Current Effects of COVID on CPA Firms – Rosenberg’s Analysis

The CPA industry is as steady as an ocean liner in heavy seas… in normal times, which is 90% of the years.  Most established multi-partner firms experience increases in revenues and profits on an annual basis…in normal times. Sure, there are major challenges such as finding staff, retirements, technology’s relentlessly huge impact on how CPA firms perform their work, among others. It was no exception to these trends in 2019.

But as the singing duo of Chad and Jeremy said, “that was yesterday and yesterday’s gone.” 2020 is a year that will live in infamy (FDR), that featured perhaps the biggest change to the profession since the adoption of the income tax law. I will dwell no more on 2019.

Here is my analysis of the effect of COVID on CPA firms.

1) Data on Revenue, Partner Draws and Staff. An extraordinary perfect storm has been experienced by CPA firms in 2020: the endless tax season plus the virus. As I write this in mid-July, five months after the virus’s onset, no one knows anything for sure going forward – neither the science of the virus and people’s health nor the economic impact of the virus on the business world.

Here is data from a survey we took of 61 CPA firms in mid-June. Virtually all firms had annual revenue of $35M or less, with the average being about $10M.  It’s important to understand these firm sizes because the Top 25-50 firms, from what the media is reporting, are making more drastic operational moves (mainly layoffs and partner draw reductions) than typical local CPA firms.

• 69% of firms’ revenues were down or flat compared to 2019. Interestingly, by the end of 2020, one-third of all firms expect to catch up – not exceed – to last year’s revenues, with only 16% of the firms expecting a decline.

• Half of the firms project 2021 revenues to increase from this year. 41% feel it will be about the same.

• Only 10% of firms have laid off staff.

• Only 17% of firms have reduced partner draws or are planning to do so.

• Before the virus, only 15% of the firms had their staff working remotely to a significant degree. Post-virus, this is expected to rise to 36%.

2) Mergers.  Pre-virus, the big merger news over the past 3-4 years or so has been the continuing boomer retirement-induced need of small firms to sell or merge up contrasted with buyers being much more selective in sellers they choose to talk to.

Amid the virus, we see no changes except in these obvious instances:

• How much of sellers’ practices will survive? How much revenue will sellers have left to sell?

• The frenetic work pace triggered by the virus has tired out many sellers, making them even more determined to sell or merge up.

• Many buyers may offer slightly lower prices to sellers due to the stress they are under to make a move. But sellers with a fine pedigree and healthy economics will continue to get nice offers.

3) Big issues that firms are frantically trying to get their arms around.

1. Before the virus, there was a clamor among staff in CPA firms to work more remotely. Amid the virus, with virtually 100% of staff working remotely, the biggest sentiment we hear is that staff miss working in the office and the social and professional interaction with co-workers. Absolutely fascinating how this has flipped. Firms have concerns about productivity, training and mentoring on a remote basis. Success in remote management depends on firm manager and partner abilities to build trust, follow processes and effectively communicate.

2. Since the dawn of time, CPA firms have stubbornly clung to two ancient methods of measuring productivity: billable hours and visually being able to see their staff’s butts glued to their seats. With most of the work being done remotely, partners are going to have to adopt new methods. This will be interesting to watch.

3. How will firms bring in new clients? This has historically been elusive for 80% of all CPAs. But without being able to meet prospects face-to-face, new tactics will need to emerge. The vast majority of firms have yet to figure this out.

4. Finally, the office space conundrum. Social distancing and remote work requirements will have a huge impact on firms’ office space and layout needs.

COVID has changed our industry faster than any other recent event or trend. The firms that emerge from the pandemic in a strong position will be the ones who address these issues and iterate solutions until they find ones that work for them. Those who sit back and wait for the answers to show up at their door will be way behind and less attractive to clients, employees and potential buyers.