Are CPA Firms Making Too Much Money?
Marc Rosenberg, CPA / Dec 13, 2023
I had lunch recently with the managing partner of a long-time client. His firm’s revenue is $15M with nine partners. The firm is in its second generation and is very successful: equity partner income averages $750,000. The MP himself earned a tad over $1M.
We discussed many things. But we focused mostly on the dire shortage of labor in the CPA profession. It was then he shared this idea. “Partners at CPA firms earn a ton of money, certainly more money than we ever expected to earn and multiple times what our parents earned.” I reinforced his statement by citing the most recent data from the 25th Rosenberg Survey: average IPP is $644,000 for firms $2–$40M.
That got us both thinking about how good an idea this is. A substantial imbalance has been created between the compensation of partners and their staff: partners are earning incomes that enable them to enjoy a standard of living beyond their wildest dreams, yet the compensation of accounting staff, which used to exceed most other disciplines, is now merely average. These thoughts are even more significant considering the following information.
Why college students are deciding in droves to not major in accounting
Dan Hood, the gifted thinker who is the long-time editor of Accounting Today, wrote an article with the above title in his publication dated July 2023. His research explained the drop in accounting majors this way:
- “Students find a major in accounting uninteresting.” This is disturbing. It underscores the need for a mass assault by CPAs to promote their profession, starting in high school. We all know that being a partner in a vibrant, growing CPA firm is not dull. But our profession has done a terrible job of communicating this to students and young staff.
- “Starting salaries for entry-level positions for accountants have become merely ordinary.” Until a few years ago, CPA firms were known for having one of the highest entry-level salaries for students with an undergraduate degree. Engineering and IT majors have always been at the top of the chart. But today, starting salaries for majors in finance, marketing and economics are also higher than accounting majors. It’s unfathomable that our profession has allowed this to happen. It can only be explained by the greed of CPA firms coupled with a blasé attitude towards communicating how great careers in accounting are.
- “The 150 hour rule is now clearly causing many students to take a pass on majoring in accounting.” Study after study has shown that this fifth year of education is unnecessary and has not achieved its goal of making CPAs more well-rounded.
- “The tax season is a real turnoff.” We’ve known this for decades but haven’t done anything about it. More and more firms are ending the policy of mandatory Saturdays in the tax season. But more needs to be done.
- “The incredible difficulty of passing the CPA exam also turns off students.” Let’s ask ourselves if we honestly believe that the material covered in the exam questions is truly necessary to practice as a CPA.
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Some startling facts
The 2023 AICPA Study of Supply and Demand for Accounting Graduates found that:
- The number of students who graduated at the end of the 2021–2022 academic year with a degree in accounting plunged 7.4% compared with the prior period. Since 2011–2012, there has been a 17% decline in accounting degrees completed (AICPA study).
- Underscoring a shortage of accountants, fewer than 1% of small and medium-size CPA firms can find enough qualified U.S. candidates for employment, according to a recent survey of 250 top CPA firm executivesby alliantTALENT.
- About 65 million accountants and auditorswere employed in the U.S. last year, 15.9% fewer than in 2019, according to Bureau of Labor Statistics data. More than 300,000 accountants quit their jobs between 2019 and 2021.
“I’m mad as hell, and I’m not going to take it anymore.”
This is a refrain familiar to serious movie-goers uttered in the great 1976 movie, Network. It’s high time that the CPA profession got mad and took some outside-the-box actions to address this terrible decline in the attractiveness of a career in accounting and the dwindling supply of accountants.
Many things need to be done and there isn’t time in this blog to enumerate them. But if partners took a little of their lucrative salaries and paid more to their staff, that might help. It’s not the only solution and may not even be the best one. But it’s a good place to start.
P.S. By the way, this MP did not follow through on the partners taking a pay cut. But at least he’s thinking about it!
4 Comments
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The gap between staff and partner compensation is not new. I recall when I became a partner at Arthur Andersen (1997), I received a surprisingly large – albeit welcomed – bump in compensation and benefits. To a large extent, that is the “promise” in professional services firms – work hard or a lower salary and you will be rewarded and become a partner. One of the impediments to the “promise” that I see today is the reluctance of partners to retire, and make room for new partners. At Andersen, retirement age was 62. Generally speaking, if you took one senior partner out of the “comp pool” you could admit 2-3 more. But, partners either need to retire, or be willing to take pay cut to fund new partner comp. That’s why I’m a fan of mandatory retirment.
Peter, as always, your comments are astute, experienced-based and helpful. Thanks for taking the time.
I am struggling a bit with the math in your first example. In order for $15,000,000 gross to provide an average partner income of $750,000 for nine partners they must be netting 45% before partner compensation. If that is the case they are definitely underpaying their staff.
Michael, thanks for your astute comment. Allow me to share a few thoughts.
1. Whether you conclude that the firm is “profitable” because (a) partners are netting 45% or (b) their absolute comp average is $750,000, I think you would agree that the partners of this firm are earning an extremely high rate of comp. So yes, we both believe that they may be underpaying their staff.
2. We have suggested to hundreds of firms over the years that the income partners net, as a percent of revenue, isn’t always the best indicator of profitability. The 2023 Rosenberg MAP Survey shows the following: firms with revenue over $20M averaged income per equity partner of $839,000, which was 29.3% of revenue. Clearly, $839,000 is a very high income level for most people and thus, the firm is “profitable.” One of the reasons why these highly profitable firms have a relatively lower profit as percent of revenue is that (a) their staff-equity partner ratio is way higher than smaller firms and (b) the larger the firm, the higher the bar is for who makes equity partner. The name of the game is leverage, one of the best ways to achieve high levels of profitability. The way the math works is the more staff a firm has in ratio to their revenue, the lower their profit percentage will be.
Thanks again for taking the time to share your thoughts. We love it!