Accounting for modern business complexity

Jeff Gutsch has been in accounting since 1990, first at Pisenti & Brinker for a half dozen years and then 19 years at Moss Adams, LLP. He became partner in 2002 and has been partner in charge of the Santa Rosa and Napa offices and is a national practice leader in wineries and vineyards.

Gutsch talked with the Business Journal

about his recent shift from managing about 85 employees in the two offices, back to client work that continues to grow more complex.

You are back to doing consulting and accounting work after serving as partner in charge?

Jeff Gutsch: I haven’t changed much what I’m doing. The partner in charge gets to go to more rubber-chicken dinners and talk to people who are having problems. I just transitioned that role to Chris Paris.

How do you make money in accounting beyond auditing and tax preparation?

Jeff Gutsch: That’s the bread-and-butter of an accounting practice, what keeps the lights on. We are constantly looking for ways to add value in general business.

A lot of our consulting is on the tax side, helping people structure transactions, setting up new businesses, looking for angles to save taxes, helping people run their businesses better. Those are the more fun parts of the job. Financial statements and tax preparation can be commodities.

How does Moss Adams stand out as a firm in business transactions, mergers and acquisitions?

Gutsch: We work either on the buyer’s side or the seller’s side. I have some clients that do a lot of acquisitions and others that want out of their business and decide to sell. There is buy-side or sell-side due diligence, representing a buyer who is looking at a potential seller, or representing a seller who is looking at a potential buyer to see if it’s a good fit.

When you are on the buyer’s side, you analyze the seller’s records to determine if they are true?

Gutsch: That’s a part of it. Another part is looking at other aspects of the business. Let’s say a company is operating in a bunch of different states but only files tax returns in California. There’s a potential liability. We’re looking at that too. What’s out there that we don’t know about that might pop up and bite us later?

The business might owe a tax liability in the other states in which it operates?

Gutsch: Right. Also there could be potential legal claims, taxes, anything that potentially damages the value that our client is paying for that business.

Is that work intended to avert surprises later or to create bargaining power on the acquisition price?

Gutsch: Both. Let’s say there is a potential $5 million liability out there. Our client wants to - at a minimum - be aware of that. And our client wants to have it factored into the value of the business. You have this thing that we think is likely going to come back and bite us.

It makes sense to drop the purchase price for the business to account for that risk?

Gutsch: Yes. It becomes a negotiating point. They may say that the chances of it, such a potential tax liability, becoming a problem are only 10 percent. So how about we take $300,000 off the purchase price? Or the seller could indemnify us against that risk. There are all sorts of different ways to handle it. We are making sure our client is fully aware of everything out there that is a potential problem.

Is that arena of work fun - analyzing a business so potential surprises become apparent?

Gutsch: Yes. On the seller’s side, we look at potential buyers to see if the value makes sense and it’s a fit. We’ll do our own diligence on the potential seller.

For example, I have a client right now in the wine supply business. We are helping to analyze their fixed assets - things that a buyer would be looking at. We want to make sure the buyer doesn’t have an excuse to negotiate the price. We are trying to get a bunch of stuff cleaned up before potential buyers come in, so buyers are looking at a business that is as clean as possible. When they send their diligence team in, they don’t find much.

It’s a form of anticipatory due diligence?

Gutsch: Right. If there’s enough stuff out there that the buyer’s due diligence team finds that is questionable, the more questions they have and the less reliable the information they’re getting appears. Whereas, if it looks pretty clean, chances are they’re not going to dig as deep as they would otherwise.

It’s a bit like an IRS audit. When the IRS comes in and they start finding a bunch of problems, they’re going to assume that there’s more to find and they will start digging.

What they find whets their appetite, and the whole transaction becomes questionable?

Gutsch: They think there’s a gold mine.

Do most sellers go along with that process, or do they balk when you find issues that they need to clean up?

Gutsch: They’re pretty helpful. That’s why they brought us in there as trusted advisers. Those are usually existing clients. We do some that aren’t current clients.

When do you recommend that a business seller look for problems?

Gutsch: The ideal time is six months to a year out [from when the business goes on the market].

When the company is hired for a particular scope of work then the client asks for more work, how does Moss Adams manage that “scope creep?”

Gutsch: We have to be out front. A client will want us to do something that is not part of the original scope of the work. We try to do extra billing and they say, wait a minute, they didn’t approve that. We tell our people to work it out with the client.

