The past, present and future of consolidation in public accounting 

Do you remember the “Big Eight” accounting firms? If you graduated from college around 1990 or later, the answer to that question may be “no.” For earlier generations of CPAs, the following top players are likely quite familiar. 

• Arthur Andersen LLP
• Arthur Young
• Coopers & Lybrand 
• Deloitte Haskins and Sells 
• Ernst & Whinney 
• Peat Marwick Mitchell 
• Price Waterhouse 
• Touche Ross & Co. 

But times change, and merger and acquisition activity reshapes the landscape. 

In 1987, Peat Marwick announced a global merger with Klynveld Main Goerdeler (KMG), a European-based powerhouse, to form KPMG Peat Marwick, now known as KPMG. A New York Times article on the combination included a quote from John. C. Burton, then dean of Columbia University’s business school and a former chief accountant at the Securities and Exchange Commission. He said at the time, “I don’t believe this merger will lead to others. There are clear economies to be realized in this merger, but my own feeling is that it is unlikely two Big Eight firms would get together, basically because the fit won’t be as good and the politics of convincing the partners to go along will be too difficult.”1 

Burton could not have been more wrong. 

In 1989, Ernst & Whinney merged with Arthur Young to form Ernst & Young, now known as EY, and Deloitte Haskins and Sells merged with Touche Ross & Co. to form Deloitte & Touche, now known as Deloitte. 

In 1998, Price Waterhouse merged with Coopers & Lybrand to create the firm now known as PwC. Only four years later in 2002, after the fallout of Enron and other corporate scandals, the Big Eight was down to the Big Four. 

In many ways, the KPMG transaction was the catalyst for a wave of mergers and combinations that has taken place across the accounting profession over the past 30 years among firms of all sizes. In this feature, we look at what motivates “the urge to merge” and examine the implications of continuing consolidation within the profession. 

Strategic drivers 

There were many factors influencing the alteration of the accounting landscape that have become clearer in hindsight. The following five reasons, though, may have been at the top of the list: 

• Global reach: Even the largest firms had gaps in their global networks in terms of geographic coverage. As service providers to the largest companies in the world, with operations around the globe, it was important for these firms to be able to offer a consistent quality of service in any country where clients had operations.
• Economies of scale: Combining two large organizations provided an opportunity to consolidate backroom operations and drive cost synergies. One firm did not require two national offices, two recruiting organizations, two IT platforms, etc. Savings were in the hundreds of millions of dollars globally.
• Diversification: It is hard for one firm, even large ones, to be an expert in everything. Combinations lead to more diversified businesses from multiple perspectives, including practice areas, depth of technical knowledge, and industry expertise.
• Financial strength: Coming together resulted in more capital and stronger balance sheets, particularly after several years when merger integration was largely complete, enabling the organization to make necessary strategic investments essential for future growth. 
• Attract and retain talent: Success in professional services is all about the quality of a firm’s human capital. Size and depth position a firm to invest in their people, offer interesting client assignments and learning opportunities, and, ultimately, provide financial rewards and incentives that will keep people with the firm. 

These factors continue to motivate mergers of all sizes, particularly as firms endeavor to keep pace with a rapidly changing technology landscape. It is interesting to note that the current Big Four have completed dozens of acquisitions in the past decade, often designed to expand their growing advisory practices by adding technology skills and capabilities in new areas, like artificial intelligence and blockchain. Look at the “About Us” section of Deloitte’s website. The firm states, “A key component of Deloitte LLP’s strategy is growth through acquisition. We will not be able to achieve our expansion goals through organic growth alone. We also need to acquire companies that will significantly accelerate our growth and profitability.” 

Segmenting the market 

There are many ways to think about the CPA firm marketplace. Joel Sinkin, president of Transition Advisors LLC, an adviser to buyers and sellers on CPA firm mergers and acquisitions, breaks the marketplace down as follows: 

• The Big Four
• Top 100 Firms (excluding the Big Four)
• The G400 Firms (101 through 500) 
• Smaller multi-partner firms 
• Sole practitioners 

It’s too early to know the specific impact the pandemic will have on firm merger and acquisition transactions, but according to Sinkin it appears that the pace of consolidation had been increasing until the onset of the pandemic. The trend will likely return once the pandemic subsides, particularly with respect to smaller multi-partner firms and sole practitioners. It is estimated there are about 45,000 CPA firms in the United States; the vast majority of these fall into the last two categories. 

