The State of the Profession

The Aging of the Profession

For the past dozen years, both the number of partners over age 50 and the average age of partners had steadily climbed upward. While there was only a slight decrease this year in both statistics, this change nonetheless represents a turning point. In fact, for firms in the $2 million to $10 million category, which is the largest group in the Rosenberg Survey, the percentage of partners over 50 fell from 70.2% to 65.5%. Rosenberg believes the decrease is due to the retirement of partners in their 60s and even 70s and the succession of new partners in their 40s. The only category that experienced an increase in percentage of partners over 50 (from 58.7% to 71.1%) was sole practitioners and smaller firms, representing professionals working later in life because they enjoy what they do or have no succession plan.

The results were slightly different in New York: 63% of CPAs are over 50 years old and 23% are now over 60 years old. The mandatory age of retirement in the New York survey data 66 on average, although one firm raised its mandatory age to 68.

Revenue Growth

In the national data, the reported revenue growth of 7.8% was down slightly from last year’s 8.1% growth (including mergers). Revenue growth for New York firms did not follow this trend, however; excluding mergers, revenue growth was at 3.3%, while including mergers, it was 3.8%. Both figures represent a strong drop from 7.1% in 2016. Growth projections for New York firms for 2018 were even lower at 3.0%.

The breakdown in fees for services in New York firms for 2017 was similar to results across the nation. On a year-to-year basis, these firms exhibited double-digit growth in consulting and other advisory service fees, tax services were down slightly, write-up and compilation declined by low double digits, and auditing and review service fees were up slightly. Explanations for the reduction in write-up and compilation work include greater accessibility to lower-cost accounting software for small businesses. The increase in auditing and review services was probably due to additional regulation and new accounting and auditing standards.

Income Per Equity Partner and Growth of Nonequity Partners

Profits—as measured by income per equity partner—in the national survey averaged $430,000, up 6% from $406,000 the year before. While New York still has the highest income per partner at $534,000 (California was second at $485,000), growth was a modest 3.7%, and projected growth for 2018 is only expected to be 3%. According to Marc Rosenberg’s analysis, firms are continuing to raise the bar on who becomes an equity partner, making better use of the nonequity partner track and thereby resisting the problematic old-school tactic of promoting managers directly to equity partners as a retention tactic. Similarly, hundreds of baby boomer partners are retiring and firms are finding that they don’t always have to replace every retiring equity partner with a new equity partner.

In the national survey, leverage (i.e., the staff-to-partner ratio) grew over 11%. The result is that income per equity partner continues to increase, principally due to this increased leverage, but also due to the firm’s normal organic growth. As Rosenberg points out, the quickest way to profitability is high leverage and high billing rates.

In New York, the partners-to-staff ratio remained relatively stable, probably due to the lower merger rate in New York and reduced opportunities to transition partners from acquired firms to nonequity partner status.

Merger Activity

Mergers continue to have a huge impact on revenue growth. For 2017, nationally, 26% of the average firm’s revenue increase was a result of mergers, slightly less than last year’s 28% and 30% the year before. In New York, mergers accounted for only 15% of revenue growth—far below the 27% from last year. According to Rosenberg, the abating of the merger “frenzy factor” is due to buyers becoming more selective, those same buyers needing time to digest the hundreds of acquisitions they made in recent years, and the logical supposition that the hectic pace of mergers over the past 10 years has resulted in the crop of sellers being somewhat picked over.

The nature of mergers and acquisitions has also undergone some changes. It has become less common for all of the equity partners in an acquired firm to become equity partners in the combined firm. As Rosenberg points out, in mergers over the past 10 years, many of the seller partners joined the buyer in positions other than equity partners, thereby swelling the staff ranks.

One additional anomaly uncovered by the survey is that staff turnover rose dramatically (19%), more than one-third greater than in 2016. On the other hand, administrative turnover, at 10%, is slightly less than the year before.

Finally, according to Rosenberg, firms are recognizing that acquiring growth is not as easy as simply acquiring a smaller firm. They are discovering the need to focus on the firm’s culture, people, technology client transition, and other issues. Firms are dedicating more time and energy to organic growth through training all firm members in the areas of communication, business development, and client service; tying compensation to client acquisition and retention targets; dedicating more resources to niche development and thought leadership; and investing in customer relationship management and marketing automation technology.