We may absorb certain things. If we bill extra, we make sure we get an agreement with the client. Otherwise, it leads to misunderstandings and hard feelings. We like to avoid that. Sometimes we send out a new engagement letter to make sure we’re all on the same page.

Is that common?

Gutsch: It happens a fair amount. On an audit, for example, let’s say it’s a C-corporation and we assumed the client was going to handle its own fixed-asset accounting and its own tax provision. We get into the job and find out that they don’t have anybody capable of doing that. They want us to do the depreciation work, the tax provisions. It’s really not part of auditing their financial statements.

When the client wants extra work, you give them a menu of additional options?

Gutsch: Yes. Sometimes we’ll just negotiate it. The client may have thought that what they wanted was part of the quoted project. For this year, we might get it done. But for next year, the client might buy the needed software, and we will show them how to do it.

There are all sorts of ways to resolve it. Some clients say, just get it done. Others want to know exactly what they’re dealing with before we get into it. That’s my preference. After the work is done is not the time to try to get an agreement with the client.

The more explicit the arrangement is, the better?

Gutsch: Yes. With professional services, it’s different than, say, buying bottles of wine.

The lack of tangibility of what you and other accountants sell makes it an issue?

Gutsch: Yes. It makes it difficult. With a tangible product, there’s never a question. With professional services, it’s time and expertise [we are providing], and there is a question.

In the past 25 years, has the pace of providing accounting services increased or stayed much the same?

Gutsch: Tax laws seem to be more complex. Years ago, I could count on one hand the number of businesses that filed taxes in more than one state. Now, most of our clients are in more than one state, and a number are international. It was rare that you’d come across an international company when I started in public accounting.

You’re still logging the same number of hours. They’re just more difficult hours now than they used to be. It’s more … taxing.

Is it more interesting, more engaging intellectually?

Gutsch: I’m not a big fan of tax complexity for the sake of complexity. I’d rather clients pay me for my industry expertise and business expertise more than my tax expertise.

Unfortunately, our government has made tax laws highly complicated. There’s a lot more to do than there used to be.

Are more than half of your clients in the wine industry?

Gutsch: I work, for the most part, only with wine and food companies, and suppliers to those two industries, such as wine-bottle distributors. We have people like me who have industry expertise. We try to expand by providing exceptional industry expertise or functional expertise.

Fifteen or 20 years ago, I did most of the services for clients myself. Now, for every client we have a team of people, such as business consultants, cost-segregation specialists, international tax people to provide deeper functional as well as industry expertise.

There’s nothing that quite replaces deep knowledge of an industry, such as wine?

Gutsch: Yes. We have functional specialists of all kinds. I had a client that was a winery owner and also had a business that was a hedge fund investor. I know nothing about hedge funds. It turns out, there’s a guy in our Seattle office who is an expert on hedge funds. I got him involved in the account. He handled all the hedge fund stuff. I handled all the winery issues.

They’re not a client, but a perfect client for us would be Ferrari-Carano. The Caranos have casinos [as part of the business group]. We have people who are experts in that. They have Vintner’s Inn, a hotel and restaurant. We have people who are experts in that. Then you have the wine business, and my team that deals with that all the time. We can handle it all expertly.

A generalist could not handle all that?

Gutsch: The world has gotten much more complicated, with accounting and tax regulations. It’s far easier to do business overseas than it used to be. Few businesses aren’t doing business internationally.

You see a lot more of that, far-reaching business relationships?

Gutsch: Yes. Some wineries acquire companies in other countries, such as Argentina. In agriculture, it used to be you would grow food when you can. Now, if the season doesn’t permit growing here, you plant in Ecuador. You have a year-round growing season. You can get anything, anytime.

Looking internally, what kind of feedback loops do you give your accountants?

Gutsch: If a job is over a certain number of hours, we do a job evaluation. Every six months, we have a review process. With younger people who have grown up with technology, everything is instantaneous. They want instantaneous feedback. We make it project by project.

In the 25 years you have been in this business, has the work become more fun, more personally satisfying?

Gutsch: It’s different. To avoid getting stale in a firm this big, there’s so much to do. You can reinvent yourself. Serving clients is fulfilling. Also there’s opportunity to take on different projects.

For instance, I sat on our firm’s partner-review committee. I drove development of a program that helps our people become trusted advisers. I have run our company’s wine-industry practice, been partner-in-charge for a couple of offices.

There are always things to keep it stimulating, interesting and different. I’m developing a new line of business in sustainability reporting, and another in closely held, family-owned businesses. It gives me a spark of energy.