MaloneBailey audits small SEC companies. With 190 SEC registered clients MaloneBailey is 7th in the world for the number of U.S. public company audit clients. MaloneBailey has grown from 1996 with two SEC reporting clients to now auditing the NASDAQ, NYSE MKT (fka AMEX) and New York Stock Exchange listed companies. Mushrooming up to a $15 million dollar firm, it has settled back down to a $10 million accounting firm. I made the drive to Houston to speak with audit partner Steven Vertucci, CPA and learn about him and this courageous firm.
How did you get into accounting?
I took one of each basic business discipline course in college. I had a great accounting professor, Dr. Margaret Shelton. I was hooked after the first class. I enjoyed the topic but she made the topic interesting and it stuck.
What do you like best about being a CPA?
We never stop learning. The accounting field continually adapts to changes in business and the economy. CPAs are constantly gaining education to keep up with change. This keeps what we do fresh and offers ongoing challenges which I enjoy. Additionally, when you specialize in an area as I do with audits of publicly traded companies, you are truly offered an opportunity to be a thought leader. The CPA designation is the gateway to that opportunity and many others.
How did MaloneBailey change the way audits are conducted for small public companies?
We embraced the idea of the remote approach to auditing. This allowed us to operate outside of our local area and by doing this we were not only exposed to companies but also to other professionals that serve those companies regardless of where the company was located. Our network of professionals we work with grew exponentially since they themselves were generally located somewhere other than our local market. We also made auditing small publicly traded companies an industry specialization. No other firm was attempting to accumulate the volume of companies we were. Rather than having a traditional practice that might have a few public companies, we made it the centerpiece of our practice. This allowed us to be the first non-national firm to hit the 100 mark for public companies. We did this in 2007 and have stayed above 100 ever since. We currently have around 200 and remain the only non-national firm to audit more than 100 and are one of 10 firms in the world who can say that. See the link https://pcaobus. org/Inspections/Pages/InspectedFirms.aspx.
What changes were made to the standard CPA firm practice model?
We adopted the remote model approach. In early years, we also focused more on building the practice by bringing in partner level candidates to provide more partner time per engagement. In later years we filled out the bottom of the more traditional pyramid but leveraged experienced people as we built the SEC practice.
The larger firms did not want to do these small company audits because they could not get the fees. It was hard to get information from the SEC pre-Internet. John Malone’s first move was to hire a financial reporting manager from Compaq computers to bolster the experience of SEC reporting. When he came over, Malone brought people in at the partner level to specialize in small company public audits. Malone attracted key securities attorneys who had a few public company clients.
Malone could deliver on time and at the right price and get ongoing referrals. Some work came from local CPAs who may not have SEC experience. Malone’s volume created efficiencies by dropping other work and focusing on SEC work. We navigated the rules to get them registered and give them fair fees. Other firms had higher salaries in the northeast and on the west coast. Southern salaries made Malone more cost efficient. We became more workflow efficient and grew sophisticated. We continued to give them the service they expected from the small firm down the street.
Technology helped perform remote auditing. Today we use a Sharefile site like lockbox to drop documents into folders and then we are alerted. High speed scanning helped. The migration to CCHs fx engagement to paperless makes it easier. CaseWare was useful. The documents are updated automatically.
KnowledgeCoach has a battery of questions about the company and tailors the audit programs necessary to prepare the audit. It builds the audit questions to determine the audit steps necessary and determine risk. It has a robust set of analytics when you have a special case. Now the system makes you aware of what you must do. It does simple things like: you must complete and link back to the other portions. After year one, you can become even more efficient.
Some firms cannot do public companies because of professional liability issues. There is greater business risk because the users of public financial statements can be anybody. PCOAB has its own standards. The audit risk is the same; you just have two additional regulatory bodies, the PCOAB and SEC. Every public company requires PCOAB compliance. CPA firms doing over 100 firms get an inspection every year. Reg A, Tier 2 audits can be under GAAS standards.
The PCOAB reviews are rooted in the SAARs. They require three reviews of three quarterly 10Q filings. So it is regularly. The turn-around for the annual audit usually takes until February. The smaller companies do not have the internal control requirements. Year-end for a public company audit is just one part. You have the SEC 10K requirement which requires other people to sign off. The financials and footnotes are a small piece of the filing, less than 50%. The rest of the 10K must be prepared by management after the audit is filed.
How does a CPA firm change to serve smaller SEC companies and reduce costs?
We allowed our volume building to create a platform for developing processes in performing audits of smaller SEC issuers. Our training is and has always been tailored to the SEC. Our people spend 90% of their time doing SEC work so they are very proficient and have a high exposure to issues SEC filers face. They don’t constantly have to research the same topics since we see them so often. These have translated into lower fees since our time is spent efficiently for each project.
How do you provide timely service in this yearend centric environment?
