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The Perfect Storm Is Coming for Our Profession

 

By Bill Reeb, CPA, CITP, CGMA
Co-Founder and CEO, Succession Institute

What a title...“The Perfect Storm is Coming for Our Profession!” This may sound overly dramatic. It also may sound very ominous. But it also may come across as somewhat hokey as well. However, I do believe the perfect storm is sitting in the Atlantic Ocean, far away, but definitely heading right toward us. We have plenty of time to prepare, as long as we start preparing right now. And depending on how we prepare, in my opinion, we can avoid most of the devastation that could be caused by being in its wake. 

In fact, quite frankly, we may be able to turn some of the storm’s energy into our advantage. Or, we simply can play ostrich and pretend that the storm is fake news. In that case, we are likely to watch the most valuable assets we have, our livelihoods and the profession we have worked so hard to nurture and build, be irreparably damaged by the storm’s surge.

What am I talking about? For something to be considered a perfect storm rather than just any common storm, multiple high-impact conditions need to be on a collision course targeting the same destination to create a devastatingly damaging environment. Some of those conditions (briefly mentioned below with more to follow on each one) are:

  1. The demographics of our profession.
  2. The impact of demographics on the sale or merger of CPA firms. This will likely be the catalyst for a declining market value of CPA firms due to a more competitive acquisition landscape that will disproportionately impact our smaller CPA firm owners, and in many cases the value of their largest single asset, as they move into retirement.
  3. The integration of technology and robotics in processing transactional accounting work will lead to the decline in revenues produced from delivering our firm’s traditional services in the future.
  4. Our global economy continues to open up our marketplace in the United States to new competitors offering traditional services at much lower prices.
  5. The accelerating need of our professionals to have very strong technology skills in data analytics, automated accounting systems and processes in order to continue to be able to perform our jobs in the future. We will need to be able to shift from simply working around the automated systems to working through them, as well as to be capable of challenging how those systems are making decisions.
  6. To continue to sustain the accelerated success our profession has been enjoying for the past few decades, we can’t achieve this by doing what we have always done. We have to be able to shift our services to deliver higher value to our clients.
  7. To deliver higher-valued services, our skill sets and competencies need to evolve at a very rapid pace. Not only are most organizations NOT addressing this at a fast-enough pace, even those that are making the investment in competency development are often doing so more on the technical side than on the “soft-skill” side. The problem with this is that, when you look at where our profession is heading with service delivery, I believe the quality of those “soft skills” will prove to be a greater predictor of our future success than the technical ones.
  8. The mergers, amalgamations, or joint ventures that cross national borders for the United States/United Kingdom, Australia/United Kingdom, and Australia/New Zealand that are in a state of flux.
  9. The licensure issues within the United States with 1) young people less interested in following a rigorous path to licensure and 2) many grass roots campaigns underway in various states legislatures to eliminate licensure, even at the CPA level, all together.

Any one or two of these nine factors by themselves, in storm parlance, would be enough to create a very damaging weather phenomenon. But when you consider all seven of those conditions converging on our profession in the same five-year period, my perfect storm analogy is NO hoax, it is NOT overly dramatic, and it will likely be VERY ominous to our profession and our professionals if we don’t start taking seriously how we need to change now, and be willing to change in a big way.

The Demographics of Our Profession

When you look at American Institute of CPAs (AICPA) membership, although it does not include all CPAs, it is a reasonable representation to make a point. Baby Boomers, as compared to the combination of those classified as Generation X and Millennials, represent about 43 percent of AICPA membership (according to an AICPA presentation sharing 2017 data on regular voting members, which excluded honorary members [Baby Boomers and those older than Baby Boomers], college students, CPA Exam candidates and associate categories). For clarity, the Baby Boomer group is comprised of those born between 1946 to 1964, with the first entrants of that group turning 73 this year, and the last turning 55.

