It’s a great time to be a CPA firm.
So says Marc Rosenberg in his foreword to the 2017 Rosenberg Survey. The annual practice management survey, now in its 19th year, provides a wealth of quantitative and qualitative assessments of the current state of American CPA firms. The most recent survey, released just last month by the Growth Partnership, has some surprises—some good, none uninteresting.
While the rosy picture painted by the Rosenberg Survey does lead one to believe that it’s a great time to be a CPA firm, how great depends largely on how well the owners of that firm have prepared for and adapted to change. Early indicators can be found in how well firms fared in the past decade’s merger frenzy, which is still going strong but also waning, according to the survey: nationally, mergers accounted for 26% of total growth, compared to 28% the previous year. In New York, growth as a result of mergers slowed significantly—13% this year compared to 21% the year before.
At this point, buyers can afford to be more selective, says Rosenberg, and are busy integrating past acquisitions. “Picked over” is how Rosenberg described the remaining firms still looking to sell, evoking the image of leftover produce at a late afternoon farmer’s market.
In New York, revenue growth dropped to 3.8%, down from 7.1% the year before. Nationally, firms saw 7.8% revenue growth for firms with revenue of $2 million and over, down from 8.1% the year prior. Profits, measured by income per equity partner (IPP), were $430,000 nationally, up 6% from $406,000 the year before, which is the highest increase in profitability since 2007. In New York, IPP remained about flat at $534,077.
Increased profits are due to two things, Rosenberg says: solid revenue growth and a “dramatic increase in leverage as measured by staff-to-equity partner ratio.” Rosenberg points to a number of factors to explain the increase, including a change in focus for the role of partners. “The new partner model calls for partners to be delegators, not doers, and to make a meaningful contribution to the firm’s efforts to develop and mentor young talent who advance under the partner’s tutelage. This change in partners’ focus enables them to manage more work,” Rosenberg says in the survey’s foreword.
Firms are also raising the bar on who becomes an equity partner in the first place, making better use of the non-equity partner role. They’re not always replacing a retired equity partner with another one, and they’ve acquired former equity partners through mergers, swelling the staff ranks.
In terms of gender, the number of female equity partners is up this year to 18.7%, from 16.7% the year prior—still a long way to go, but at least moving in the right direction. That trend is consistent in New York as well, increasing from an abysmal 11% last year to 14% this year.
The survey also includes anecdotal observations from top consultants that drill down to specific topics. Rosenberg describes an “avalanche” of new firm managing partners (MP) as baby boomers finally begin to retire (the average partner in New York is 55 years old). These new MPs are more management-oriented than their predecessors and are doing things differently in other ways; the MP is not the firm’s best rain-maker, focusing instead on management, organization, and strategic planning. Another trait of the next-generation MP: fewer free rides. There’s a higher focus on partner accountability, as younger partners realize they must pay out millions in buyouts to retiring owners for whom it was only “suggested,” not “required,” that they proactively transition their client relationship to other firm members.
No More Busy Season?
There’s a lot of hype surrounding the transformative effects of blockchain and artificial intelligence on the profession, and the consultants included in the Rosenberg Survey are no exception. In the future, Marc Rosenberg predicts that technological advances will dramatically reduce—by more than 50%—the demand for traditional CPA firm auditing and tax compliance labor. These technologies will also speed up firms’ access to their clients’ data and automate the compliance process, greatly reducing the crunch between January and April.
Want to take a deeper dive into the Rosenberg Survey results? Be sure to read the December CPA Journal.