Gender Diversity

In the national survey, Rosenberg reported that the percentage of female equity partners in multipartner firms increased from 17% to 19%. All categories in firms greater than $2 million in billings saw an increase, while those firms under $2 million saw a decrease. In New York, however, the percentage of female equity partners was only at 14%—though that represented a substantial 27% increase over the past year. In addition, while not a statistically precise measure, in the New York data, where the female-to-male staff ratio was highest (60%), the percentage of female equity partners was also highest, between 20% and 22% (except at the smallest firms surveyed). Another anomaly, perhaps also because of the small sample size, was the reduction in the female-to-male staff ratio year over year, from 51% overall to 49%; this represented a decrease of about 6% from the year before.

Technology Change

According to Rosenberg, the CPA profession is on the cusp of arguably its greatest changes and advancements in history. The trigger for the changes will be technological innovations, such as blockchain and artificial intelligence. This in turn will dramatically transform how a CPA firm is managed and staffed, and what it will mean to be a CPA. Rosenberg posits that this will resolve two previously uncontrollable, debilitating external forces: lack of qualified staff and the compression of busy season.

The results to date do not support the proposition that this sea change is already underway. In New York, firm work hours, charge hours and fees continue to increase. Audit and review services continue to increase, as does consulting services (11%). About the only effect of technology, anecdotally, is a low double-digit decrease in fees from compilation and write-up work as a result of low cost client software or cloud based smart software that allows clients the ability to handle such simple accounting processes without outside accounting firm assistance. Tax services remain flat but one wonders whether this is due to uncertainty about potential federal tax reform and the unwillingness of clients to pay for planning in periods of uncertainty.

Financial Planning

After a decrease in firms offering investment advisory services between 2014-2015—perhaps attributable to uncertainty over the Department of Labor’s proposed fiduciary rule—large firms (those with net fees over $20 million) saw a large increase in investment advisory services. Firms in the $10–$20 million range also increased their offering of investment advisory and other financial services. In New York, there was little movement in the sample; only one firm in the $50–$100 million range owned its own registered investment advisor (RIA), and most firms were not likely to offer these services in the next 12 months. The principal reasons for this were “conflict of interest,” a lack of knowledge, and the conclusion that clients were satisfied with other financial service providers.

Practice Management

One of the most significant changes on the accounting landscape, according to Rosenberg, is “an avalanche of new MPs at firms.” Rosenberg reports that these new managing partners are more sophisticated and management-oriented than their predecessors. Among the findings is that these managing partners focus more on leadership development and less on client work; they also focus on partner accountability and strategic planning. According to Rosenberg, the younger partners are also questioning why they have been paying out millions of dollars in buyouts to partners who did not deserve the money. Some firms, for the first time, are even adding claw-back provisions that penalize retirement-minded partners for not doing everything they can to transfer the relationship. Rosenberg suggests a new mantra: “no transition [of existing clients], no goodwill.”

Jeff Pawlow, of the Growth Partnership, creators of the Rosenberg survey, weighed in on some additional issues regarding the “MAP” era. His perspective is that “managing our accounting practice to become faster, better, cheaper … the CPA firm as a factory … has gotten pretty good. So good that the robots are ready to take things over.” As Pawlow argues, in order for firms to succeed, now is the time to “move away from the industrial paradigm of MAP and toward the relationship paradigm that underpins ‘Advisor.’” He adds that “absent that level of familiarity with your client, you are just an inefficient robot who is about to be replaced.”

On the Cusp of Change

In the foreword to the survey, Marc Rosenberg describes the current state of the accounting profession as “the best of times and the worst of times” before cautioning that the next lines in Dickens’s classic point to the potential for dramatic change. The good news about revenue growth and profitability is underscored by potentially dramatic changes in practice management due to technological innovations. He returns to Dickens’s “spring of hope” as a metaphor for how coming technologies might provide an answer to both the profession’s perennial talent shortage and crushing busy season. CPA firms that do not adapt to this changing environment—while adopting best practices in the areas of management, succession, and diversity—will fall behind the rest of the pack.