Simply put, our profession, like most every profession in the United States, has a lot of Baby Boomers who can now see their personal horizon for winding down their careers. Many of them are not in the mode of, nor do they have a strong appetite for, reinventing themselves and their skills sets to compete in the decades to come. The coming decades requiring this reinvention are referred to by many as the beginning of our fourth industrial revolution (the expansion of cost-effective capability due to advanced technology and robotics solutions).

When you consider the appetite for change within the rank and file of our profession, a profession that has never done better economically than we are currently experiencing today, the change that is being embraced by the vast majority of firms is, at best, one of continuous improvement (or small incremental changes). This certainly shouldn’t be a shock as there is a common saying that supports this position, which is “if it ain’t broke, don’t break it!” How can a profession doing better than it has ever done before be broken? 

The fact is we are NOT broken now!! But there is a storm on the horizon coming our way, and after it hits, we are not prepared for the aftermath. Storms hit fast and when they are devastating like this one is poised to be, people can’t believe how their lives change in an instant. Get out of your comfort zone, look at the signs on the wall, read the tea leaves, or do whatever it takes to understand how and why our profession will be changing soon. If you have a few people in your firm with a short horizon to retirement who want to ride out the storm by doing what they have always done, then great. That might be the perfect path for them to retire. But don’t let those people put your firm in a position where you are NOT ready for the storm that is brewing. It is time to stop talking about change, and start doing it. It is time to start re-engineering our firms to make the changes that the fourth industrial revolution is calling for.

The Impact of Demographics on the Sale or Merger of CPA Firms

Due to the number of CPAs in our profession entering their retirement window during the next five or so years, and given the number of single owner firms that will be in the market to sell (or merge to sell), the landscape for mergers and acquisitions (M&A) of small firms will seemingly overnight become a buyer’s market. Acquiring firms have a limit as to how many organizations they can successfully assimilate into their cultures at a time. For most, that would aggressively be about one per year. Therefore, as the number of sellers grow, with the buyers being limited as to how fast they can take on the next opportunity, we believe the basic tenants of economics will prevail. Prices will begin falling as the availability of sellers will outpace what the buyer can successfully assimilate. We expect this to create an M&A mania within our profession that will make the past M&A frenzies seem calm. This will not only be fueled due to the baby boomer generation reaching ages that are historically older than past retirement ages, but also because CPAs are choosing to retire later in life, which then exacerbates the situation by adding in a number of unexpected short-notice transitions caused by personal medical events. The fact that retirement plans for many small firm owners assume they will receive a strong market value when selling their firm only makes this storm even more personally devastating.

We already see M&A stressors in the market now. For example, according to the AICPA Private Company Practice Section (PCPS) and Succession Institute Succession Planning Survey, conducted every four years, with the last survey occurring in 2016, here are some disconnects to consider:

Based on the 2016 survey, 40 percent of the group, comprised of sole proprietors and solo practitioners, plan on retiring in the next five years. Now, our experience says that a lot of people say they are going to retire within the next five years because it is that perfect place of non-accountability. In other words, my retirement is far enough away that I don’t need to do anything different right now, but short enough to say, “I can just do what I have always done and not worry about the changes in the marketplace because I will be phasing out soon.”

To me, this means that a large percentage of small public accounting firms are going to want to position themselves to keep things the same just long enough for them to transition into retirement, which will be soon. That perspective can create a crisis within our profession because we can have large factions fighting for change to make sure our profession is as strong or stronger in the next decade than it is today, with another large faction just wanting to keep things from changing too much so their skills and capabilities will be relevant until the day they decide to hang up their shingle.

Let’s say that this 40 percent number, which is huge when you consider how many firms might be gone in five years, is an exaggeration. While it might be, and even if it is and is only half-way correct, that is still a great deal of transition coming soon. But we believe this 40 percent number is truer than it has ever been because of the answers to this next question: “At what Age are you expecting to fully retire?”

