The sixth annual 2020 NYSSCPA–Rosenberg Survey identifies trends from the national 22nd Annual Practice Management Survey and provides profitability and growth data of participating New York CPA firms. This year was unlike any that our profession has faced in the 22 years of the survey. The survey data reflects trends and performance from 2019, before the coronavirus (COVID-19) pandemic struck. A second part of the survey presents analysis and conclusions from leading experts and practice management consultants on how accounting firms have adapted to the challenge of COVID-19. As Charles Hylan, managing partner of Rosenberg & Associates and author of the survey remarked: “The landscape for accounting firms changed quickly when the pandemic hit. It was as if a switch was flipped. Managing partners were forced to deal with massive changes in workflow and practice.” This year’s Rosenberg Survey provides valuable analysis, guidance, expert insight, and practical recommendations for CPAs on how to adapt and succeed during this crisis and what comes after.
The results of national 22nd Annual NYSSCPA–Rosenberg Practice Management Survey provided eight key takeaways for CPAs in public practice for the period leading up to the coronavirus (COVID-19) pandemic: 1) Revenue growth was significantly down from the prior year (before the pandemic hit). 2) Income per partner increased over the prior year. 3) The percentage of revenue growth through mergers of acquisitions dropped sharply. 4) Net fees per partner (up until the pandemic) grew slightly. 5) The percentage of partners older than age 50 in small firms (less than $2 million in net fees) has increased from 58.5% to 72.3%. However, larger firms seem to be handling succession much better than smaller firms, where there are no partners to replace the managing partner or they don’t want to retire, or simply can’t afford to retire. 6) Firms with the least audit work (i.e., the lowest quartile) actually outperform those firms with more audit work; in other words, audit work dampens profitability. 7) Although the ratio of female-to-male professional staff has grown (now at 58% female, 42% male), the percentage of female equity partners has remained flat at 23% for all multipartner firms. The percentage of female partners in large firms (more than $20 million in net fees), on the other hand, remained at 20%. 8) Firms that had formal written marketing plans on average achieved net income per partner that was $22,000 higher than firms without these plans.
The Rosenberg Survey analyzes national trends that all CPAs in public practice need to be aware of in the areas of revenue growth, merger and acquisition activity, leverage (partner-to-staff ratios), and demographics. The first part of this article details the results of the 22nd annual survey, conducted in early 2020, based on firm results for calendar year ending 2019. The overall results are summarized in Exhibit 1. The accompanying Sidebar analyzes the impact of COVID-19 on professional practices during the pandemic through October 2020.
THE 2020 ROSENBERG SURVEY Results at a Glance (Based on 2019 Data)
Revenue and Profits
The annual revenue growth nationally of 6.4% (pre–COVID-19) was down significantly from 7.7% the previous year (See Exhibit 2 and Exhibit 3).
Annual Revenue Growth
Profits, as measured by income per equity partner, also were up from the prior year nationally. Income per partner rose from $451,000 to $482,000, representing a 6.9% increase (pre–COVID-19). In New York State, the income per partner at $608,000 was 4.9% higher than the previous year. Similar to the national averages, fee growth at 4.9% was expected to slow to 1.4% (pre–COVID-19). This parallels the national trend, where the increase in income per partner exceeded annual revenue growth, which has shown slowing growth since 2015. The positive impact, according to the Rosenberg Survey’s Charles Hylan, is “an increase in profit that is close to or higher than the increase in revenue and that the quickest path to profitability is high leverage and high billing rates.”
Economies of scale obviously factor into why larger firms are more profitable than smaller firms, but Hylan also attributes increased firm profitability to engaging in marketing and practice development, attracting larger clients, attracting and recruiting staff, having the resources to train staff more effectively, working as a team, and adhering to a strong set of core values. Other factors include the higher level of profitability on non-tax and non-attest clients, as well as an increased ratio of consulting and advisory services offered by the largest firms.
Staff-to-partner ratios (i.e., leverage) correlate closely with income per partner and, therefore, organic growth. Firms that have staff-partner ratios greater than 10:1 have income per partner that is 102% greater than firms with ratios of less than 3:1. On the other hand, until COVID-19 hit, a high staff-to-partner ratio was correlated with increased turnover of professional staff. This is concerning, given that many firms consider shortage of staff, lack of experienced partner-ready staff, and employee retention to be among their biggest challenges.
