Chris Geier, the CEO and managing partner of Sikich LLP, a Top 100 Firm, has been watching what is going on at Deloitte and wondering whether the next CEO will be a CPA like Deloitte’s current chief executive, Cathy Engelbert.
The Deloitte board recently informed its partners that Engelbert, who is the first female CEO at Deloitte, hasn’t been re-nominated for a second four-year term, as traditionally occurs for most of the firm’s chief executives (see Deloitte CEO Cathy Engelbert not nominated for a second term). Nevertheless, Engelbert could still be nominated again by Deloitte’s partners for another term, according to The Wall Street Journal, and now there is reportedly a clash behind the scenes between some of the partners and the board (see A ‘Fight Club’ remake, starring only accountants).
“Our partnership has a longstanding succession process that is conducted every four years,” said a statement forwarded last week by Deloitte spokesperson Jonathan Gandal. “We are in the early, board-nominating committee stage of that process, which will include input from our partners, principals and managing directors and culminate with a formal leadership election in early 2019. We will provide an update at that time.”
Sikich CEO Geier admitted he doesn’t have any inside information about what is going on at Deloitte and he doesn’t personally know Engelbert, but he does see signs of a larger trend at work. He was elected in 2016 to succeed the firm’s founder, Jim Sikich, and took office on Jan. 1, 2017 (see Sikich elects Geier as next MP).
“It’s not a dissimilar situation in terms of the type of business and the revenue streams that we’re building here at Sikich,” he said. “In 2017 almost two-thirds of our firm’s revenue is of the non-traditional CPA A&A and tax. With Deloitte, similarly, their consulting business made up almost half of their U.S. revenue and then a much smaller piece from audit, less than 30 percent. It’s kind of the same with Sikich. The reason I was elected CEO at Sikich is that I’m not a CPA.”
Geier also sees parallels with what is going on at another Top 100 Firm, Armanino LLP, which announced in March that COO Matt Armanino will be taking over from his brother Andy Armanino as managing partner next January (see Armanino announces leadership transition).
“But for myself and soon Matt Armanino, in 2019 when his brother Andy steps down, we may very well be the only two Top 100 or even Top 50 or even less, Top 30 probably, CEOs of firms like ours that aren’t CPAs,” said Geier. “The way our board looks at it, and then our partnership that elected me, is that this is becoming a very complicated business. It’s not the CPA business of the past anymore. When you start talking about revenue streams, in Deloitte’s case consulting is 48-plus percent of their overall firm revenue. You probably get into a situation where consulting partners and board members are looking at something like that and saying, ‘What is leadership representative of? What is soon to be coming and making up the bigger piece of our business?’ I could see that because that’s what happened here at Sikich. I’m sort of a living, breathing, walking example of that. Here at Sikich, we were near two-thirds nontraditional last year in ’17 and we’ll probably be two-thirds this year.”
Geier believes technology will play an important role in forcing more accounting firms to focus on revenue from consulting. “My vision of the industry as it relates to tech and the disruption of technology and what that looks for professional services, I have a pretty strong point of view about that,” he said. “We’re probably seeing that even among the largest firms in the country. You’re certainly seeing that diversification of those revenue streams.”
He isn’t sure whether Deloitte would go so far as to make a non-CPA its next CEO. “I don’t know,” he said. “It’s very possible. That’s becoming a much bigger piece of their business. You might question if it’s becoming a bigger piece of the business, why do we have a person who is running the audit practice, which is what Ms. Engelbert did before she became CEO. Why not somebody that has a different background for that role? That would make sense to me. It’s not that audit is not part of the strategy going forward. It certainly is. We all know, though, that audit revenues are under significant pressure. The margins are getting compressed.”
Spinning off Audit
He pointed to PricewaterhouseCoopers’ recent decision in February to sell its U.S. Public Sector business to the private equity firm Veritas Capital (see PwC sells its U.S. public sector business). “You saw what PwC did with their government auditing practice,” said Geier. “They spun it off. It’s not that it’s not still part of the strategy overall going forward, but I think the real future in these firms are the ones that have the ability to understand the effects that technology will have on their clients’ businesses and consult around that. It’s sort of a professional services wrapper around technology is how I describe it.”
He sees Deloitte heading in a similar direction. “Almost 50 percent of their revenue is consulting revenue and only 28 or so percent is audit,” said Geier. “The understanding in the market of what these firms are capable of doing comes down to improving business performance. That’s a big piece of it. They certainly are more about strategy and process and technology, whereas in the past they all grew up as accounting firms.”
He sees more of an emphasis at firms like Deloitte and his own on capabilities like human capital, artificial intelligence, blockchain, machine learning and robotic process automation.
“I think that that’s where they want to be: on the forefront of that transformation,” said Geier. “I believe this because that’s what we’re doing. We’re just doing it in the middle market. We’re pedaling hard to do that as well and not in a dissimilar way as I talk about our revenue streams. We’re already pretty diversified today and just becoming more so. We’re doing all the same things around AI, analytics, blockchain, cloud technologies, digital transformation, and internally agile. All those are things that we’ve really been jumping on in earnest in the last 18 months here at Sikich.”
While Deloitte is more focused on Fortune 500 clients, according to Geier, Sikich aims for middle-market clients. In Europe, there has been increasing pressure for the Big Four to spin off their auditing practices. Geier pointed to what happened in the U.S. in the wake of the Sarbanes-Oxley Act of 2002.
“That happened once already in the last 20 years and all the auditing firms had to spin off consulting,” he said. “Of course now, they’ve built them back again. The reality of it is they all have them again, and they’re big and bold. It didn’t take long to rebuild them because they have these big enterprise clients that are huge consumers of consulting. As long as regulation doesn’t get in the way, they’ll operate like this.”
Even with the large consulting practices, Geier still sees future demand for audit services that can be delivered at a profit. “Look, audit is still a good business,” he said. “And when the technological solutions really hit the compliance area, it’s going to be a good, profitable business. Now, from an audit perspective, there is a lot of fee compression, but that doesn’t mean there’s not going to be some form of audit in the future, or some sort of compliance-related function in the future, that is aided by technology. It’s not going to go away and I don’t think the profession is going away. That’s certainly not the case. But the real money is in these performance initiatives that allow companies to perform better, the technological advancements around cyber, AI and BI [business intelligence].”
He said his motto at Sikich has been to “embrace change and learn to adapt because it’s inevitable in business.” “For the firms that aren’t doing that, I think there’s going to be significant consolidation probably in the top 30,” said Geier. “There will be a lot fewer firms around two, three or four years from now. That’s for sure. The amount of disruption that technology’s going to bring to this industry, and it’s ripe for right now, we see it as just a whole bunch of opportunity. It’s just a really exciting time right now to be in this industry.”
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