In Brief

The ninth annual 2023 NYSSCPA-Rosenberg Survey identifies trends from the national 25th Annual Practice Management Survey and provides profitability and growth data of participating New York CPA firms. This survey reflects many of the challenges that professionals in CPA firms of all sizes are currently facing. “Our profession is experiencing unprecedented pressure from the economy, staffing shortages, technology, and competition,” noted Charles Hylan of the Growth Partnership and Rosenberg Survey (Rosenberg Survey, p. 2). These challenges include a continuing presence of the COVID-19, fewer college graduates entering the accounting workforce, and increased levels of employee turnover and severe staffing shortages, “resulting in people being stretched to their limits,” according to Hylan (p. 2). Additional challenges noted by the survey include how to manage a remote workforce, outsourcing workflow initiatives, technology integration, and the acquisition of professional accounting practices by private equity investors and special purpose acquisition companies (SPAC).

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Regarding remote work, Marc Rosenberg of the Rosenberg Survey remarked, “Most agree that remote work is here to stay but at the same time, many are concluding that firms are less productive when remote work levels are high. It’s also harmful to job satisfaction because people lack the person-to-person contact they crave. The hybrid model is showing signs of going from 2–3 days in the office to 3–4” (p. 15).

The survey data reflects trends and performance from 2022. A 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 challenges in 2023.

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The results of the national 25th Annual NYSSCPA–Rosenberg Practice Management Survey provide many key takeaways for CPAs in public practice. According to the survey, the accounting profession had a banner year! During this time, revenue was up 11.4% (p. 2), and income per partner was up 11.8% (p. 2). There is no doubt that 2022 was an incredible year from an economic standpoint. However, the challenges associated with running a firm—keeping up with technology, hiring qualified candidates, retaining star team members, and serving clients—continue to grow.

According to Charles Hylan of the Growth Partnership and Rosenberg Survey, the following are “ramping up in a major way:”

  • ▪ Outsourcing/Offshoring/Onshoring. This initiative continues to grow, according to the survey. “Clearly, many firms are engaging in outsourcing/offshoring/onshoring initiatives and best of all, the vast majority plan to continue or increase their activities. As we look at firms with over $10M in revenue, more than 50% are engaging in outsourcing activity and nearly 70% plan to do more next year. Of those not outsourcing, 50% plan to start next year” (p. 2). Regarding firm size, more than half of the firms >$20M outsource staff or tax returns and 74% plan to do more next year (p. 32).
  • ▪ Client culling. During this period, due to staff shortages, CPA firms trimmed their non-ideal clients to “ease the workload and make room for more attractive engagements. … Looking at firms >$10M, 51% are actively culling clients, while 45% of firms between $2M and $10M are unloading clients” (p. 2)
  • ▪ Technology integration. With the introduction of new technologies, AI is ‘reshaping’ the firm. Firms are not only using technology to gain new but also “to provide advisory services, digitizing all areas of workflow, and enabling virtual collaboration” (p. 2).
  • ▪ Non-accounting hires. With the growth in advisory services, firms are “realizing that a lot of work does not have to be completed by an accounting grad” (p. 2).
  • ▪ Advisory services. According to the survey, “firms investing in advisory services, private equity investing into firms in hopes of growing advisory services … continues to pick up momentum. … Nearly 10% of participants in the Rosenberg study have more than 50% of their revenue driven by non-compliance related activities” (p. 3).
  • ▪ Average age of partners. The percentage of partners older than 60 is holding at approximately 25% (p. 23). The takeaway (Exhibit 4) is that one-quarter of accounting firm partners are near or past many of the mandatory retirement age provisions.
  • ▪ 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, and a steady increase between 2011 and 2022 of women taking more leadership positions. The staff mix this year, however, of 56% female and 44% male for the largest firms remains distant from the average of 26% female partners in all size firms. There has been a decline in the percentage of female partners from 39% to 35% in firms between $2 million and $5 million in size (p. 31).
  • ▪ Outsourcing. In a new category, this year’s survey reports that more than half of the firms >$20M outsource staff or tax returns, and 74% plan to do more next year (p. 32).

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 (i.e., partner-to-staff ratios), and demographics. The first part of this article details the results of the 25th Annual Survey, conducted in 2023, based on firm results for the calendar year 2022. The overall results are shown in Exhibit 1 “Results at a Glance.” The Sidebar provides opinions from the experts on the profession and how so many firms embraced a change in service to their clients and the public during this period.

