Here, Accounting Today staff writer Melissa Klein talks with Gary Shamis, managing partner of Saltz, Shamis & Goldfarb in Cleveland, and chairman of the American Institute of CPAs management of an accounting practice committee, about how consolidation is already changing the accounting industry, how the consolidators are changing their strategies, and what lies ahead for the profession.
Q: How are accounting firms currently reacting to consolidation of the industry?
A: Firms are becoming much more cautious. Originally, there were a lot of knee-jerk responses. A lot of firms concluded that consolidation was the way things were going, and they didn't want to be left out, so they moved quickly. Firms continue to consolidate, but they're far more careful -- they're asking more questions. They're more strategic in their decision-making. That's evident in the fact that the number of deals has gone down, but the total dollar volume of the deals hasn't.
Q: How, if at all, have the strategies of the major consolidators changed since the roll-ups picked up speed?
A: H&R Block's strategy is significantly different. They've taken a 180 degree change in direction. At first, their strategy was similar to the other consolidators - they acquired entrepreneurial firms in major markets, one at a time. With the McGladrey deal, they've changed the way they're consolidating. I've had some discussions with them about their strategy. Now they're looking at firms that fit with McGladrey. With American Express, there hasn't really been a change in the way they do business it's methodical. Century has slowed their pace almost to a halt. Some of that could be because their stock wasn't doing as well.
Q: Since the consolidators first appeared on CPAs' radar, there's been talk about the consolidated firms potential to develop synergies that would give them an edge in the marketplace. Have consolidated firms begun to develop any type of synergy?
A: I think it's been harder than they thought and slower in coming for them to develop into national organizations. The ultimate goal has to be for the firms to work together harmoniously in the marketplace. People talk about the benefits of consolidating, like developing economies of scale and best practice models. As part of an independent regional firm, I can't see yet where those synergies are making my life more difficult. Right now, the consolidators are still focused on market share. They have a ways to go.
Q: How have the structures of the deals and the prices changed since the feeding frenzy began?
A: The deals haven't really changed. There was speculation early on that the prices would go up, but the prices have been pretty constant. The purchase price typically is a multiple of about six times the cash flow that the firm can give the consolidator, or about one times their gross billings. That may change. Firms are making deals more carefully. Consolidators still need to pick up geographic areas.
Q: How, if at all, do you think law firms will fit into the picture?
A: My speculation is that law firms will become a factor in a year or two. A lot has happened. The multidisciplinary practice committee of the American Bar Association is softening its position on allowing fee-splitting. The model of the Big Five firms in Europe has been successful. I think they'll continue to drive toward that. The rank and file have become aware, and have moved it up on their list of priorities.
We've been approached by three law firms already, in anticipation of the change in the law. Firms are acutely aware of what could happen. Accounting firms are expanding their services into specific aspects of legal firms.
If accounting and law firms align, it will change the dynamic of getting referrals. A law firm won't send client opportunities to a CPA firm that's merged with another law firm. In a small city or town, that combination will rule the marketplace. But it will be a lot different tin big cities.
Is it the right thing to do from the consumer standpoint? If you believe in the notion of one-stop shopping, it probably is. It would make it easier to buy services.
Q: Do you see any other big players coming into the market?
A: There's been a lot of speculation over the past two years. There are four major players. The marketplace probably can't hold more than one or two more. As the four major consolidators continue to evolve, the number of firms that fit their strategy is dwindling. There's not a lot of room left. But I wouldn't rule out a financial services company buying out one of the consolidators. Think about it. Take any large financial services company. When they want to get into a new business, how do they do it? They buy a company in that marketplace. To get into the CPA market, a company had to buy CPA firms one at a time, until now. It would be far easier to buy a consolidator than to make individual acquisitions.
Q: As the chair of the AICPA's MAP Committee, what is the AICPA doing to help?
A: The AICPA has a task force from a small-firm advocacy committee looking at how to provide information for smaller firms on consolidation. They're also working on a turnkey investment services product, including education, products, etc., to help firms be more competitive.
A lot of independent firms have changed their model to broad-based financial services companies. Most firms have been doing well for the past five years, largely because we've had a good economy. Accounting firms have to evolve to become something different. Our core services are declining. General ledger and write up services are pretty much gone. Income tax returns are being done more and more by computer. The 1040 business is next to be changed by technology. Firms need new value-added services. When Accounting Today did its annual survey of the Top 100 firms, the top growth areas were not in accounting, tax or audit. The challenge is to get the message to small firms, which are slower to change, and the majority of CPA firms are small.
Many firms are sitting and waiting. There are questions that haven't been answered. There's a lot more wait and see.
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