawing partners, creating an ongoing source of much-needed capital, and providing corporate benefit plans for long-term wealth accumulation results in a very attractive environment. The requirement for young partners to make a capital contribution or sign personally on a lease obligation or bank loan has been taken off the table--a major plus.

The success in all four of these areas has been dramatic.

Life with TBS

CPAJ: Have you had new service opportunities because of being part of TBS? Has American Express introduced new business to you?

Golub: That is not why we made the deal. But I do believe that the brand affiliation is giving us a greater presence in the marketplace and enables us to be a player in work for which previously only larger firms were considered. Our financial viability as an organization is now never questioned. The respect that American Express enjoys in the corporate world is transferring to us. Our growth this year has been strong, continuing our trend of double-digit annual rates, and we are on a track to meet all our expectations.

CPAJ: Are you actively involved with the other TBS units? Is there uniformity of practice?

Golub: One of the real benefits is the quality of the firms that have joined TBS and the interaction we have had with them. A common theme is our commitment to quality and integrity in serving clients. There is no uniform approach to delivering services, no common checklists and the like. Our national practice at the moment is based on sharing talent, not methodologies.

CPAJ: Do you foresee the day when all the partnerships whose partners are managing directors of TBS will operate under a common name à la McGladrey & Pullen?

Golub: Most of our firms are located in major business centers where they have developed dominant positions. They have name recognition that we would not want to give up too easily. Someday, I envision that the regulators will no longer require the side partnerships and all services will be delivered in the TBS name. However, that merger will not be achieved for many years to come. Until then, the local names of our related firms are strong enough to operate successfully in their markets.

CPAJ: GGK has a number of public clients. Has independence been an issue?

Golub: We have served as the accountants on a number of public offerings since the transaction, and our independence has not been an issue. Regulators have been made aware of the diligent way in which we maintain the separateness of the two organizations. The basis for our procedures is the protocol letter that we received from the New York State Education Department. That department currently is in the process of reviewing our procedures to see that we have followed the protocol. I foresee no problem.

CPAJ: Public Accounting Report recently published its list of the top 100 CPA firms in the country. GGK is no longer on that list; neither is McGladrey & Pullen LLP. PAR says that firms have to do some audits in order to remain on the list.

Golub: Over the years we have enjoyed being on the list. And although the revenues of GGK on a stand-alone basis would be enough to be on the list, we have chosen not to give out information about the separate operations of GGK. Also, TBS does not give out information on the revenues of individual offices.

Consolidators and the Local Firm

CPAJ: What is TBS going to look like five years from now?

Golub: Bigger, better, broader. Within the next six or seven years of my watch, I would expect that we will have important firms in 20 to 25 major business centers of the country, each of which will have grown dramatically, and when you put them all together under the TBS label, we will be the largest middle-market firm. I clearly see us enjoying the No. 6 position in the rankings (or a lower number, if there is continued consolidation amongst the Big Five).

CPAJ: Larger than RSM McGladrey and CBIZ, both of which are larger than you are now? Golub: Oh yes. The consolidators in total over that time will be major players in the profession. That is not to say that independent firms will not be prospering in local markets as well. The business model of choice will be an affiliation of some kind.

CPAJ: What will be the source of continuing growth in the middle-market community?

Golub: I have a few secrets up my sleeve, which hopefully will be visible in the marketplace very soon. But, for now, unlike the Big Five firms with most of their growth coming from consulting, our traditional services of audits in GGK and tax and business services in TBS have been growing at double-digit rates. Our consulting practice over the last two or three years has also grown in leaps and bounds, but the attest function, which draws clientele to the business firm, will continue to be the engine of growth for us and for most firms in our market. We are in the accounting business. Our clients need accounting services. That's why we wear the CPA pin in our lapels.

CPAJ: The impression exists that many local firms feel their future financial success rests on their ability to earn commissions or fees from products and referrals to financial institutions. That is not your vision. Are they wrong?

Golub: I can see the appeal of sharing a commission for smaller firms whose typical fees for service are relatively small--the $1,000 fee for preparation of a tax return. A commission on the sale of a $1 million life insurance policy may seem very attractive. But what about the cost in time and energy to obtain the necessary licenses and become competent to advise the client properly?