Exhibit 1

The 2023 Rosenberg Survey (Based on 2022 Data) Results at a Glance

Over $20M in Net Fees (60 Firms); $10-20M in Net Fees (75 Firms); $5-10M in Net Fees (100 Firms); $2-5M in Net Fees (46 Firms); Under $2M in Net Fees (12 Firms) Income per equity partner; 838,890; 726,072; 584,794; 437,498; 240,781 Fee growth: 2022–including mergers; 14.0%; 11.8%; 10.7%; 8.8%; 9.4% Fee growth: 2022–excluding mergers; 11.6%; 10.1%; 9.6%; 8.2%; 9.4% Fee growth projected for 2023; 9.2%; 9.2%; 8.6%; 7.3%; 0.8% Fees per equity partner; 2,828,927; 2,453,041; 1,859,864; 1,427,888; 837,325 Fees per professional; 271,170; 255,295; 249,892; 263,748; 209,447 Fees per person; 221,451; 211,741; 208,225; 210,162; 171,337 Realization; 85.9%; 90.2%; 91.1%; 93.1%; 92.4% Average equity partner billing rate; 433; 386; 361; 316; 341 Overall net firm billing rate; 197.03; 181.64; 177.06; 172.37; 162.52 Average equity partner charge hours; 1,092; 1,120; 1,169; 1,168; 1,292 Average staff charge hours; 1,435; 1,456; 1,462; 1,496; 1,407 Staff to equity partner ratio; 9.7; 9.3; 6.7; 4.8; 3.1 Admin to total headcount percentage; 17.9%; 16.8%; 16.4%; 18.8%; 17.9% Professional staff turnover; 19.3%; 18.8%; 19.5%; 22.0%; 23.1% Utilization %; 54.5%; 55.5%; 56.5%; 57.1%; 54.1% Months of A/R+WIP; 2.5; 2.6; 2.7; 2.2; 2.4 Staff salaries/benefits as % of fees; 49.0%; 46.2%; 44.3%; 40.0%; 37.5% Overhead expenses per person; 41,656; 42,877; 40,983; 49,919; 49,686 Assurance services as % of total fees; 32.4%; 26.6%; 26.3%; 24.6%; 16.3% Average fee per 1040 return; 1,834; 1,426; 1,248; 992; 1,335 % of firms offering investment advisory; 45.0%; 28.0%; 16.0%; 17.4%; 16.7% Formal written marketing plans; 80.0%; 48.0%; 40.0%; 20.0%; 25.0% Outsource staff; 55.0%; 49.3%; 33.7%; 10.9%; 33.3% Typical new partner buy-in; 173,016; 165,492; 200,558; 145,031; 101,667 Non-equity partner position at firms; 83.3%; 72.0%; 57.0%; 32.6%; 25.0% Male/Female professional staff breakdown; 44%/56%; 42%/58%; 44%/56%; 42%/58%; 37%/63%; % female partners; 22.9%; 25.9%; 23.4%; 35.3%; 25.0% Expected acquisition in 3 years; 62.7%; 48.6%; 29.9%; 35.7%; 14.3% Average age of partners; 52.5; 52.8; 52.6; 52.9; 53.6; % of partners over age 50/60; 59%/23%; 54%/22%; 59%/25%; 55%/25%; 55%/25% Comp committee for allocating ptr income; 83.3%; 43.2%; 20.6%; 9.5%; 0.0% Formula used for allocating ptr income; 6.7%; 27.0%; 30.9%; 28.6%; 14.3% Closed compensation system–% usage; 73.3%; 38.4%; 22.9%; 11.9%; 0% Buyout method–multiple of compensation; 68.4%; 53.0%; 53.0%; 38.7%; n/a Average valuation of goodwill; 71.8%; 76.8%; 74.3%; 84.3%; n/a % of firms making ptr buyout payments; 85.0%; 78.4%; 65.0%; 60.9%; 41.7%

Revenue and Profits

Annual revenue growth nationally was 11.4%, up from 9.5% just one year before, and up from 5.7% in 2021, as shown in Exhibits 2 and 3. Revenue growth for CPA firms in the Northeast, including New York, was slightly lower at 10.3%.

