MSF Buyout Created KPMG Culture Shock

by Gwen Moritz  on Monday, Sep. 1, 2003 12:00 am  

The acquisition in March 2000 of accounting firm KPMG's Little Rock operations by Moore Stephens Frost was advertised as "seamless" for KPMG's clients.

But the merger was anything but seamless for the 13 employees who had worked for KPMG. The only KPMG staffer still on MSF's payroll is a clerical worker, and few KPMG clients are still in MSF's stable.

Joseph I. Strack, the highest-ranking KPMG accountant to make the move, is at the center of inches-thick litigation. In it, he accuses his former MSF partners of forcing him out and stiff-

ing him for $175,000 in severance pay after he complained of unethical accounting practices and an "indecent" corporate culture.

Strack, through his attorneys at the Rose Law Firm in Little Rock, declined to be interviewed for this article. For its part, MSF insists that the partners merely set a date for the resignation that Strack had already announced and vehemently denies any impropriety in its accounting practices.

MSF Managing Partner Greg Flesher still believes the KPMG acquisition was worthwhile, but this much is indisputable: The cultures of KPMG and MSF were so different as to be incompatible, and the merger didn't live up to expectations.

The Merger

KPMG, one of the so-called "Big Five" national accounting firms, had operated an office in Little Rock since 1961. In early 2000, the Little Rock office's managing partner, Dorsey Jackson, was planning his retirement.

That, by all accounts, precipitated KPMG's decision to sell its book of private-company business to Moore Stephens Frost, the largest Arkansas-based accounting firm, while keeping the public-company accounts that reported to the Securities and Exchange Commission. The accounts KPMG sold represented revenue about one-tenth of MSF's.

It was a whirlwind courtship. Even Joe Strack, the only other equity partner in KPMG's Little Rock office, learned of the sale less than six weeks before he became a partner of MSF. The acquisition was finalized only nine days before its effective date of March 1, 2000.

The deal, according to MSF's Flesher, required MSF to hire all 13 of KPMG's employees, 10 accountants and three support staffers. KPMG, in return, agreed not to transfer any of the Little Rock accountants to its other offices.

In what Flesher described as "very normal" terms, MSF was to pay KPMG a percentage of the revenue derived from its former clients, subject to a defined minimum, for a set period of time.

"It sounded like a great deal," Flesher said. "Their tax partner was coming. We were going to get him and his client contact. We thought there would be a way to expand the central Arkansas market."

But it didn't sound great to Strack. According to his sworn affidavit, he was concerned about MSF's reputation from the get-go.

On the day that he learned of KPMG's plan to sell to MSF, he told Joe Armine, chairman of the Moore Stephens North America network of accounting firms to which MSF belongs, that "MSF did not have a good reputation among the professional community."

Strack also said in his affidavit that other KPMG employees, on their first meeting with Flesher after the merger was announced, "asked several questions centered on the operations and practices of MSF, including its reputation, ethics, integrity and independence. We were assured that any negative references to MSF were unjustified and untrue."

Strack agreed to become a tax partner, and the remaining KPMG employees — having barely a week's notice — also joined MSF.

According to Flesher, Moore Stephens Frost continued paying KPMG for its former clients until the spring of 2002. Then the collapse of Arthur Andersen LLP in the wake of the Enron bankruptcy prompted KPMG to consider buying Andersen's Little Rock operation, which had handled Alltel Corp.'s lucrative audit work.

KPMG abandoned that idea when Alltel decided to replace Andersen with PricewaterhouseCoopers — but not before renegotiating the contract with Moore Stephens Frost that would have prevented a return to the market.

The Culture

Many of the new additions didn't last long at MSF. By the end of 2000, at least half of the KPMG accountants were gone. By the time Strack left at the end of 2001, only one KPMG accountant was still at MSF — and she subsequently left in November 2002.

Had they had more time to prepare, Flesher speculated, several of the KPMG accountants probably wouldn't have moved to MSF at all.

"Some of those people did not want to travel, did not anticipate traveling, and did not want to be given one week to decide to come to work for us or not. So it wasn't unusual to us that they accepted the job in order to continue their paycheck," he said.

And travel is a key word in Flesher's explanations of the cultural differences between Moore Stephens Frost and KPMG.

"I don't think anyone would dispute we travel more than normal for a local accounting firm, or even a national accounting firm with a local office," he said.

MSF has developed a niche specialty in family-owned animal agriculture companies — particularly egg, turkey and hog producers — and these are flung "from Maine to California," Flesher said.

The departing accountants found a variety of jobs — two went to other Moore Stephens affiliates in different states and others went to work for client companies. MSF even waived the contractual restriction to allow two of them to join other KPMG offices.

Greg McKinney, a KPMG accountant who joined Moore Stephens Frost as an audit manager, said any suggestion that the KPMG professionals weren't willing to do the work demanded by MSF is "malarkey."

"The culture there was different, the personalities were different, the type of work was different," McKinney said, explaining why he and the others soon found jobs elsewhere.

McKinney, who joined Bank of the Ozarks in early 2001, said there were frequent reports of outrageous behavior in the tax division, where Strack worked. But, having worked in the audit division on another floor of the TCBY Tower, he was unable to say whether any of them were true.

This does appear to be true: MSF has had significant turnover in the tax division, where much less travel is required than in the audit division.

