ParenteBeard, BTVK bosses tell why Phila's top accounting firm is merging

UPDATE 10/7: Tim Christen, CEO of Chicago-based accounting firm Baker Tilly Virchow Krause, stopped through Philadelphia last week to explain his firm's planned absorption of ParenteBeard, Philadelphia's largest: 
"Clients are the objective of the merger. With the combined firm we can bring all the expertise in either firm to the clients of the combined firm. The result is enhanced value for the client. In professional services, if you enhance the value for the client, you do well."

With an expected $475 milllion in yearly sales, the combined firms will form the 12th largest accounting group in the U.S. "Our vision is to be a top 10 firm with revenues approaching $1 billion within five years," Christen told me. Their Baker Tilly International global network ranks itself eighth in the world, with $3.4 billion in yearly revenues. Two ParenteBeard practice leaders, Mark Ross (health care) and Donna Massanova (benefits), will also run those practices for the combined firm, which will do business as Baker Tilly Virchow Krause.

EARLIER: Robert Ciaruffoli, boss of ParenteBeard LLC, which he built through mergers into the biggest accounting firm in Philadelphia after moving here from Wilkes-Barre 10 years ago, agreed to talk about his firm's recent decision to merge into Baker Tilly Virchow Krause LLP, a larger Chicago firm that is part of the same global network of firms, Baker Tilly International. Edited transcript:

Are you merging because it's the only way you could find to grow? Our strategy has been consistent for many years: You can start from scratch. Or you can join somebody and get there a heck of a lot faster.

We've done both over the years. We started some offices from scratch. In my opinion it was a heck of a lot easier to do that 20 years ago than today. There was less technology. There was a heck of a lot less regulation.

Are local accounting firms obsolete? There's a different niche out there for everybody.  It depends on what you want to be. But for our plan, for our business clients, we knew there was no holding back globalization. People think about global companies as really large companies. But it's shocking how many clients we have, large, medium and small, do business internationally.

We recognized that it 1991 when we joined Summit International (now Baker Tilly International, a consortium of accounting firms that share clients across regions and countries). Around 2000 we changed the name: Summit was headquartered in New York, where there were pages of Summit, Summit Cemetery, everything. So we needed (a more distinctive name.) Baker Tilly was our UK member firm. We built on that name.

With respect to our strategic plan, moving from Wilkes-Barre to Philadelphia, to be a metro-based firm, was Step One. People asked me why in Philadelphia there are still so many accounting firms. I said, when you have point-0001 percent of the market you have no place to go but up.

With all that potential right here, why did add other offices?  We have a lot of strong industry groups. So do our merger partners. But our (ParenteBeard group practice) industry leaders are saying, if you want to grow, we need more geography. We already have the vast majority of the business we need in this marketplace. We have the skill sets, the critical mass, the people, to take what we have and introduce it into other marketplaces.

A lot of our clients are looking for other services above and beyond tax and accounting. We can build it or we can acquire it or merge into somebody that has it.

We focused initially on the Washington D.C. to New York areas. In the last 36 months we expanded that to Boston. We have had a hard time finding partners in Washington that fit with our firm culture. 

You ran out of smaller firms to add, so you found a bigger firm to join?  We came to a critical inflection point this past year. We had a number of industry groups, in anticipation of our annual meeting this year, say that we ought to look at merging up. I asked our partners, 'Humor me: Has anyone who has worked with Baker Tilly, whether it be work for the firm which we have done, or with them on a client, joint venture, or committee, please stand?' We had worked with them for a little over 20 years. We had a very close relationship. Everybody says they are a Chicago-headquartered firm. But they were founded in Wisconsin, they went into Minnesota, before they came to Chicago.

Like you coming here from Wilkes-Barre. Yes.

Our healthcare practice needed more geography; Baker Tilly wants to get into healthcare. We wanted to be in Washington; they have 300 people there. Both of us had New York offices that were too small. Combined, we'll have a $50 million (yearly sales) practice there, which is enough critical mass to be taken seriously in Manhattan. And they, too, would like to be in New England.