Exhibit 2

Annual Growth, 2014 to 2023 (Firms Over $2 Million)

Exhibit 3

Annual Revenue Growth, by Firm Size

2023; 2022; 2021; 2020; 2019 Over $20M; 14.0%; 12.0%; 7.4%; 9.1%; 9.9%; $10-20M; 11.8%; 9.5%; 5.9%; 7.7%; 9.7% $5-10M; 10.7%; 9.5%; 6.0%; 5.1%; 7.0% $2-5M; 8.8%; 7.0%; 2.7%; 5.1%; 4.8% All firms >$2M; 11.4%; 9.5%; 5.7%; 6.4%; 7.7% Overall Growth, Size of Market 2023; 2022 >2 million; 12.1%; 10.4% 1–2 million; 10.8%; 6.6% 250k–1 million; 11.7%; 7.3% <250k; 7.4%; 6.9%

Exhibit 4

Age of Partners

Firm Size; Average Age of Partners; % of Partners Over 50; % of Partners Over 60 2023; 2022; 2021; 2010; 2023; 2022; 2021; 2010; 2023; 2022; 2021 Over $20M; 53; 54; 53; 51; 59%; 63%; 59%; 53%; 23%; 24%; 22% $10-20M; 53; 53; 53; 51; 54%; 61%; 59%; 54%; 22%; 26%; 24% $5-10M; 53; 52; 53; 51; 59%; 58%; 61%; 61%; 25%; 23%; 25% $2-5M; 53; 53; 53; 51; 56%; 58%; 60%; 58%; 26%; 26%; 25% <$2M; 54; 59; 58; 53; 55%; 59%; 75%; 59%; 25%; 42%; 43% All firms >$2M; 53; 53; 53; 51; 57%; 61%; 60%; 56%; 23%; 25%; 24%

Profits, as measured by net income per equity partner, were up by 11.8% for firms of all sizes. In New York State, results were similar. Income per partner was $676,000. Fee growth in 2023 was at 9.4% and predicted to grow in 2024 to 9.6%, the fourth highest among all the states measured in the 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, as in previous years, 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, developing a strategic and business plan, and adhering to a strong set of core values. As in past years, the growth in non-tax and non-attest clients also tends to be more profitable. Larger firms tend to offer a greater proportion of consulting and advisory services. In addition, the size of the market a firm is located in affects billing rates and profitability (Exhibit 6). Merger and acquisition activity can also affect growth rates, so the survey compares merger growth from organic growth (Exhibit 8).

Leverage

A firm’s staff-to-partner ratio (i.e., leverage) correlates closely with income per partner and therefore, profitability. Firms that have staff-to-partner ratios greater than 10:1 boast income per partner ($1,021,000) 2.3 times higher than firms with ratios of less than 3 ($438,000). Another argument for leverage is that it allows a firm to have their talent working in areas that are the highest and best use of their skill sets.

Tax Season Impact

As in the past, this year’s survey reports that firms with the highest percentage of hours worked during the busy season have on average the lowest income per partner. Clearly, there is a tremendous benefit of spreading billable hours over the year. Average staff billable hours during the tax season for all size firms ranged between 1,427 hours to 1,527 hours; this continues the trend from previous years. The firms with the highest percentage of annual hours worked during the tax season averaged around $528,000 income per partner, whereas the firms with the lowest percentage of annual hours worked during the tax season averaged $774,000 income per partner.

Mandatory Partner Retirement

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

Rosenberg reports that more than 90% of firms with >$5 million in net fees have a documented retirement system. But there continues to be a decrease in the number of firms with less than $2 million who 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 conflict that could arise in creating a retirement system.

Audit Work

For the eighth consecutive year (Exhibit 5), the firms in the lowest quartile in terms of providing assurance services (representing 8.7% of total fees) significantly outperformed all other categories. In addition, many of the consultants who contributed to the Rosenberg Survey commented that the move from compliance to advisory services also yields many opportunities. On the other hand, there are additional challenges in maintaining profitability when offering assurance services. These include pressure on fees, the inability to attract and retain qualified staff, increased regulation, and the lower profitability within their audit practices.

