More community banks are switching auditors as their old ones turn down their business, raise fees, or quit the account.
So far this year three dozen publicly traded community banks have hired new auditors; 91 did so last year, according to auditanalytics.com. Though some banks initiated the changes themselves, others say they were nudged out the door by firms that are short-staffed, focused on larger clients, or simply not equipped to meet their needs.
Helping clients comply with provisions of the Sarbanes-Oxley Act - specifically section 404, which requires that an independent auditor conduct a separate review of internal controls - makes extraordinary demands on accounting and auditing firms' resources.
In February the $99 million-asset First Niles Financial Inc. of Ohio was dropped by Anness, Gerlach & Williams Inc. of Youngstown, Ohio.
Anness had determined that it was not worth the time and cost of training its staff on Sarbanes-Oxley compliance when First Niles was its only publicly traded client, said William L. Stephens, the bank's chairman, president, and chief executive.
Mr. Stephens said he would prefer hiring a local auditor but is not sure he can find one that is qualified.
In another case, the $3.1 billion-asset Independent Bank Corp. in Ionia, Mich., fired KPMG LLP after learning the firm was raising fees. It switched to Crowe Chizek & Co. LLC.
Robert N. Shuster, Independent's chief financial officer, said he thinks Crowe Chizek is a better fit for a small company. But he also speculated that the Big Four accountants - KPMG, PricewaterhouseCoopers, Deloitte & Touche, and Ernst & Young LLP - are not that interested in small customers.
"I think the cost structure is different at the big four firms, and they are geared more for the delivery of service to those big clients," Mr. Shuster said.
Auditanalytics.com's data appear to support that argument: More than one-third of small banks that switched auditors this year moved from one of the Big Four.
Other large firms say that, given heavier workloads, they are reevaluating customer relationships. A major problem for most auditing firms is staffing, they say. Turnover is high, and large firms (and even many smaller ones) say they have too much work and too few people.
In a statement to American Banker, Ernst & Young said it is constantly reexamining its ability to meet the needs of different accounts.
"As a result, we have resigned from a range of clients, both big and small. We are aggressively seeking to increase our resources to meet the increasing needs of our clients by actively recruiting more people," the firm said.
But community bankers insist that large firms prefer to concentrate on large customers.
In an April 1 letter to the Securities and Exchange Commission in advance of a hearing last week on section 404, America's Community Bankers said that some small banks "are having trouble finding auditors and consulting firms willing to do the work, because those firms are too busy with other clients."
Diane Koonjy, the senior regulatory counsel for America's Community Bankers, said in a follow-up interview that one member, a bank with assets of $850 million, "did not get any interest from larger auditors."
The group's letter said to the SEC said that in some cases banks have had no choice but to accept "a doubling of their audit fees to maintain a longstanding relationship" with an accountant.
Trent Gazzaway, a managing partner of corporate governance in the Charlotte office of Grant Thornton LLP, said audits have certain fixed costs because banks have the same basic business - taking deposits, making loans, and managing money - regardless of their size.
And with Sarbanes-Oxley, Mr. Gazzaway said, the work required of firms "has nearly doubled, because they have to audit financial statements and internal controls."
Privately held companies are also complaining about their relationships with auditors. Many private banks and thrifts say that though they are not subject to new accounting standards, firms are applying them anyway, which raises their costs significantly.
In its letter, ACB said that auditors are applying uniform standards to all banks, fearing that if they do not they risk running afoul of the Public Company Accounting Oversight Board, a regulator created by Sarbanes-Oxley.
Another concern of bankers is the quality and experience of the firms' personnel. Mr. Shuster at Independent said that though senior executives had a good relationship with KPMG, they at times got frustrated with the firm's staffing and turnover rate.
Curtis L. Hage, the chairman and CEO of the $848 million-asset HF Financial Corp. in Sioux Falls, S.D., expressed similar concern at the SEC hearing last week.
Because HF Financial is not a big company, it is often assigned auditors "right out of college," he said. "We have to teach them a lot."
Those issues led the $501 million-asset ECB Bancorp Inc. of Engelhard, N.C., to switch from KPMG to Dixon Hughes PLLC of Asheville in March.
Gary M. Adams, ECB's chief financial officer, said the company moved after KPMG raised its fees and several of its longtime auditors left for Dixon Hughes.
"They were sharp individuals who gave us good guidance," Mr. Adams said.
Small firms like Dixon Hughes, and midsize firms like Crowe Chizek and Grant Thornton, have benefited most from banks' severing ties with the Big Four.
Crowe Chizek, which is based in Indianapolis, has picked up four former Big Four clients since September; Grant Thornton has gained three in the past three months.
And some banks are dropping even midsize firms for smaller, regional ones. Beard Miller Co. LLP of Allentown, Pa., has garnered two former Grant Thornton clients and one client from Crowe Chizek in the past six months.
But Clarence Ebersole, an executive in Crowe Chizek's financial services group, said he expects it to get more clients from smaller firms that may not be able to handle auditing a public company.
"I know ... situations where some accounting firms ... don't want to register with the Public Company Accounting Oversight Board," he said.
