Small accounting firms are dealing with some big headaches
Life can be tough for the small firm. For every new development and obstacle being discussed by larger firms and the profession, it should be remembered that small firms have to work twice as hard to address the same issues, with limited resources and time to keep up. Three experts in the field recently shared what they think the future holds for small firms and, more importantly, what the firms can do about it.
While “small” covers a slew of sizes and services, their concerns remain mostly uniform. According to the recently released American Institute of CPAs’ 2017 PCPS Top Issues Survey, which included small firm offices ranging from sole practitioners to businesses of 20-plus, finding and retaining staff, succession planning, and bringing in new clients were their top concerns.
Marc Rosenberg, president of Chicago-based consulting firm The Rosenberg Associates, feels that finding and keeping the right people is ground zero for small firms going forward. “This is a huge problem for larger firms, so imagine the difficulty for small firms,” he said. “I often risk offending smaller firms by asking them the following question: Why would a smart, ambitious young staff person want to work for a tiny firm, with limited advancement, development and compensation opportunities, when they can work for larger, more sophisticated, dynamic firms?”
Sandra Johnson, managing partner of Johnson, Kass & Greenberg CPAs in New York, believes that in order to address staffing issues, small firms will need to start reinventing themselves to prospective employees, to a degree: “Smaller firms must be more creative when it comes to finding and retaining qualified staff. Clearly we cannot compete with the larger firms when it comes to competitive salaries. I have always offered my staff flexible schedules, additional vacation time, and work very hard to create a fun and happy work environment.”
Carl Peterson, vice president of small firm interests at the AICPA, agrees. “More and more, what we find is that human capital is where the real value of a firm lies,” he said. “Protecting that piece may require looking at policies and operations to make sure you remain attractive to younger workers.”
Technology is vital. “Firms have limited funds to spend on technology, yet the need to upgrade and protect the security of our clients is critical,” said Johnson. “I believe this is a direct threat as to whether or not the small-firm unit will continue.”
Johnson also feels current business trends could put audit work on the chopping block. “It is becoming more and more difficult to find peer review firms that the small firm can afford,” she said. “Compliance requirements become increasingly difficult for all CPA firms but especially for the smaller firms. I believe it is only a matter of time before the small firm will no longer be able to do audit work. This will cause severe hardship for the small business or nonprofit organization that needs audited financial statements.”
Where should small firms focus most of their business efforts? Rosenberg says the “hands-down winner” is consulting. “Small firms think they are too small to do consulting, but this is a self-imposed limitation,” he said. “Small firms need to staff up to free their time to perform consulting services.”
“[Firms] have some options, particularly if you’re just starting out today,” said Peterson. “Tax and audit are still the main categories for most smaller firms, but we’ve seen small to midsized practices thrive with client accounting services, which also helps ease some of the seasonality/workload compression issues that many smaller firms grapple with. We also think advisory services across the board are going to grow in importance.”
Added Johnson: “I spend a lot of time lecturing to and teaching small-business owners [and] one of the biggest complaints I hear is that their accountants don’t explain what their financial statements mean or how to use the financial statements to grow their businesses. Small CPA firms are leaving money on the table by not offering these services.”
THE ONCE AND FUTURE FIRM
Another potential cloud over small firms’ heads is how to best handle the future of their practice, relating to succession and M&A.
“It really depends on what the small firm has been doing in the past few years in terms of investment regarding technology, specialization in services, and adopting of innovative practice management techniques,” said Peterson. “All of those can add value and make an M&A scenario more likely than just a straight sale of the client roster. If you haven’t thought carefully about your exit strategy, you really limit your options and your leverage in negotiations.”
Johnson is more pragmatic: “I believe small firms are more likely to merge or be acquired by a large firm. The number of younger CPAs going into small practice is declining drastically. There are many larger firms still looking to acquire new business. Many small firms are not preparing their practice for sale. They have aging clients and do not look to bring in younger clients to make the practice more attractive for sale. Many small firms also do not charge clients competitive fees, making them less attractive for purchase.”
Even if this is true, Rosenberg believes there will always be a place for small firms. “Statistically, because succession planning is so elusive to small firms, it is likely that many will eventually merge out of existence,” he added. “But … there will always be a place for small firms simply because most larger firms’ growth strategy has no provision for small clients and/or a large 1040 practice, the bread and butter of many small firms.”
ENOUGH ROOM FOR EVERYONE
Small firms must focus on what only they can offer. “In terms of thriving, taking the time to do a strategic review of your firm may sound like a luxury when you’ve got tax season bearing down on you, but it’s also critical to assessing your team’s strengths and weaknesses and setting goals,” advised Peterson.
“There will always be small firms,” said Rosenberg. “I’ve been in the CPA firm business for 30-plus years and in every one of those years, pundits predict the demise of the small firm. This is hogwash. The main reason for this is that the CPA firm market is so robust there is plenty of room for all players. Most larger firms have plenty of clients … and grow every year. Therefore, larger firms can afford to be choosy about the kind of clients they accept. This leaves a huge universe of smaller firms willing to make a very nice living on clients that are not a good fit with larger firms ... And the flip-side is true. There will always be smaller clients that prefer the personal touch they receive from smaller CPA firms.”