Exhibit 5

Audit Practice Impact on Key Metrics

Ranking by % of assurance services work done compared to total fees; % of total fees represented by assurance services; Annual Net Fees; 2023 IPP; 2022 IPP; 2021 PP; 2020 IPP Highest 25%; 51.8%; 15,665,000; 655,000; 581,000; 474,000; 469,000 Middle 50%; 24.6%; 16,957,000; 602,000; 534,000; 489,000; 473,000 Lowest 25%; 8.7%; 10,966,000; 753,000; 687,000; 634,000; 576,000 All reporting firms >$2M; 27.4%; 15,143,000; 653,000; 584,000; 521,000; 497,000

Exhibit 6

Billing Rates of Partners within the Same Population Markets

Population Range; Upper 25%; Middle 50%; Lower 25% Average Partner Billing Rate; IPP; Average Partner Billing Rate; IPP; Average Partner Billing Rate; IPP >2M; 527; 978,000; 393; 649,000; 300; 516,000 1–2M; 458; 849,000; 348; 579,000; 284; 434,000 250K–1M; 435; 612,000; 332; 560,000; 263; 349,000 <250K; 369; 633,000; 305; 645,000; 224; 300,000

New Partners

As noted by Hylan, the new partner buy-in amount decreased on average this year for firms in every category. Anecdotally, firms are trying to reduce the buy-in number to remove one more obstacle in a very difficult labor market. In 2023, the average new partner buy-in ranged from $173,000 for firms with greater than $20 million in net fees to $145,000 for firms with $2–$5 million dollars in net fees.

Client Retention for Retiring Partners

This year’s survey, backed up by the experience of the consultants at Rosenberg, indicated there is a 90–96% client retention rate when partners leave a firm. As in the past, Hylan offers some best practices in retaining clients, which includes having partner agreement provisions requiring 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 over 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.

Partner Buyout

The Rosenberg Survey presents detailed information on different partner buyout arrangements. Just as in prior years, the multiple compensation method is the gold standard across all firm sizes, particularly at firms with five or more partners. As noted for the past few years, firms of all sizes are struggling with partner retirement. As a result, firms are struggling with client transition, responsibility transition, and oftentimes leadership transition (e.g., “Who will be the next managing partner?”). Historically, for partner buyouts and firm sales, the rule of thumb when valuing a CPA firm’s goodwill has been 1× annual net fees. According to Rosenberg, for many years, internal partner retirement payments settled around the 80% mark. This figure dropped just a bit and has settled around 76% (Exhibit 7) for this year (p. 37).

Exhibit 7

Partner Buyout Systems

2–4 Partners; 5–7 Partners; 8–12 Partners; 13+ Partners 2023 Total; 2022 Total; 2021 Total Multiple of compensation; 45%; 51%; 66%; 65%; 54%; 51%; 51% Book of business; 8%; 5%; 8%; 0%; 6%; 8%; 7% Ownership percentage; 30%; 11%; 4%; 3%; 14%; 18%; 15% AAV; 13%; 17%; 10%; 23%; 16%; 15%; 15% Fixed; 4%; 16%; 12%; 9%; 10%; 8%; 10% Firms with no retirement provision; 19%; 5%; 7%; 3%; 10%; 10%; 12%

Exhibit 8

Overall Revenue Growth, Organic vs. M&A

Firm Size; 2023 Overall Revenue Increase Total; Organic; From Mergers; Merger Growth as % of Total Growth 2023; 2022; 2021 >$20M; 14.0%; 11.6%; 2.4%; 17%; 18%; 9% $10-20M; 11.8%; 10.1%; 1.7%; 14%; 11%; 20% $5-10M; 10.7%; 9.6%; 1.1%; 10%; 19%; 17% $2-5M; 8.8%; 8.2%; .6%; 7%; 23%; 67% 2023: All firms >$2M; 11.4%; 9.9%; 1.5%; 13% 2022; 9.5%; 7.9%; 1.6%; 17% 2021; 5.7%; 4.4%; 1.3%; 23% 2020; 6.4%; 5.4%; 1.0%; 16% 2019; 7.7%; 5.9%; 1.8%; 23% 2018; 7.0%; 4.3%; 2.7%; 39% 2017; 7.8%; 5.8%; 2.0%; 26%

New Metric for a New Environment

Although the past year has seen some highlights for accounting practices—it marks the second consecutive year that profits have outpaced revenue—it has not been without its challenges. People are being stretched to their limits amid continuing staffing shortages. The profession continues to struggle with the pipeline problem of a lack of new entrants to the profession. The impact of private equity continues to be felt on the structure of accounting practice and acquisition. Macroeconomic conditions, increased competition, and technology challenges represent pressures for firms that try to maintain the status quo. Hylan observes that, “doing nothing is not an option and hope is not a strategy.” Rosenberg is starting to track new metrics (e.g., net firm billing rate and net fees per person) to help firm leadership understand how to measure a changing revenue mix and maximize the best use of the people they have in today’s shorthanded environment. The survey indicates that although CPA firms may be facing challenges in changing times, there are also exciting opportunities to be had for firms that can see and adapt to them.