Nearly half of this group (48 percent) plans to retire at age 70 or older, while 16 percent plan to retire at 75 or older. Given that the full Social Security age for Baby Boomers is likely prior to or near age 67, as you can see, people are deciding to work longer. The longer people decide to work, the more likely medical and other family issues will end up being drivers of the final retirement decision date.

Consider that, according to 2017 data, about 140,000 members of the AICPA are Baby Boomers, and that the age of a Baby Boomer in the middle of that span of years is turning 64 this year (1946–1964), and there are large number of solo owners of CPAs that are saying they are going to retire by age 70 (56 percent say they will retire between 65 and 70 years of age). This confirms, in my view, that the planned five years until retirement stated in the first graphic is very real. It syncs up with the planned age of retirement and with the demographics of our membership.

If you are starting to see that there is some evidence that many firms will transition in the next five years, let’s go over a significant disconnect working against our small firm owners. First, our small firms are flying blind. They don’t have a plan to transition their firm to another generation (they are single owner firms), nor do they have another firm signed up to buy them out. Consider this graphic covering 12 years of data gathering. When asked, “Do you have an existing written Practice Continuation Agreement?," the percentage answering "Yes" never got into the double digits.

As you can see, our small firm owners have not made it a priority to put together a Practice Continuation Agreement because for as long as they have been around the marketplace, selling a CPA firm practice has not only been pretty easy, but pretty consistent. You could sell your practice, depending on the makeup of your clients, for anywhere from 75 cents on the dollar to up to 150 cents on the dollar. To be sure, the most common answer in the survey was a dollar paid by the buyer for a dollar of revenue received by the seller. The problem is that while that is still pretty true today, the stressors, as I mentioned earlier, are changing what is behind that statement, which will have a definite impact on the overall price of the acquisition. To put it bluntly, while “a dollar for a dollar” is still a commonly referenced term, there is a giant gap between what the seller and buyer thinks that means, which once again, only raises the intensity of the possible brewing storm.

When we asked the solo owners what they thought they would get for their practice, here is what they said (and let’s assume that everyone was talking about the purchase price of “a dollar paid for a dollar of revenue,” which is not really true, but any price disconnect for revenue is not actually the scary factor). The question was, “Which best describes your expectation regarding financing the sale of your firm?” The answers were:

  • Down payment with a fixed amount based on annual revenues at the time of sale to be paid over a specific number of years: 38 percent
  • Down payment with an amount based on revenues for clients retained by the buying firm to be paid down over a specific number of years: 28 percent
  • Payment in full up front based on annual revenues at the time of sale: 16 percent
  • No down payment, but a fixed amount based on annual revenues at the time of sale to be paid over a specific number of years: 8 percent
  • No down payment with an amount based on revenues for clients retained by the buying firm to be paid over a specific number of years: 7 percent
  • Other: 3 percent 

When you focus on the words in bold, and then add up their corresponding percentages, you will quickly see that 62 percent of the solo owners in this survey expect to sell their CPA practice based on the fixed amount of their annual revenues at the date of sale.

Now, let’s consider the next question that we asked. This one was posed only to those people who had actually bought practices. We asked, “Which best describes YOUR APPROACH regarding financing the sale of a firm?” The answers were: 

  • Down payment with an amount to be paid over a specific number of years based on revenues for clients retained by the buying firm: 83 percent
  • No down payment with an amount to be paid over a specific number of years based on revenues for clients retained by the buying firm: 13 percent
  • Down payment with a fixed amount to be paid over a specific number of years based on annual revenues at the time of sale: 2 percent
  • Other: 1 percent
  • No down payment but a fixed amount to be paid over a specific number of years based on annual revenues at the time of sale: 1 percent
  • Payment up front in full based on annual revenues at the time of sale: 0 percent

Again, notice the words in bold. Fully 96 percent of the buyers plan on buying the seller’s practice based on revenue retention. This can be translated as paying for those clients the buyer decides to keep, not whoever the seller worked with during their last year prior to the sale.