Merger activity among the top 100 

Firms that fall within the top 100 are often motivated to build out their geographic footprint and representation in different parts of the country. An example would be Baker Tilly US LLP, a firm with Midwestern roots, acquiring ParenteBeard, a large East Coast firm in 2014 to ensure a presence in the densely populated northeast corridor. In the summer of 2020, Baker Tilly also acquired Squar Milner of Irvine, Calif. According to INSIDE Public Accounting, “the deal adds Squar Milner’s established client relationships and on-the-ground local presence in California to the Baker Tilly portfolio.” The combined firm will have a workforce in excess of 4,000, a coast-to-coast presence, and revenues approaching $1 billion.2 

Other drivers of mergers and acquisitions in this segment include the desire to expand service capabilities beyond core assurance and tax and the acquisition of talent. EisnerAmper LLP recently described its combination with Compensation Resources Inc. (CRI) as follows: “As companies continue to face complex organizational changes and human capital challenges, combining with CRI represents a strategic move that bolsters EisnerAmper’s Consulting Group and provides yet another value-added service that clients eagerly seek.”3 

Cherry Bekaert, a firm based in Richmond, Va., added “six experienced professionals” to its credits and incentives practice when it acquired The Tax Advantage Group in a deal announced earlier this year. From the acquired firm’s perspective, its founder was quoted as saying, “Joining Cherry Bekaert, one of the top 25 largest CPA and consulting firms in the country, provides an expanded platform for us to better service the growing demand of our client base.”4 
Firms in this segment are not just doing the acquiring; they are also being acquired. According to the AICPA, 39 of the firms that were part of the top 100 in the year 2000 no longer existed as of 2019. 

Other market segments 

In 2018, G400 firms were the acquiring or successor firm in 57 mergers or acquisitions that we know of. Forty of those transactions involved merging in smaller multi-partner firms or sole practitioners, and 11 were acquisitions of non-CPA firms. In the same year, 11 G400 firms were merged into other firms – nine by top 100 firms and two by other G400 firms. One-half (48 out of 96) of the acquisitions by top 100 firms were merging in firms smaller than the G400 firms.5 
Over much of the past decade or two, the demand for acquiring smaller firms primarily was from firms seeking growth and long-term stability. It was essentially a seller’s market: 

Most geographic markets had a significant number of firms that were able to acquire smaller firms, which created competition between potential acquirers. 

Smaller firms frequently could be merged in with little or no increase in infrastructure, resulting in high incremental profit margins for acquiring firms. 

Due to limited resources, organic growth through practice development was not seen by many firms as an attractive alternative to acquiring other firms, which could create immediate growth of up to 50%. 

In the coming years, the baby boomers who founded or helped grow CPA firms will be looking to exit the workforce and secure their retirement in greater numbers. Many do not have a logical successor and have not invested the time to find one. The lack of planning in this area can negatively impact the value of a franchise, particularly if the firm needs to negotiate while in crisis mode due to a founder’s unexpected health issue. 

AICPA’s Private Companies Practice Section (PCPS) CPA Firm Succession Survey in 2016 predicted that the merger market for small firms would be robust in the short term. However, as a result of an increased number of firms in play, the market could get soft at the end of a five-year period. Indeed, in a 2019 Accounting Today article it was noted that the number of potential merger partners who will be interested in firms having a near-term need for partner succession through an upstream merger has narrowed. This trend will, in all likelihood, continue. For those firms who are able to attract an interested acquirer, they will likely drive a harder bargain.6 As such, the conventional wisdom is that it is a buyer’s market, except for smaller firms in densely populated markets. 

The purpose of the PCPS CPA Firm Succession Survey was to update the profession’s understanding of the challenges that succession planning poses for CPA firms, together with the actions CPA firms are taking to address those challenges. Of the more than 800 respondents to the 2016 survey, over 380 sole proprietor firms participated. Unfortunately, as was the case in the 2012 survey, the 2016 survey revealed that the majority of sole proprietors operate without succession plans. Only 10% indicated they had one in place. The results were comparable for multiowner firms: less than half surveyed had succession plans in place.7 

There are four ways to wind down a career as a CPA firm owner. The first is to simply close shop one day. This option means the CPA remains in control until the end, but the downside is the practice will have little or no residual value. Internal succession is a second option. Like other segments, smaller firms should consider the fact that technology will disrupt the profession as we know it in the coming years. The number of hours devoted to attestation and tax compliance services will decrease significantly due to automation. Consulting and other advisory services will drive growth for most firms in the future. In this environment, a large number of local firms may realize they do not have the cash flow or talent to execute an internal succession plan. The third option is a sale of the practice, and the fourth is an upstream merger. 

