The eighth annual 2022 NYSSCPA-Rosenberg Survey identifies trends from the national 24th Annual Practice Management Survey and provides profitability and growth data of participating New York CPA firms. This survey reflects how our profession has met the challenges during the coronavirus (COVID-19) pandemic, which, for a second year, has transformed the workplace unlike anything else in professionals’ memory. The survey data reflects trends and performance from 2021. The second part of the survey presents current analysis and conclusions from leading national experts and practice management consultants on how accounting firms have adapted to the acute and continuing challenges of COVID-19. As Marc Rosenberg of the Rosenberg Survey remarked, “Working remotely and its wide-ranging challenges may be the biggest game-changer to the CPA industry since 1978 when the CPAs were allowed to solicit business. Remote work can no longer be described as a trend because it’s here to stay.” This year’s Rosenberg Survey provides valuable analysis, guidance, expert insight, and practical recommendations for CPAs on how to adapt and thrive during this crisis, as well as how to plan for what comes next.

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The results of the national 24th Annual NYSSCPA-Rosenberg Practice Management Survey provided many key takeaways for CPAs in public practice during the continuing coronavirus (COVID-19) pandemic:

• Economic growth. According to the survey, the accounting profession had a banner year! During this time, revenue was up 9.5%, the largest increase since 2007, and income per partner was up 12.0%. There is no doubt that 2021 was an incredible year from an economic standpoint; however, the challenges of running a CPA firm—keeping up with technology, hiring qualified candidates, retaining star team members, and serving clients—continue to grow.
• Alternative workforce. This is the term that Charles Hylan of the Rosenberg Survey uses to describe firms that are outsourcing, onshoring, and offshoring. More CPA firms than ever this year either increased their usage of an alternative workforce or said they are getting serious about going down this path.
• Compliance to advisory. Firms have been easing down this path for a while, but they are now picking up the pace. Clients are demanding more than traditional accounting services and the fees for traditional services are getting more and more competitive. Furthermore, it is easier to hire people in certain advisory areas. Finally, the shift to advisory is one of the biggest reasons why private equity is entering the accounting profession.
• Non-traditional hires. According to Rosenberg, firms increasingly are hiring “solid team members” who do not necessarily have accounting degrees nor any desire to pursue a CPA license. For example, as client accounting services (CAS) continues to grow, firms are hiring smart, detailed-oriented people who can use technology.
• Average age of partners. The percentage of partners over the age of 60 increased from 24% to 25% (see Exhibit 4). In other words, one-quarter of accounting firm partners are near or past many retirement age or a mandatory retirement requirement. According to a recent NPR podcast, Going Concern’s Adrienne Gonzalez said that a staggering 75% of AICPA members became eligible for retirement in 2020 (referring to this AICPA exposure draft, https://bit.ly/3uLAFPi).
• Gender mix and percentage of female partners. There continues to be an upward trend in the percentage of female equity partners, across firms of all sizes, as well as a steady increase from 2011 and 2021 in the number of women in leadership positions. The staff mix this year of 54% female and 46% male, however, still remains distant from the 21% female partners in all size firms. The greatest growth in female partners, at 39%, is found within firms between $2 million and $5 million in size.
• Private equity. As reported by Marc Rosenberg of the Rosenberg Survey, the entrance of private equity is certainly the biggest new trend in the profession. Initially, it was geared to mega-firms, but private equity’s influence starting to trickle down to large firms below the mega-firms.

The Rosenberg Survey analyzes national trends that all CPAs in public practice need to be aware of, covering 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 24th Annual Survey, conducted in 2022, based on firm results for the calendar year 2021. The overall results are shown in Exhibit 1, Results at a Glance. The second part provides opinions from the experts on the impact of COVID-19, its aftermath, and how so many firms embraced change in services to their clients and the public.

Revenue and Profits

Annual revenue growth nationally was 9.5%, the largest increase since 2007, and up from 5.7% from the previous year as shown in Exhibits 2, 3, and 8. Profits, as measured by net income per equity partner, was up 12.0%. In New York State, equity per income partner was around $642,000 and fee growth was 9.9%, exceeding the national average.

Fee growth for New York State CPA firms for 2022 was projected to grow by a little less aggressive 7.3%. New York State ranked third in projected fee growth rate among the states broken down by the Rosenberg Survey.

The Rosenberg Survey has tracked the correlation between firm size (in terms of net fees) and the corresponding profit (in terms of income per partner). Although being a larger firm does not guarantee larger profits, economies of scale factor into why larger firms are more profitable than smaller firms. Hylan also attributes increased firm profitability to engaging in marketing and practice development, soliciting larger clients, attracting and recruiting staff, having the resources to train staff more effectively and work as a team, adhering to a strong set of core values, and developing a strategic and business plan. As in past years, an increased share of non-tax and non-attest clients also tends to increase profitability. Larger firms tend to offer a higher proportion of consulting and advisory services. Also, the size of a firm’s market has an effect on partner billing rates (Exhibit 6).

Leverage

A firm’s staff to partner ratio (i.e., leverage) correlates closely with income per partner and therefore profitability. Firms that have staff-partner ratios greater than 10:1 boast income per partner 92% greater than firms that have ratios of less than 3:1. Greater leverage also allows a firm to have their talent working in areas that are the highest and best use of their skill sets.

