Is an Outdated Business Model Threatening the Relevancy of CPA Firms?

locomotive1.jpgTwenty of Accounting Today’s 2016 Top 100 Most Influential People cited “relevancy” as a major issue facing the CPA profession.  The business graveyard is littered with major industries that went into decline because they failed to adapt to change, thinking “if it ain’t broke, don’t fix it.”  Examples:

  • Ice companies failed to get into refrigeration because they saw themselves in the ice business
  • Railroads missed out on autos and aerospace because they didn’t see themselves in the transportation business
  • A DEC CEO said he couldn’t imagine why people would want computers in their own homes

To be fair, it is very difficult for even the smartest people to foresee cataclysmic changes.  CPA firms have had a good, long run.  To keep this going, we need to constantly re-invent and re-engineer ourselves.  Staying the same is a recipe for disaster.

The CPA industry is operating an outdated model

Here are examples.  The focus below is mostly the typical local firm with annual revenues of under $15M.

How staff see CPA firms.  Up until the relevancy issue surfaced, the words ‘boring, nerdy, uncool, long hours, tax season, work-life balance’ and ‘low use of technology’ were thought to explain the CPA industry’s labor shortage.  But we need to dig deeper.  The issues below further deter young people from seeing accounting as a lifelong career choice.

Being a trusted advisor instead of just an accountant.  Blog reader Richard M. wrote me: “If the profession continues to generate most of its revenue from selling what consumers merely need (compliance services) instead of providing what they really want (all kinds of future-looking services and planning applications), then it’s clear that CPA firms are becoming less relevant.”

Firms run like factories.  ‘Get the clients in and get the work out so we can quickly move on to the next client project, and the next…’  Partners are too busy pumping out prodigious amounts of billable hours, leaving precious little time for firm management, strategic planning and especially, training and developing their staff.  Instead of partners averaging 1,200-1,500 annual billable hours, this number should be closer to the 500-800 range.

Over-emphasized importance of ownership.  At most CPA firms, staff feel that to “make it” at their firm, they need to be owners.  Not true in most businesses.

The path to partner.  It typically takes 12-20 years to become partner, an awfully long time for bright, ambitious staff to wait. Firms need to speed this up.

Teamwork.  At most firms, partners pretty much run their own fiefdoms, each doing the same client process different ways and rarely working together on common clients.  At larger firms teamwork is a core value embraced by their partners and nicely compensated.

Growth.  Held back by (1) focus on individual practice development efforts vs. firmwide marketing initiatives, (2) firms continuing to offer the same services, failing to come up with, in Gale Crosley’s words “shiny new stuff,” (3) failure to take advantage of the global economy and (4) firms failing to differentiate themselves from the competition.

Tax season.  Hardliners say that the tax season is a fact of life.  If you can’t handle it, stay out of accounting.  But the tax season is a huge downer for the staff, and even for many partners who will never publicly admit this.  Progressive firms are devising ways to make the tax season less onerous on staff.  Example:  Doing away with mandatory Saturdays in the tax season.

Issuance of audit reports.  Tim Christen, MP of Baker Tilly recently said:  Do we really think public companies will continue to accept audit reports that are issued 120 days after the period reporting on?

So, is the CPA industry really in danger of becoming irrelevant?

Skeptics will say the relevancy issue is nothing more than some desperate people creating new sound bites.

Progressives understand that most local CPA firms are operating with an outdated operating model and that it’s possible this may make our profession less relevant in future generations.

Who’s “right?”  Stay tuned.


The first step in engaging your staff is by making them understand the importance of their role in the firm. Firms rely on our book How CPA Firms Work: The Business of Public Accounting as an onboarding tool for new hires.

5 Comments

  1. Jody Padar on May 10, 2016 at 10:06 am

    The world has changed…but most CPA’s haven’t. I feel for the firm owners who would like to sell to me, the “new firm”, new business model firm owner. Cause I won’t buy a traditional firm . And myself and my peer are the next generation of partners won’t be retiring any time soon.



  2. Steve mayer on May 10, 2016 at 1:27 pm

    I agree which is the reason we created a totally new type of firm that addresses most of your points, for example:
    1. most of our revenue is trusted advisor revenue
    2. ownership doesn’t mean much at our firm since we share all profits 50% with the employees
    3. teamwork is our DNA. over the past three years our firm is the highest rate place to work in the SF Bay Area;
    4. Our growth rate is exceptional
    5. Our tax season is manageable as our revenue model is structured so almost every month is the same. there is a small increase in revenue for busy season, but not much; 6. we have no turnover and most of the people we hire are not from the traditional places most people hire from. when we started, we wanted to “change the status Quo” we are clearly doing that.

    cheers



  3. Anthony Kane on May 10, 2016 at 4:02 pm

    Hello Marc-

    One of the major challenges that we see are unfunded retirement packages. As the baby boomer partners retire more and more of the firm’s income is going to be siphoned off to pay for their retirement.

    The result is that the younger partners will see less of the profits of their work. In addition, since they are working more and making less, then their retirement packages will be much smaller.

    This is very similar to what is happening with social security. The difference is that the government can float the system by printing more money. An accounting firm can’t. It is going to be harder for older established firms to attract the top talent unless they address this problem. We feel that firms that ignore this problem are going to be in a great deal of trouble in the coming few years.

    Our group has thought about this a great deal and we have some ideas, but I have never seen anyone else who has a solution.

    I would appreciate your thoughts on this matter.

    Anthony Kane



    • Marc Rosenberg on May 11, 2016 at 2:29 pm

      Anthony – the conventional CPA firm unfunded retirement/buyout plan is admittedly a bit quirky, but it has worked for decades and continues to work today for the vast majority of firms with such plans. Retiring partners are able to redeem the value of their interest in the firm simply because their compensation stops or is greatly reduced. The savings to the firm of the discontinued comp to retired partners is used to fund the retirement payments. There should be no reduction in net comp to the remaining partners and there should be no reduction in the value of the firm in future years. In fact, if both do not increase over time, something is wrong.

      When the plan fails or appears unworkable, it’s not because the plan is flawed. Instead, it’s because the underlying factors that make the plan viable are weak. Those underlying factors are: (1) The firm is profitable, (2) high client retention rate of clients of retired partners, made possible by (3) proactive and effect client transition, (4) the firm grows most if not all years, (5) the firm continually brings in new partners, so that there are no large clusters of aging partners.

      Without the presence of these underlying factors, firms are better off merging up instead of trying to remain independent.



  4. Allen DeLeon on May 11, 2016 at 9:46 am

    D&S has successfully address most of your points. We are focusing on how we can help our selves and client focus on future hard trends and will effect our business and that of our clients; being that trusted advisor.



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