When leverage goes bad

If you own a small or medium-sized business, you’re on the radar screen.

As professional service firms plot their expansion strategies, the dynamic and exciting “growth companies” are the target.

How do lawyers, insurance specialists and other service providers attract the attention of these businesses? Referral and word of mouth continue to set the standard for choosing a professional services firm. At the center of this referral network is the CPA — a business executive’s “most trusted adviser.”

If your CPA refers you to an attorney or insurance firm, that referral is seen as credible and, in the final analysis, of some economic value.

The financial industry has begun to realize the key role the CPA could play in building a network of services for a business owner.

Some CPA firms have responded to this by assembling a sort of “CPA mall” — purchasing other firms or establishing divisions to provide such ancillary services as the sale of securities, financial planning, insurance or money management.

Other large companies, such as American Express or Century Business Services, have been buying up CPA firms and service providers to build a network of firms that refer clients back and forth. These companies — or consolidators, as they’re known — are geared in theory to provide “one-stop shopping.” At the same time, they’re designed to provide additional revenue streams from cross-referral activity to the other business partners.

In the end, will the business owner be better served by the consolidator approach or the “mall?”

I don’t think so. Many in our industry feel that both approaches threaten the “trusted adviser” relationship they’re attempting to use as leverage.

The CPA earns a position of trust based on two characteristics: 1) skill as a CPA, financial analyst and business adviser, and 2) independent objectivity.

The first is a basic requirement.

Maintaining the second requires that the CPA occupy a position of unquestioned impartiality in order to provide advice unencumbered by self-interest.

If the CPA stands to gain nothing financially from a referral to another service provider, such referrals carry tremendous weight with the business owner.

Now, as the CPA provides referrals to other companies in which he maintains a financial interest, the business executive can’t help but wonder about the apparent conflict of interest. Would I have received this same referral before she started the financial planning division? Is the recommended payroll service the best for my small company, or simply the one affiliated with my CPA? Is this the correct financial investment for me, or am I purchasing it because my CPA now derives commissions from it?

In my own firm, my partners and I have expanded beyond the traditional role of tax and auditing to provide management consulting, litigation support, business valuations and other business counsel needed by our clients.

However, we have chosen to remain separate from the consolidators, and have decided not to wander beyond where our independence in thought and practice would take us. Because we are not trained as technology consultants, legal experts, risk management specialists or investment advisers, we refer clients to firms we respect and with whom we have no economic reciprocity.

Above every doorway in Goodyear’s executive office is a phrase placed there decades ago: “Protect our good name.”

It appears that the CPA profession, in its rush to what it perceives as profitable business, is trading on its good name in a way that could damage the very reputation that carries so much leverage today, a reputation built over decades of objectivity and independence. Rick Federovich is managing partner of Bober Markey & Co., Akron.