Why is this so critical? 

  • We have a large number of solo owners in our profession, close to retiring and selling their practice, 
  • a time when many other baby boomers have the same idea, 
  • pricing will not only get softer, 
  • But we clearly already have a huge disconnect in the market as to what that sale will look like.

This means that many within our profession have a storm on the horizon that could be very financially damaging to them as they enter then next phase of their lives.

Technology, Robotics and Artificial Intelligence in Transactional Work

The integration of technology and robotics in processing transactional accounting work will lead to the decline in revenues produced from delivering our firm’s traditional services in the future. According to the World Economic Forum “Future of Jobs Report,” two of the top 10 jobs expected to decline are:

  • At number 2, Accounting, bookkeeping and payroll clerks
  • At number 7, Accountants and Auditors

The good news about predictions is that they, like mine, are based on a fairly static or incremental change environment. They don’t consider leaps in change that leadership can make. So while the prediction of us holding the number 2 and 7 slot in the jobs most likely to decline is scary, we have the ability to change that.

In another study by Deloitte/Accenture, robotics and artificial intelligence are predicted to automate or eliminate up to 40 percent of transactional accounting work by 2020. Cognitive expert advisors (artificial intelligence systems that aim to simulate human thought) could replace entry-level tax, accounting & finance functions and accounting software might accomplish more complex tasks by acting as virtual assistants. Since 2020 is right around the corner, it is easy to dismiss predictions such as this as hype, but a commonly quoted statement from Roy Amara, a researcher, scientist and past president of the Institute for the Future, said “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” This quote has been attributed to many, including Bill Gates, but the key isn’t who originated it, but how widespread the quote is referenced. So, will 40 percent of the compliance work CPAs do today go away due to technology? Of course not. But the handwriting is on the wall. We are already seeing clear signs that accounting software is gaining in sophistication and requiring less human interaction to create a financial statement than was required just a few years ago. We also see companies like Intuit are now providing a tax return review by a CPA while working with TurboTax for $30.  These are just two examples. The idea that 40 percent of the compliance work we are currently doing will go away is probably conservative, it is just that the predicted timing is wrong. And when you consider how much of the work a typical CPA firm does today that is purely transactional, if you are not starting to address this today, you won’t be ready when the real drop occurs.

The Impact of Globalization on our Traditional Services

Our global economy continues to open up our marketplace in the United States to new competitors offering traditional services at much lower prices.

As covered in far more detail in a recent column titled “The Damage Caused when Firms do NOT Constantly Push Work Down  Part 2,” here are a few highlights supporting this point. 

Image that tomorrow, someone with a couple of years of accounting experience walked you’re your offices and said, “I would like to work for 20 cents on the dollar as compared to what you are paying to hire people right out of school?” Well, you would not only hire them in an instant, but you would ask if they have any brothers, cousins, or friends that feel the same way. That is what Outsourcing looks like to many firms. 

In the past, to pull off having full time employees in India, China or some other country in the world, you had to be a big enough organization, with deep enough pockets, to send people over to those locations, find space to work, recruit, hire employees, hire management, train everyone, invest in technology, establish security protocols and so much more. It was just too big of an undertaking for the vast majority of CPA firms. Today, that landscape has changed as new options are popping up every year that allow smaller firms to hire one or two employees and have them plugged into an outsourcing operation. Those employees work for you full time and you can, all in, pay about 25 cents on the dollar for that assistance. So, if you are not outsourcing, you need to ask yourself why because your competitors are likely bidding on work at significantly lower prices only to make more money doing the work due to leveraging these economies.

The Changing Core Competencies Required by Our Professionals

Consider the accelerating need of our professionals to have very strong technology skills in data analytics, automated accounting systems and processes in order to continue to be able to perform their jobs in the future. For example, when you think about performing assurance work, more and more, we will need to be able to shift from simply working around the automated systems to working through them. Additionally, as blockchain becomes more prevalent in systems, as well as the incorporation of artificial intelligence into processes, the CPA of the future will need to also be capable of challenging how well those systems are working and whether their decision-making processes are operating as expected/correctly.

