Leaders of Somerset CPAs PC are soaking in the single life, one year after they split from First Indiana Corp.
Twenty-one Somerset partners bought the assets of the accounting firm from the locally based public company on Oct. 25, 2004, ending a four-year relationship in which bad timing contributed more to the breakup than bad karma. The corporation is the holding company of First Indiana Bank.
At a time when the Sarbanes-Oxley Act mandates auditor independence, Somerset President Patrick Early, 48, is thrilled to have regained autonomy.
"You didn't know if your organization was going to be sold," Early said. "That wasn't something [First Indiana] advocated, but your destiny was somewhat out of your control."
Somerset paid $11.4 million, including $5.4 million of existing cash at the firm, to free itself from a union that benefited both sides before Sarbanes-Oxley's stiffer regulations rained on the festivities.
The aim of the law is to protect shareholders from corporate malfeasance by requiring greater transparency of financial statements and demanding greater executive and director accountability.
Because of the reform, Somerset could no longer perform audit work for First Indiana customers as a related subsidiary. Conversely, Somerset could no longer refer clients to First Indiana for banking services.
The law went into effect in 2002, but the groundwork was laid the year before following Enron Corp.'s spectacular collapse into bankruptcy. Then, in June 2004, First Indiana Bank hired Robert Warrington as its president and CEO.
Early recalled a conversation the two had shortly after Warrington's arrival, in which both agreed the regulatory climate would no longer allow the relationship to prosper.
Jonathan Hamilton, editor of Public Accounting Report, a trade publication in Atlanta, concurred.
"There's just no way that would work," he said.
Warrington, who replaced the retired Owen B. Melton Jr., told IBJ following the announcement last October that his intent was to execute a turnaround plan with a focus on central Indiana.
"We made the strategic decision that our market will be in this marketplace," he said at the time. "Anything that didn't fit isn't right for us."
The bank sold several key earning assets outside Indiana's borders. It also eliminated 70 jobs through cuts and planned retirements, tightened its credit risk standards, and initiated a cost-cutting plan.
First Indiana took a $2.2 million loss that it posted in third-quarter results last year. The transaction required Somerset employees to forfeit roughly 217,000 non-vested stock options valued at $1.3 million.
While charge-offs for bad loans battered First Indiana, Somerset flourished under its direction. Founded in 1960 as Whipple & Co., the accounting firm became Somerset Financial Services LLC, a division of publicly traded The Somerset Group Inc., in 1998. The Somerset Group was another company, besides First Indiana, led by the McKinney family. Somerset merged with First Indiana in September 2000.
Early arrived at Whipple in 1979 following his graduation from Purdue University and has led the firm since 1989. Growing the midsize firm became a priority and Somerset and First Indiana provided the backing to make it happen.
"A lot of our partners were getting older, and we were one of those small firms that hadn't grown a lot," Early said. "It gave us the capital to grow in a period of time when we really needed to."
In September 1999, McGee Rice & Wheat, the city's 14th-largest accounting firm at the time, merged with Somerset. The move added 21 employees to Somerset's accounting and consulting practice and increased annual revenue to $12 million.
A few smaller acquisitions included the 1999 purchase of Internet service provider Paradym Technologies, which added 14 employees, and the accounting office of Cox Brennan & Co. LLP in 2001, which brought 200 clients and $500,000 of annual revenue.
With 42 accountants and 95 employees, Somerset ranks as the city's eighth-largest accounting firm. While it does some public-company work, the firm's bread and butter remains the private sector. Health care, construction, manufacturing and entrepreneurial services are large practice areas.
Shiel Sexton Co Inc., the city's fourthlargest construction contractor, has been a client of Somerset's about 15 years. Any skepticism company CEO Andrew Shiel expressed toward Somerset's affiliation with First Indiana turned out to be unwarranted.
"I was kind of uneasy about [its] being public, because I thought the level of service would suffer," Shiel said. "But it really hasn't skipped a beat. They've done a really good job through their ownership transitions to make that seamless for the customer."
Somerset, similar to non-Big Four firms such as Katz Sapper & Miller LLP and BKD LLP, are picking up more private companies as clients, as the larger firms shed them to concentrate on the additional work created by Sarbanes-Oxley.
Without any ownership opportunity under First Indiana, Early admitted the staff might have lost a bit of its edge. For Early, though, the accounting profession has always provided enjoyment.
"I'm not a great accountant and never have been," he said. "But I love working with people. A lot of it is making good business decisions, and that's been fun."
Early is vice chairman of the Capital Improvement Board and led the charge to build Victory Field and Conseco Fieldhouse, and negotiated the lease to rename the Hoosier Dome the RCA Dome.