Strack's Complaints

While travel may have been an issue with some of the KPMG transplants, it doesn't seem to have been a part of Strack's discontent. In his affidavit, he states that the established clients he brought to the table were from states as far away as New York, Colorado and New Mexico.

Instead, Strack listed four issues in a memo he wrote to Flesher on Aug. 6, 2001. Strack said in his affidavit that he wrote the memo as a follow-up to a conversation he had with Flesher earlier the same day; MSF calls it a letter of resignation.

Strack wrote:

"1) I am uncomfortable with many of the processes of the tax department.

"2) My management style is in conflict with that of most of the other tax partners.

"3) I am at odds with the 'atmosphere' and 'culture' of the firm.

"4) I have no desire to spend the effort to try to change any of the above."

In the memo he said he thought "it might be different and fun" to work in private industry rather than public accounting — language that Flesher described as "typical accountant burn-out words."

In his affidavit (see excerpts here), Strack expanded on several of the points. He described being conflicted on a commission structure for partners who steer clients to buy insurance from an agency associated with MSF and uncomfortable with certain tax practices and attitudes. He also said he was offended by an open extramarital affair between two partners, whom he didn't name, and what seemed to be a casual attitude toward sexual harassment.

Flesher said he thought Strack's main complaint was that MSF simply didn't do things the way KPMG did — including the compensation structure.

"When he came here, we offered him [base salary of] $25,000 more than he was making at KPMG. That was fixed for the first 15 months he was here. At the end of that time, when about half his client base had left, we cut his salary $25,000 — which isn't anywhere near the same ratio of clients he had lost, but as an indication that he needed to rebuild his practice," Flesher said.

"One thing I know is that in the big national firm culture, your salary doesn't go down. In our culture, at this firm, your compensation fluctuates with your performance."

Strack reported in his affidavit that he earned $460,000 in 1999, his last full year at KPMG. In 2000, he made $387,000 during his 10 months at MSF, a figure that dropped to $350,000 in 2001. After his partners selected Dec. 31 of that year as his last official day at MSF, Strack was unemployed for more than 10 months.

He now works for the Thomas & Thomas ac-counting firm in Little Rock, where he is guaranteed $85,000 but expects to earn $125,000-$175,000 this year.

As for MSF's accounting practices, Flesher said the idea that they were unethical "is totally foreign to me" and were not supported by outside consultants that the firm paid "tens of thousands of dollars" to investigate Strack's complaints.

"Joe was unhappy if everything didn't stay exactly as it had been done at KPMG, down to the color of binders and the order of work papers. Not surprisingly, if we were 90 percent and they were 10 percent of the basic work force, we instituted some of theirs but the procedures primarily stayed the way we had done," Flesher said.

He pointed out that Moore Stephens Frost, alone among Arkansas firms, has made repeated appearances on Bowman's Accounting Report's annual list of the 25 "Best of the Best" accounting firms based on fiscal and management performance.

"It is not a client satisfaction survey, but without satisfied clients, you cannot maintain your existing base and continue to grow. So I think they do measure that implicitly," he said.

It is also true, however, that a peer review of MSF conducted last fall found several instances of "noncompliance with the firm's quality control policies and procedures and professional standards." Most were associated with a single unnamed quality control director, who Flesher said had been terminated.

MSF has agreed to another peer review this fall, according to the American Institute of Certified Public Account-ants.

As for the love affair, Flesher said, "It was a personnel matter, and people aren't perfect. It was a personal relationship between some people that was not the way we think they should behave here. They certainly were reprimanded and dealt with.

"I think this was after-the-fact dirt put in the filing."

The Litigation

Strack was actively seeking another job during the fall of 2001, but he said he didn't intend to leave until April 30 of the following year — the end of MSF's fiscal year and after the April 15 filing deadline for his tax clients. His partners, however, voted him out of the firm effective Dec. 31.

When they were unable to reach a financial agreement, even after mediation, MSF filed suit last September seeking a declaratory judgment settling the dispute. Flesher described the decision as a last resort "that seemed to be the only avenue to bring closure."

In a countersuit filed in October, Strack and his attorneys take the position that he was forced out of the firm and is therefore due six months of severance pay — about $175,000 at his 2001 salary level. They are also challenging MSF's attempt to enforce all five years of a noncompete agreement that Strack signed.

Moore Stephens Frost, meanwhile, considers the Aug. 6 memo to be Strack's "resignation letter" and the $73,409 the firm paid him for his equity stake to be all the compensation he is due.

The KPMG merger clearly didn't work out as planned, but it wasn't a total failure, Flesher said.

"We would have hoped to have retained Joe Strack. We had not anticipated him coming in and resigning. We've kept a few clients we got from that, but we would have preferred to keep more clients."

MSF Partners
As of Sept. 1, the partners in Moore Stephens Frost are:

Greg Barnes
Bob Childress
Dennis Cooper
Ted Duncan
Keith Ekenseair
Greg Flesher
Tom Gibbons
Rachel Kremer
Tammy Lisko
Dan Peregrin
Doug Richardson
Cheryl Shuffield
Gini Vanness

More on MSF
Click here to see excerpts from Strack's affidavit. And click here for more on Greg Barnes, who has become audit partner at Moore Stephens Frost.



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