Is Your CPA Firm a Small, Mid-Sized or Large Firm? How Is This Properly Measured?

There is a little devil in me that will come out as you read my blog today. Devilish because this is a blog that will likely cause some readers to question some of my assumptions and statements. That’s okay. I love it. I can take it.

This blog was inspired by two experiences:

(1) First, a client emailed me, asking what size ranges constitute small, mid-sized and large multi-partner CPA firms. My reply is below, but I must give the strongest possible caveat on this. Ask 10 of the most credible people in the CPA business and you will get 10 different responses, some quite varied.

• Small firms: under $10M in revenue; most will be much lower than $10M. There are a few thousand firms in this size range. Using an average of $210,000 of revenue per person (per the latest Rosenberg MAP Survey), total personnel would be 50 people or fewer.
• Mid-sized firms: $10M–$58M. There are roughly 500–750 firms in this group. Way more firms toward the bottom of this range than the upper end. Total personnel would be 50 to 275 people.
• Large firms: over $58M, the threshold for making Accounting Today’s 2024 list of the top 100 firms. Total personnel would be over 275 people.

Two important observations in the data above: First, based on our 30 years of consulting experience, firms at the lower end of the $10M–$58M group should not be considered small firms. They are substantial firms that enjoy considerable success; describing $15M firms as “small” simply doesn’t make sense to me or the firms. Second, the mid-size range is quite vast. While they may enjoy a nice level of success, $10M–$15M firms in no way operate at the level of sophistication, growth and profitability that $40M–$58M firms do. But when forced to use only three categories, the expansive range of mid-sized firms results. Perhaps we need to replace the term “mid-sized” with two new monikers: Lower mid-sized and upper mid-sized. Please don’t ask me to draw a line between the two!

(2) The second thing that triggered this blog was a great article by one of the CPA profession’s most knowledgeable and insightful luminaries, Dan Hood, long-time editor-in-chief of Accounting Today. Writing in June 2024, Dan provocatively asked the question, “What is an accountant?” He pointed out that despite the public image of accountants being tax preparers and auditors of public companies, today they are much, much more, providing a wide range of consulting services, some financial and some non-financial. Said Hood: “Being the owner of an accounting firm isn’t a reliable guide to what makes an accountant because it’s been a long time since one had to be a CPA to have an ownership stake in a firm. The introduction of private equity into the field has brought in a flood of new owners whom no one would mistake for accountants.” Dan concluded: “With so many ways to be an accountant, what unites them all? I’ll be the first to admit I don’t know…”

By highlighting the difficulty in defining a once simple word—accountant—Dan made me think more deeply about how small, mid-sized and large firms can be differentiated. This is a complex question. Maybe we need a different way to describe these three terms. Read on.

Are CPAs cognitors?

I discussed Dan’s article with him. After smothering him with kudos for writing such an insightful article, I reminded him of the great “cognitor” fiasco. This took place in the late 1990s. By the 1990s, it was abundantly clear that the terms “accountant” and “CPA” did not properly explain what CPAs do. Not only do CPA firms provide compliance services such as audit, accounting and tax, but they are also their clients’ trusted advisors on all aspects of running and supporting their businesses and personal affairs, including personal financial services, wealth management, technology, business valuations, litigation support, health care and M&A, to name a few. This is corroborated by the IPA Practice Management Report for 2023, which states that 43% of revenue of firms over $50M comes from non-compliance services; for firms under $20M, this figure is 30%.

In recognition of this, in the late 1990s, the AICPA considered replacing the term “CPA” with “cognitor.” This term would acknowledge CPA firms as business advisers instead of simply accountants. The AICPA membership soundly rejected it. The idea may have been a worthy one, but coming up with a term that sounded like a dinosaur was understandably repugnant to a large portion of the CPA community. Besides, many accountants were proud to call themselves CPAs because it carried with it a lot of prestige. The cognitor initiative was roundly considered a disaster by CPAs across the country.

NEW Second Edition Now Available!

CPA Firm Management & Governance, Second Edition, is a must-read for partners who want to run their firm like a business – an essential guide to elevate your firm’s operations to new heights. The book addresses: Best practices for managing and structuring the leadership group • Insights into decision-making processes and voting • Functions and responsibilities of the Board • Expectations and roles for partners within the firm • Organization structures for various firm sizes • Job descriptions of key management positions • Strategies for fostering partner accountability

Start operating at peak efficiency: Purchase your copy today!

A better way to differentiate firms than revenue size

Sure, revenue size will always play a role in categorizing firms. But an equally valid way is to identify the level of a firm’s management and leadership excellence, sophistication and complexity of what it does, and the extent that a firm is innovative and changes with the times.

I suggest these criteria for your consideration:

SMALL FIRMS

• Informal management.
• Operate as a partnership instead of a corporation.
• The managing partner is more of a COO who spends the majority of their time on client duties.
• Success and growth is limited by lack of attention to management.
• Partners vote on every decision.
• Low or no partner accountability.
• Low leverage (staff-partner ratio).
• Almost unsolvable crisis in finding people.
• Services all or mostly compliance.
• Partner income allocated by an “eat-what-you-kill” (EWYK) mentality.
• Old school in their ways.
• 70%–90% of these firms, while they may be successful today in terms of partner income, are severely challenged to make it to the second generation.

MID-SIZED FIRMS

• Moving to more structured and formal management and firm governance.
• At the lower end of the range, operates somewhere between a partnership and corporate model; at the upper end, almost all adopt the corporate model.
• MP position becomes more formalized and essential; more of a leader than an administrator. Most MPs at mid-sized firms spend more time managing the firm than tending to client duties.
• To keep the MP and other partners out of administration, firms hire a full-time, non-partner administrator: a firm administrator at smaller firms in this range and a COO at the upper end.
• Growth and success fueled by leadership, not just the MP but the board, department heads and the line partners themselves.
• Strategic planning understood to be important, but many firms struggle with implementation.
• Some partner accountability, but still not enough.
• Partner comp systems begin to move away from EWYK towards subjective systems that incorporate management’s judgement, achievement of written goals and the value of intangible performance traits.
• More leverage; more pushing work down to staff.
• Better success at recruiting staff because they have more to offer.
• At the cutting edge of change.
• Some merger activity, more at the upper end of this group.
• Better positioned to make it to the next generation, if they haven’t already made it.

LARGE FIRMS

• Firm management, leadership and governance front and center. Like a constitution.
• Corporate model fully embraced.
• MPs function like a CEO, working in tandem with a board and a COO.
• Almost no meaningful votes taken by the full partner group.
• Everything is about team; “we” instead of “me.”
• Strategic planning and goal setting are integral to firm’s way of life.
• Some success at staff recruiting, though until the supply of accountants increases, this will never be easy.
• Partner comp moved to comp committee; though still important, the firm’s book of business or client base managed is just one of many key performance factors relied on.
• Consulting is center stage; compliance may continue to be the firm’s biggest revenue generator, but consulting grows at a faster rate than compliance.
• Strong, active merger activity; almost all top 100 firms have at least one partner working full time to find and integrate mergers. Most top 100 firms make at least one merger a year; many make several every year.
• Leading edge; highly innovative; never complacent, regardless of how successful.
• Significant revenue growth as a result of the above.

Click here for a complimentary copy of the detailed list of the differences between the three firm sizes.

What category describes your firm?

Please let us know your thoughts.