We have a strong higher-ed audit practice. They have a strong higher-ed consulting practice. Where they have services, we have clients, and vice versa. They have a big financial institutions practice, as do we. Not just the traditional finanical institutions -- it's the hedge funds, the private-equity funds, the bankers. They are doing a lot more wealth management. 

Weren't their firm and your firm once the same size; could this have ended differently, with your firm name and a combined Philly headquarters? At one time were both around $30 million a year. Now they are larger (1,500 people for the Chicago firm vs. around 800 for ParenteBeard, down from over 1,000 after mergers, departures and cuts.) That's a small part of why this has worked out as it has.

They are already a regionalized firm. Our group will be the Northeast region, Pennsylvania through Maine. 

Can a Philly-based firm attract overseas clients? Outside the U.S., people don't even know where Chicago is, or Washington; they sure as heck don't know where Philadelphia is. What everyone knows is New York. If you're Latin, maybe Miami. If you're Asian, you know L.A. and Vancouver. Outside that, I don't know how many presentations I've done in other parts of the world where I had to explain where Philadelphia is, and show that we have easy access to Washington and New York.

How can smaller firms survive? Firms are able to carve niches in industries. In New York and L.A. you have quite a few boutique firms that would specialize in entertianment. There are firms that focus on aspects of banking, internal audit, compliance. And retirement plans, which aren't global. You could concentrate your practice on a locally-headquartered Fortune 500 company's retirement plans.

Is the business of accounting unstable? So many firms have vanished... Go back 20 years ago and look at the top 25 firms, then look at them today, it's amazing how names arent on there. One or two unfortuantely went out of busines. There have been so many mergers. The big firms got bigger and bigger.

Is it harder for partners to find enough business to fund their pay? In the public accounting profession you are never going to get rich. You can make a lot of money but you won't get rich just by being a CPA.
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You do get wealthy with respect to a knowledge base or skill sets you can use elsewhere. If you change careers after three or five or 25 years, you see so much, you have the ability to learn so much, it will serve you forever.

Jim Smart (who in 2007 sold the firm formerly known as Smart & Co., and now heads SmartDevine) is a classic example. He's a very smart guy. He did not have what I would consider the typical CPA firm. He focused a lot on consulting. He was able to carve out a very nice niche. For the size firm he was, he was very specialized. They were able to attract a lot of large clients. 

So just buying smaller firms isn't the way to wealth --  That's why roll-ups won't work: there's not enough profit margins in the business to support both partners and investors (who fund acquisitions, as opposed to mergers). With mergers you can be more strategic. That's why the number of accounting firm transactions that involve cash up front these days is a decimal point. 

Business development, it's like in any industry: You want one client, you'd better be talking to three or four prospects. It's the same with mergers. There are some firms, you have one meeting, you know it's not going to happen. Others, in the due giligence process, you see certain things, you realize the chemistry's not going to be there. Or something else you see that's not the way we do business.

I'll never forget, years ago, we wanted to grow in the worst way in Philadelphia, we had an opportunity, we were walking down the aisle to the altar. One thing happened, something's not right there. Something else happened, wow. Around the time of the Velvet Revolution. I had a client in Prague. The CEO called me there. I said I would pull the plug. It just wasn't the way we do business. (He won't detail what went wrong.) 

I heard from some of your ex-partners when they quit after mergers last year. There were complaints about leadership styles, about cultural fit, about work flow. It seems you have to work as hard to keep your team happy, including senior people, as you do the customers?  That's in everything: marriage, for-profits, nonprofits, politics.

At the end of the day partnerships are becoming more and more like corporations. You can't have 100 partners making a decision on what pencils we're going to buy. At the same time you've got to take a look at all your stakeholders. What do your clients want? What are your partners after? What's more important, clients or team members? Without one you can't have the other. It's a debate I refuse to enter.

We've always run on a philosophy: 'Here's our strategic plan, here's our plan that was approved by the board as a leadership team, it may not be for everybody.'

There's no way with a large-sized firm you're going to get everybody on the page 100 percent of the time. The direction may not be for you. Let's sit down and talk about it. Make it work for you. Or help you out, to do what you want to do. Big firms do scare some people.

