On the Wave of a New Industry: Small Companies Have Always Relied on CPAs, but a Growing Business Adds a New Twist to the Relationship
CPA David Bass has entered a fast-growing industry that is well suited to an accountant's training and abilities, the field of professional employer organizations (PEOs). PEOs work mainly with smaller companies, taking on the administrative burdens of employment for them. According to the National Association of Professional Employer Organizations (NAPEO), the industry's growth in gross revenues was roughly 35% in each of the last three years, and PEOs serve as "employers of record" for between 2.5 million and 3 million workers. BUILDING A PEO Bass, a former audit manager at Arthur Andersen LLP, left the large firm in 1991 to become CFO of U.S. Personnel, a temporary staffing company, joining with a small equity stake. At that time, company revenues were growing from 40% to 60% per year. The company formed a PEO in 1994 and then sold everything but the PEO to a larger temporary staffing company in 1996. The staffing portion of the business hadn't actually been for sale, Bass says, "but it was worth more to them to buy it than it was for us to keep it." Bass teamed with one of U.S. Personnel's founders and a third partner to recapitalize the PEO and run it as Paradyme Corp., an independent business. The company now has 550 clients, about 10,000 worksite employees and close to 100 internal employees. According to NAPEO, there are roughly 1,800 to 2,200 PEOs across the country, and 15 states have licensing or regulations for these businesses. NAPEO Vice-President Milan Yager says PEOs need the skills of accountants, actuaries, risk managers, attorneys and benefits and human resource experts. He reports that the founders of most of these organizations are lawyers, human resource professionals--or CPAs. Because strong internal controls and understanding of compliance issues are crucial to the businesses, Bass believes CPAs are ideally suited for them. Not only does he frequently run into CPAs at industry conferences but CPAs also owned two of the five PEOs that Paradyme has acquired since its inception. WHAT THEY DO Paradyme's typical client has between 10 and 100 employees, with an average of 20, although the company does work with businesses that have as many as 850 workers. The average client has no human resources personnel. Instead, the business owner does the payroll work at night or on weekends, Bass says. Most small clients have no employee handbook, no definitive statement of company policy on many important matters such as vacation, substance abuse, sexual harassment or progressive discipline. There is no formal safety program. "When someone is injured Bass says, "the owner turns the claim over to the insurance carrier and assumes the carrier will handle it in the right way, which often doesn't happen. You can have a dramatic impact on the ultimate cost of workers' compensation claims by implementing a very proactive and disciplined system for dealing with them." In addition, at many small companies, "once a year the business owners feel totally tormented by their health insurance and other employee benefits renewal choices. I met with someone who owns a wholesale distributor of floor coverings with 135 employees. He could talk all day long about the different grades of carpet, but when we started discussing health insurance, he looked sick. He said, `I hate this. I wish we could go to the doctor and take a couple of chickens and a dozen eggs, or some vegetables from the garden, and pay that way. I don't understand networks, acronyms, referrals, getting approvals. The insurance companies send me explanations that don't explain anything.'" Here's how a typical arrangement with a PEO might work. A small business owner begins to feel overwhelmed by the administrative demands of being an employer. He contracts with a PEO to take over these duties. He retains the same workers, and the right to hire and fire employees, but the paperwork and risk- and cost-management aspects of employing the existing permanent workforce are transferred to the PEO. …