Then comes the more profound question as to how the client will view the quality of advice if commissions are involved. I am not convinced, as yet, that over the long term being able to participate in fees and commissions is an enrichment opportunity. I see separate divisions of firms staffed with full-time, knowledgeable people, probably not CPAs, giving advice and selling products. That should work. But paramount, even for those separate divisions, will be dedication to the client's interests.

CPAJ: Is there a risk that some CPAs will not follow your ideal?

Golub: One of my fears is that CPAs will get into the product-selling business without the required expertise and demean and taint the perceived quality of other things the profession does.

An interesting development is occurring. A number of firms are affiliating with investment advisors and broker/dealers in order to compete with us. They may come under pressure to 'deliver the goods' and make the product sales even though they are uncomfortable or ill-prepared to do so. I have no pressure to sell anything. In our shop, the client drives what we do.

CPAJ: Is there a future for the local firm?

Golub: Over the course of my almost 40 years in the profession, I have never seen the profession at a higher level of public acceptance, client respect, and respect from other professionals. The profession has arrived and is running on all cylinders. The consolidation movement only adds to the stature of the profession.

Growing the Profession

CPAJ: You have stressed the need for talent and the importance of talent for the continued growth of TBS and, indirectly, the profession as a whole. People are the No. 1 problem for most firms right now. What is the long-term solution to attracting more talent to the profession? Fifteen years ago, young people saw the profession as having the potential for significant financial rewards. That doesn't seem to be the case right now.

Golub: A number of factors draw people into a profession: a challenging workload, a pleasant workplace environment, and the potential for long-term financial reward. The profession has to offer all three things to bring in the talent. I think the alternative structures, such as TBS, are in an excellent position to deliver all three. I am sure that the Big Five firms will ultimately have to demonstrate they can do the same. This will invigorate the flow of talent into the profession on the whole.

CPAJ: You are convinced that we are better off because of the consolidators coming on the scene, that they bring stability to the profession and are important to the long-term prosperity of the profession.

Golub: As an indication of the importance of consolidation and the need for new ways of conducting an accounting practice, we can look at what happened to the firms that used to form Group B of the AICPA, firms with more than 50 CPAs but smaller than the Big Eight firms. In 1975, there were 25 members of Group B. Of those 25 firms, today only 11 exist as they were then known. Some merged with the then Big Eight, now Big Five. Some encountered practice and financial problems, and others just felt they could not go it alone. One firm went bankrupt and liquidated.

The consolidation movement brings much-needed strength, viability, and continuity to the profession. In some ways, I am surprised that the regulators don't view it this way.

CPAJ: The AICPA has invested a great deal in its Vision Process, to help lead and motivate CPAs to a bright future in the new century and the new millennium. How is that affecting your strategies for growth and success?

Golub: The Vision Process began under the leadership of my partner Stuart Kessler, then chair of the AICPA. The process went from the bottom up. Now that all the digesting and assimilating has occurred, it is a process operating from the top down. The AICPA has created a package that says, 'here is where CPAs at the grass roots think we should be headed and here are the tools to help you accomplish it.' The specifics are to broaden the smarts and capabilities of every CPA and to create new service opportunities for them. It is not just the same old way--it is a new way to help clients do better and do more and to lead the business community. This is a very positive step, which I hope will convert to gains on the part of everyone in the profession.

In the boardroom of every CPA firm I hope the questions are being asked: Where are we headed? How are we going to compete? How are we going to equip ourselves for success? What are we doing to ensure that we are an important player in our business community five years from now? How is our leadership moving our firm forward?

CPAJ: On a personal level, how has your life changed because of TBS?

Golub: As chair of all of TBS while remaining CEO of the New York operation, I have been very busy. But I enjoy what I do. The intellectual stimulation is still exciting, the business challenges are still demanding, and the success that all the partners and I are enjoying is very rewarding.

Interestingly, the negative reaction we first felt when announcing the consolidation has significantly decreased. Instead, we see a large number of highly respected and successful firms exploring new ways to organize and function in recognition that, as the profession changes, new structures are required. I hear from some of my colleagues in the profession that perhaps our firm was a step ahead.

CPAJ: Thank you, Gerry, for your vision of the CPA profession serving the middle market. You give the impression that the profession is in a period of great prosperity and great promise--a golden period, if you will.

Golub: Absolutely. Change is under way. This creates discomfort on the part of some, but it also creates great opportunities. *

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