Public companies have deadlines. When 90% of your client base is public companies with generally four deadlines a year, you become accustomed to having and meeting deadlines. The deadline focused nature of our practice has demanded timeliness in what we do. There are consequences for SEC issuers not filing timely which we understand and take their deadlines seriously.
How do you maintain quality audits and SEC filings?
Since we are only one of 10 firms in the world with more than 100 SEC filers and we have such an ultra focus on public company work, our work is highly scrutinized by the PCAOB. We are one of only 10 firms that have an annual inspection while everyone else has triennial inspections. Our volume creates a reality where we are dealing with SEC either directly or indirectly on a very frequent basis. Both PCAOB and the SEC are sophisticated regulators and our regular exposure to them requires we maintain quality in all we do.
When should a CPA firm consider auditing the new Regulation A+ public companies?
Reg. A+ companies are required to have an audit. These audits can be done under GAAS and don’t require PCAOB standards. This opens the door for non-PCAOB audit firms to work on these audits. However, CPA firms that don’t regularly work on SEC issuers should approach Reg A+ companies assuming they may want to eventually go public. If that is the case, those companies are going to want to use those previous audits. If the CPA firm is not interested in auditing public companies they should generally avoid auditing Reg A+ companies. If the offering is successful the firm will need a PCOAB audit and will ask to have the opinion upgraded, and the firm may not feel comfortable to perform, and then the firm has to be re-audited.
Reg. A+ Tier 1 and Tier 2 have been qualified but they have not raised a lot of money especially Tier 1. At least Tier 2 has companies behind it.
What do you see as the potential for the crowdfunded companies made possible as a result of the JOBS Act?
Mainly access to investors that otherwise would have been out of reach. Crowdfunding also offers up a new platform for raising capital that didn’t exist prior to the JOBS Act. The potential is there for these companies; the challenges have been letting the regulatory environment mature so everyone involved knows what’s required.
There are four or five approved portals for Tier 2, Reg A+ raises for qualified investors. There was some resistance from broker/dealers. Not a lot has happened with it; it is still a mystery. There appears to be a problem with the portal determining and validating the status of the investor qualified to raise the money.
How does a CPA firm transition to a 100% paperless approach?
You have to jump in and not look back. Change can be challenging and there are reasons firms can come up with on how paperless is too different or too difficult. It is different and can be challenging but it is widely adopted so many firms have proven it can be done successfully. The best thing we did when we went paperless in 2005 was to not do it in steps. We fought the urge to “try it” and instead made the decision to take the entire practice paperless all at one time. We moved forward and never looked back.
How do you perform remote auditing?
For remote auditing to be most effective, a paperless approach is needed and firms will need to invest heavily in technology to assist them with the transition and execution. You need a culture that focuses on technology and provides the tools to audit from anywhere. It is important to note that remote auditing cannot replace the need to be onsite if facts and circumstances require it. We look at every project with the question of what does the project need and require based on what’s going on with the project. One size and one approach does not fit all companies and situations. Auditing still remains an art. In some cases you don’t have to be onsite, and can be there with less time. We are more efficient at our desks. Everyone has four monitors on their desks and a docking station. We can handle a higher volume of clients, and have no down time and expense to set up at a remote site. We are only working on clients when they are ready. We are not waiting. It limits non-productive time.
We can work from anywhere. Malone embraced the idea, we can audit from anywhere. Some staff have an extension of the office as if they are in the office. It accommodates the accountant. One monitor is all email. Another is dedicated to CCH product. The other one may be the Internet for research. You may have a lead sheet on one screen, the bank reconciliation on another and the trial balance to confirmation, rather than flip from one screen to the other. Gone are the days of printing and redlining the financial statements. You can verify; and as the audit partner you can keep all the tasks open at once. We can abandon printing.
After four monitors there is a diminishing return. The desk will usually accommodate only four. John Malone had a special rack to hold five monitors. All seniors can have three or four monitors at home. What we have learned from the remote approach is the auditors love it, and don’t have to live out of a suitcase and be away from home. It has made it easier to recruit. All the brainpower is here at the office to solve issues and get answers. It’s a great environment to learn from.
What advice would you give new CPAs?
Receiving your CPA license is just the beginning, not the end. While it is an extraordinary accomplishment, it is the first of many milestones and goals in a CPA’s career. Enjoy the moment, and prepare for a career of equally challenging moments. I joined the firm when there was only John Malone, founder, Sterling Bailey, co-founder and a senior auditor. I stayed with the firm because of the direction of the firm. Malone was only auditing a couple public companies at the time. Malone built the firm focused on this approach. In 2011 Malone opened two offices in China to serve public company clients there. George Qin came from Deloitte to be Malone’s practice leader in China and do basically the same thing we do here.
What do you do with your free time?
I enjoy spending time with my family. We enjoy water activities so we’re always looking for something near the water in the summer.
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