Tax Season Impact

Average staff billable hours during the tax season were 1,467 hours. Typically, firms with the highest percentage of hours worked during the busy season have the lowest income per partner. This was no different this year, as the average income per partner (IPP) was $515,000, down from $525,000 last year; furthermore, it was significantly lower than the IPP outside of tax season. This continues the trend from previous years. According to Hylan, all firms understand the benefit of spreading billable hours over the year. As the accounting profession moves from compliance-related services to advisory-led relationships, the expectation is that the percentage of annual hours worked during tax season will decrease.

Mergers and Acquisitions

Last year, 2021 saw a noticeable increase in merger-fueled growth among larger firms, consistent with data from past years. But merger growth as a percentage of total growth (in all firms over $2 million in net fees) has decreased since 2015. Many firms, including those in the Top 100, are turning to mergers to address succession issues and lack of leadership, as well as to join forces with a larger firm that has the capital to help the firm make the transition from compliance services to advisory services.

Financial Advisory Services

Larger firms are significantly more likely to offer financial services than smaller firms. Nearly half of larger firms offer financial services. The reason for offering financial services is that CPAs are trusted advisors.

Firms that offer financial services are more profitable. For example, IPP for firms that offer financial services is $638,000, whereas IPP for firms that don’t offer financial services is $539,000. The Rosenberg Survey also reports an increase in firms greater than $20 million that are “very likely” to offer financial services in the next 12 months.

Audit Work

For the seventh consecutive year, the firms in the lowest quartile in terms of providing assurance services (representing an average 8.2% of total fees) significantly outperformed firms in all other categories as measured by IPP (Exhibit 5). In addition, many of the consultants who contributed to the Rosenberg Survey commented that the move from compliance services to advisory services yields many opportunities. There are several challenges in maintaining profitability when offering assurance services. These include pressure on fees, the inability to attract and retain qualified staff, increased regulation, and lower profitability within audit practice.

New Partners

As noted by Hylan, for the first time in five years, the average amount of a new partner buy-in has increased in every category of firm. The number of firms that have buy-ins greater than $400,000 has also increased over the past four years; for example, there were 27 firms in 2021 that met the criteria, vs. 22 in 2020, 20 in 2019, and 17 in 2018. The increase in the number of firms with large partner buy-ins is consistent with the overall increase in all firms greater than $2 million in fees.

Mandatory Partner Retirement

This year’s survey reports a slight decrease in mandatory retirement provisions across all revenue bands except for firms with $2-5 million in fees. According to Hylan, mandatory retirement does not mean it is mandatory to stop working; it means that partners must relinquish their equity, and begin the capital and goodwill payment process. A well-structured succession strategy allows for a partner to continue working—so long as it’s a win-win between the individual and the firm.

Rosenberg reports that more than 90% of firms with greater than $5 million in net fees have a documented retirement system. There continues to be, however, a decrease in the number of firms under $2 million that have a formal retirement system. According to Hylan, many smaller firms simply do not want to deal with creating a formal retirement system because they are unaware of the various valuation methods, do not want to invest the time in creating one, cannot get all of the partners to agree on a system, or want to avoid the potential conflicts that could arise in creating a retirement system.

Client Retention for Retiring Partners

This year’s survey, backed up by the experience of the consultants at Rosenberg indicated there is a 91–95% client retention rate when partners leave a firm. Hylan offers some best practices in retaining clients: having partner agreement provisions require partners to give at least two years’ notice; creating formal client transition plan that includes dates and responsibilities; offering client service training for managers and senior managers; and giving staff and managers ownership for certain client relationships early in their careers, so that they are prepared to take over the clients of a retiring partner when the time comes.

Partnership Buy-out

The Rosenberg Survey presents detailed information on different buyout arrangements. Just as in prior years, the multiple of compensation method is the gold standard, particularly at firms with five or more partners. As noted over the past few years, firms of all sizes are struggling with partner retirement. As such, firms are struggling with client transition, responsibility transition, and oftentimes leadership transition (i.e., who is the next managing partner?). Historically, for partner buyouts and CPA firm sales, the rule of thumb has been to value a firm’s goodwill at one time annual net fees. According to Rosenberg, for many years, internal partner retirement payments settled around the 80% mark. This figure has dropped just a bit, however, and has settled around 77% for the past few years (Exhibit 7).

The Chaos Continues

As the world emerges from the COVID-19 pandemic, 2022 has been another chaotic year. Challenges include: frustration in dealing with the IRS, including the Practitioner Priority Service; significant tax code changes (the fourth such significant set of tax changes since 2017); installing and upgrading IT to remain functioning via a remote workforce; the impact of private equity-backed CPA firms, using their newly available capital to drastically alter the way they structure their acquisitions; staffing struggles; an aging workforce; and pipeline shortages of new entrants to the profession.

The results of this year’s Rosenberg Survey augur that CPAs will weather the storm of change well, as they always have before. If there is a dip in the market due to a recession or a tighter labor force, it may give the profession a chance to catch its breath and prepare for the next wave.