Mergers and Acquisitions
Mergers continue to have a huge impact on revenue growth, but there has already been a significant downward trend in merger activity. Merger growth as a percentage of revenue for large firms (greater than $20 million in net fees) decreased significantly, from 30% to 14%. This was similarly noticeable in smaller firms (less than $10 million in net fees).
Financial Advisory Services
Larger firms are more likely to officer financial services than smaller firms, by a significant margin. Nationally, there was a slight downward trend in firms offering financial services from one year ago. In the survey, the follow-up question was: “If you don’t offer financial services, how likely are you to offer them in the next 12 months?” While there has been a downward trend in the number of firms currently offering these services, it does appear that more firms are open to the idea of providing these services.
As noted by Hylan, this is the second year that there has been a slight increase in the average buy-in amount for new partners. The survey identified 20 firms where the partner buy-ins exceeded $400,000; in the prior year, there were only 17. Overall, the buy-in price for new partners increased slightly, from $168,000 to $172,000.
Mandatory Partner Retirement
The survey reports a slight increase in the percentage of firms with mandatory retirement provisions. According to Rosenberg, the number of firms that have mandatory retirement provisions in their partner agreements remained relatively steady, after an upward trend over the past few years. As Hylan noted, mandatory retirement does not mean it is mandatory to stop working; it means that partners must relinquish their equity to the partnership and begin the capital and goodwill payment process. A well-structured succession strategy allows partners to continue working, so long as it is a win–win for them and the firm.
Client Retention for Retiring Partners
In the survey, and in the experience of the consultants at Rosenberg, there is a 90%-plus retention rate when partners leave. Larger firms are putting more of an emphasis on properly transitioning clients as a partner nears retirement; the increased retention percentage reflects that these efforts are paying off. It is also clear that more than 90% of firms with net fees greater than $5 million have a documented retirement system, although there was large decrease (from 68% to 56%) in the number of firms with net fees under $2 million that have a formal retirement system. The Rosenberg consultants attribute this to small firms—
- being unaware of the variety of valuation methods available,
- not wanting to invest the time in creating a retirement system,
- being unable to persuade all the partners to agree on a system, and
- wanting to avoid potential conflict that could arise in creating a retirement system.
The Rosenberg Survey presents ample data on different buyout arrangements. The gold standard, however, remains the multiple of compensation method. A retiring partner is paid their share of the tangible and intangible value of the firm; 95% or more of these arrangements are unfunded. The multiple of compensation method includes book of business, ownership percentage, a percentage of goodwill, and net fees, as well as a fixed amount. For many years, internal partner retirement payments settled around the 80% mark; in the current survey, this figure dropped to around 77%. In terms of the multiple used to value partner retirement benefits, large firms (more than $20 million in net fees) have seen a drop from 77% in 2016 to 67% in the current survey. Rosenberg sees the valuations for the intangible portion of the buyout decreasing as a result.
See Exhibit 4 for a breakdown of the average age of partners, Exhibit 6 for a summary of partner billing rates, and Exhibit 7 for an overview of partner buyout options.
Audit Practice Impact on Key Metrics
Partner Billing Rates
Partner Retirement Buyout Options
Audit Practice Impact on Key Metrics
For the fifth consecutive year, the firms with the lowest percentage of audit and review work reported the highest income per partner (Exhibit 5). The reasons are generally understood to be pressure on fees, an inability to attract and retain qualified staff, and increased regulation. Many of the consultants quoted in the Rosenberg Survey commented that the move from compliance to advisory services will yield many opportunities, including less reliance on attest and tax services, which face greater regulatory scrutiny each year.
The Light at the End of the Tunnel
In many respects, 2020 was a chaotic year for public accounting professionals. The Rosenberg Survey found contradictions in every area of practice. The data from 2019 indicate that, at a macro level, revenues were trending positively for the profession (see Exhibit 8); before the pandemic hit, one would have expected these trends to continue in 2020. COVID-19 undoubtedly had a major impact on practice; but even now, in the depth of the pandemic, the promise of a vaccine appears to be a light at the end of the tunnel. While nothing mitigates the tragedy of this unprecedented crisis, CPAs would do well to remember that the current moment also represents an opportunity to serve the public and protect the public interest.
Overall Revenue Increase
This article is part of a package analyzing the results of the 2020 Rosenberg Practice Management Survey.
Included in this package is “The State of the Profession: The Impact of COVID-19. Opinions from the Experts”
To participate in the 2021 Rosenberg Survey, please visit http://rosenbergsurvey.com between January 1, 2021, and July 15, 2021. To purchase a complete copy of the 2020 survey results, visit http://rosenbergsurvey.com at any time.