There's a firm out there for everybody. We have a firm and a culture where, if you want to get ahead, you have goals and objectives. It's not about how hard you work. it's about how smart you work. It drives me cuckoo in conversations: 'I work all these hours.' The question is, what did you accomplish with those hours?

How tough is accounting as a profession? I think it was harder 20, 30 years ago. I worked a lot more hours than people at that level are working today. I know everybody else I worked with did. It was the nature of the business.

A lot of that was, you had a lot more companies whose fiscal years ended 12/31, the end of the year. One of the reasons the old Parente Randolph (predecessor firm) got into the healthcare industry, they were all June 30 year-ends. What else can we be doing this time of year? That's why we went into healthcare.

Working hard is a state of mind. You can have somebody working 2000 hours and think they are not working hard. I find it accounting a very rewarding profession intellectually and econmomically. Anybody who has a job they really enjoyed, it's not like work. 

Glad you moved to Philly? I moved down here 12 years ago. My wife and me, we love Philadelphia. Our entire family's in Northeastern P-A (John O'Hara spelling of the vocalized initials), we love going back and visiting. This is clearly our home. I've seen a lot of good things happen here.

The newspaper writes about the migration in. I see more and more of that in Society Hill where we live. If anything there's not enough space for residential housing.

Where do they work? Nobody's building more office buildings here...  You'd be surprised by how many people in Phila and surrounding communities commute to New York.

What does the city need? The single biggest problem Philaelphia has is schools.  Until we fix the school system across the state, preschool, grade school, high school, we're not going to get (well-prepared) people. All businesses are having to spend a tremendous apart on education (that should have been done by schools.) That's why you notice real quick in this city you have traditional empty nesters and young people with maybe really young kids. Then they disappear to the suburbs.

What's next for you? I'm 63. In June 2013 I told my partners my retirement plans. We had started even before that the transition to Jeff Ferro, our president. WIth the merger it did nto make sense for me to assume a leadership role for just my last 15 months. Jeff deserved it. I will be on the board of directors at Baker Tilly; I'll be in the Office of CEO, involved in special projects, the integration of the firm, over the next 12 months.

And I'll be spending quite a bit of time on this (he touches a pin in his lapel), the World Meeting of Families, Sept. 22-27 next year (when Pope Francis will visit Philadelphia.)

Do you expect big changes in the Church, an end in the recent decline, from this Pope? I don't speak for the Holy Father. But if you read the profiles, if you see what Fortune Magazine in its cover story wrote, for example in the finances of the Vatican, he's made more changes in a year than in all the prevoius years. Good changes. More transparency, more experts, people who understand the field.

I'm president of the World Meeting of Families (-Philadelphia), I'm involved in the auditing and the financial committee of the Archdiocese of Philadelphia, because of the increased transparency that's taken place, the recruitment of lay people.
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The articles your paper has written in the past two years (by my colleague Harold Brubaker) follow those tremendous improvements. It's nice to be part of that but it's also very rewarding for the Church as a whole. It is getting stronger. It has to get stronger before we can expect people to come back. The Holy Father is helping that process.
 
Jim Smart credits Tim O'Shaughnessy, the archdiocesan CFO and a man apparently recommended by him, you and others, for helping Archbishop Chaput in these improvements. I made a comment to the Archbishop one day, I'd hire Tim in a heartbeat and take him anywhere. He looked at me and said, 'Don't you dare!' 

Will your own kids be accountants? My son was a freshman in college and he came home and said, 'I want to get into the investment world'. I set him up with Mike Cook in 1996, he headed a $500 million firm in Wilkes-Barre that did money management.  Mike went over with him what a stockbroker does... Finally Mike says, 'Don't you want to be a CPA like your father?' His response was, 'I don't want to work the hours, I want to earn real money, I want a chance for a pot of gold at the end of the rainbow. '

A couple of years later, my son is with a hedge fund, and he says out of the clear blue, 'Two out of three's not bad. I'm making good money, I have a chance for the pot of gold. But I work harder than you ever did!'

Look, I'm from a family, I had nine brothers and sisters. You don't work, you don't eat. (Smiles)