The terms “merger” and “acquisition” are often used interchangeably. In a sale, the practice owner does not retain ownership in the successor firm. In a merger, the owner exchanges practice ownership for ownership in the successor firm. A sale is a common succession solution for sole proprietors and other small CPA firm practices. The larger the firm is and the greater the number of partners, the more likely the solution is an upstream merger or a combination of some partners selling and some partners merging. The issues that small-firm owners should consider in a merger are many; they are extremely important but beyond the scope of this article. We will, however, mention that CPA firm owners should be aware that taking on a significant or longer-term office lease commitment can have a negative impact on their desirability to a potential acquirer, particularly in an increasingly virtual/remote work environment. According to Sinkin, “Leases can be an albatross to getting a deal done.” 

Suffice it to say, small-firm owners need to be cognizant of the market and how their firms evolve. Those who prepare for succession, embrace change, and transition in a sustainable fashion should find success. Developing talent through training and creating a path for future firm leaders is extremely important. Diversification is a risk mitigation strategy both for those that remain independent and those who want to make themselves more marketable for succession through a merger or acquisition. The prospects for a successful upstream merger are more likely for firms that have strong niches in consulting and advisory services and for firms that have an outstanding reputation or a wealth of young talent. 

Conclusion 

The continuing consolidation in the profession is affecting firms of all sizes, and it is advisable for CPA firm leaders to proactively address the strategic implications of this trend on their business and future direction. It is also evident that advances in technology and the expansion of advisory services are blurring the lines between traditional CPA firm business models and consulting-oriented/service models. Beyond firm owners and partners, other constituencies will be affected by these developments: 

• Clients: Hopefully, they will receive enhanced service and benefit from expanded capabilities. But how will larger firms and increasing automation impact the client experience?
• Staff: Will their career growth opportunities expand or shrink in a world with fewer firm choices?
• Regulators: What are the public policy implications of consolidation? Will there be sufficient competition and choice, particularly among the largest firms? Are more conflicts of interest and potential independence issues likely to be experienced in the audit marketplace?
• Academic community: How can universities better prepare students and future CPAs for a new accounting world? Should students consider taking additional IT/MIS courses to achieve their 150 credit hours? 

Most importantly, how will continued consolidation impact the profession’s ability to effectively serve the public interest? For over 100 years, our profession has thrived because we collectively treated this as our highest priority. That focus has served us extremely well and hopefully will not be lost as the “urge to merge” drives continued consolidation in the profession and accounting firms add more “non-CPA” advisory services to their rosters.   

Jerry J. Maginnis, CPA, is a board member and audit committee chair for inTEST Corp. in Mount Laurel, N.J., independent director and chair of the audit committee for Cohen & Steers in New York City, executive in residence for Rowan University in Glassboro, N.J., and a member of the Pennsylvania CPA Journal Editorial Board.

David D. Wagaman, CPA, is professor emeritus in accounting at Kutztown University of Pennsylvania in Kutztown and a member of the Pennsylvania CPA Journal Editorial Board.

The authors wish to thank Joel Sinkin of Transition Advisors for his valuable input to this article. 

1 “Marwick, KMG Plan to Merge,” The New York Times (Sept. 4, 1986). 
2 INSIDE Public Accounting (Sept. 12, 2020). 
3 EisnerAmper press release (May 5, 2020). 
4 Cherry Bekaert press release (April 1, 2020). 
5 “Go Beyond,” AICPA (January 2019). http://winning-is-everything.com/assets/files/Go_Beyond_-_Koziel.pdf&nb…;
6 Terry Putney and Joel Sinkin, “What’s Driving Upstream Mergers?” Accounting Today (June 3, 2019). 
7 www.aicpa.org/interestareas/privatecompaniespracticesection/strategy-pl…;

Reprinted with permission from the Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of Certified Public Accountants.