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Go Public, Go Big Eight?

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Norman Stavisky, a partner in the Boston accounting firm of Stavisky, Shapiro & Whyte, leaned back and laughed. "Look at that!" he said, nodding toward a dog-eared copy of Time magazine. On Time's cover was a drawing of Star Wars archvillain Darth Vader. Across it was pasted the headline, "N. Stavisky Strikes Back!"

Clearly, someone admired Stavisky's chutzpah -- and no wonder. In late June, Stavisky, Shapiro & Whyte did what few in the accounting profession have dared to do. The firm sued a Wall Street investment banker, Ladenberg, Thalmann & Co., over the loss of a client. It also sued the client, Kevlin Microwave Corp. in Woburn, Mass., for breach of contract.

Kevlin, a $6-million-a-year designer and manufacturer of microwave devices for radar systems, engaged Ladenberg Thalmann late last spring to underwrite an offering of its common stock. Then Ladenberg Thalmann instructed Kevlin to hire a big-name certified public accounting firm to audit the company's 1983 financial statements.

When Stavisky heard that Kevlin, his client since 1980, had retained Arthur Andersen & Co., he was livid. "James Galbraith hired me, and I want a letter from him telling me I'm fired and why," Stavisky told Kevlin Microwave's controller. In response, Galbraith, the corporation's chairman and chief executive officer, wrote, "It is with great regret that I inform you of [our] decision to change auditors. . . . We made this decision solely on the basis of underwriters' opinions that we must have a larger and more well-known accounting firm to express an opinion on our financial statements for our prospective public offering."

Galbraith's letter, delivered by messenger on June 6, did little to diffuse Stavisky's anger. In fact, it made him more furious. He decided -- and his partners agreed -- that he should contact the firm's attorney, William F. Macauley.

Later that week in Macauley's office, Stavisky recounted the tale of the lost client. Last spring, Stavisky explained, Kevlin began negotiating with investment bankers for an offering of its common stock. Stavisky, Shapiro & Whyte hoped that it would remain Kevlin's accounting firm and audit the corporation's 1983 financial statements.

However, Kevlin refused to sign an engagement letter (which is the equivalent of a contract) retaining Stavisky's firm for another year. It would not do so until Stavisky, Shapiro & Whyte was approved by the investment banking firm chosen to underwrite the stock. "I could understand that," Stavisky said later. "Sometimes an accounting firm is replaced by a Big Eight accounting firm during the time of an offering. Then the small accounting firm gets its client back."

Soon, Stavisky got word that he and his partners were being "checked out" by Burgess & Leith Inc., one of the underwriters with whom Kevlin was negotiating. Still, Stavisky thought, there was no need to worry. The worst that could happen, he reasoned, is that a large, national accounting firm might be brought in on a temporary assignment.

But even that fear dissipated quickly. Within a few weeks, Stavisky was told that Burgess & Leith had given his firm "high marks." Then, on May 4, Galbraith, Kevlin's chairman and CEO, signed the engagement letter retaining Stavisky, Shapiro & Whyte for another year.

With the letter in hand, Stavisky put his staff to work on Kevlin's audit. "We had people hopping," he remembered. Then the trouble began. In a brief telephone conversation on June 2, Stavisky was informed that Arthur Andersen was Kevlin's new accountant and auditor. Stavisky demanded a letter of explanation from Kevlin and got one, four days later.

What, Stavisky asked, did Macauley think of all this1 "I have a very conservative attorney, and I really thought he was going to downplay it," Stavisky said of Macauley. "But he came back and told me and my partners that we had a prima facie case and that it was a wrong that should be addressed."

So, on June 28, Stavisky's accounting firm filed suit against Ladenberg Thalmann and Kevlin Microwave, seeking more than $10 million in damages from its ex-client and its ex-client's underwriter. The action, brought in Suffolk Superior Court in Boston, charges Ladenberg Thalmann with "malicious interference with Stavisky, Shapiro & Whyte's contractual and advantageous business relationships," and alleges that Kevlin Microwave breached its contract. The suit asks for a jury trial. So far, no date has been set.

What makes the Stavisky suit important is that it challenges underwriters that insist that companies switch to large, preferably Big Eight, CPA firms when they go public. The practice, accountants agree, is widespread. Will the suit make a difference? Opinions on that score are divided. "Until the suit gets resolved, the fact of life is that if you're going to go public, or if you're going to go for big financing, 9 out of 10 banks are going to say go Big Eight, or the next two or three, the Main Hurdmans," says Richard A. Connor Jr., of CPA Marketing Systems in Springfield, Va. "This suit will make underwriters think twice before they insist on a Big Eight firm," counters Chuck Kaiser, the national managing partner of Pannell Kerr Forster, a Second Tier firm. "What will happen is that underwriters may look more at the professional qualifications of the auditor, rather than at the size of the auditor." He adds, "Big Eight auditors are bigger, but that doesn't mean they're better."

Kevlin Microwave and Ladenberg Thalmann, for their part, decline to comment on the case. As for Stavisky, he insists, "This is not a crusade for my profession. This is a matter of principle. If my clients don't like balding, chubby, Jewish accountants, they should have the right to change. But they shouldn't have the right to breach their contracts./ And someone else shouldn't have the right to get them to breach their contracts."

Stavisky isn't alone in his thinking. Since the suit was filed last summer, the 48-year-old accountant has received a fair share of fan mail. Some people have even sent donations to help defray legal costs. Stavisky won't say how much he has received, but he notes that the smallest check was for $100.

Last updated: Jan 1, 1984




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