No matter what field you are working in today, technology skills are becoming a fundamental requirement. We are not alone in this. As I recently shared at an AICPA Council meeting, when I was skiing recently, I asked a young man where he was from. He said “Maryland.” He then added, “I attend Annapolis.” When I asked what he was interested in doing, he said, “I want to join the Marines, but it doesn’t matter, it is all routed in technology.” Check with your auto mechanic and see if he or she can fix your car without utilizing technology. Almost every job has been slowly shifting from manual, to automation assisting the human, to now shifting to the human assisting automation. I recently saw on TV a company demonstrating how the equipment in a quarry was digging up rock, loading it onto a truck, hauling it up a winding dirt road to a distribution site, and then unloading it. The only function of people in this process was standing at each transition point watching the equipment work. They were not there to do the work, but rather, they were there to assist should there be a technology malfunction while the equipment was doing the work.

The point is simple. The CPA of the future, just like the Marine of the future, will need to be significantly more technologically savvy and capable. The difference is that we have to create a profession that attracts people with these skill sets to want to join us rather than trying to make someone who is not that interested in technology become a technologist.

We Need to Live Up to our Profession’s Mantra of Being Trusted Advisors

We cannot continue to sustain the accelerated success our profession has been enjoying for the past few decades by doing what we have always done. We have to be able to shift our services to deliver higher-value to our clients.

This shift starts with us living up to being our clients most Trusted Advisor (both personally and in business). This job isn’t hard to do ... it is fun to do. I have taught thousands of CPAs to augment every service they perform with a consultative conclusion. If you are doing tax work, then you should be talking with your clients about how to better plan and manage the financial aspects of their life (life planning). If you are preparing financial statements, you should be discussing what that information might be suggesting, trends, changes, and most of all, the things the client might do to make sure the end results are in line with their goals and aspirations. It doesn’t matter what we do ... we shouldn’t consider THAT work completed before we spend time discussing how that information might impact their future, either positively or negatively, and then create plans to shore up the likelihood of the positive changes occurring or the negative ones being mitigated.

We need to stop thinking this is a service we will perform when we have time. We need to stop pretending like we are doing this when the reality for most CPAs is that we rarely do it. We need to hold, at a minimum, every partner and manager accountable to having these conversations with their client ... not once in a while, but every time.

One of the misnomers that gets in our way of moving forward more diligently in this service area is the idea that advising means selling. To most CPAs, selling is not what we signed up to do. A real advisor is simply trying to understand what keeps their clients awake at night, to connect with them about their aspirations and expectations, to listen while they share their personal or business areas of struggle, etc. So, when you think of it this way ... advising is right up our alley, because helping is what every CPA I have worked with is intending to do.

If we can add a future focused discussion into every compliance or transactional service we perform, we will be delivering higher-valued services to our clients that they are willing to pay more money for. We will also be extending the life of some of the transactional work because it is part of the bundle of information required for an advisor to be able to perform his/her work. If you don’t add advice, religiously, to everything you do, then not only can you expect sometime in the next five years to see a great deal of the transactional/compliance work go away, but you can expect your overall revenues to decline too. Don’t wait until it is too late ... until your clients are walking out the door ... to decide it is time to become an advisor. Do it now while you have time to perfect your art and build the reputation that you should be the first call every client should make when they are trying to determine what to do next.

The Quality of Our Soft Skills will likely be the Greatest Predictor of Our Future Success:

To deliver higher-valued services, our skill sets and competencies need to evolve at a very rapid pace. Not only are most organizations NOT addressing this at a fast-enough pace, even those that are making the investment in competency development are often doing so more on the technical side than on the “soft-skill” side. The problem with this is that, when you look at where our profession is heading with service delivery, I believe the quality of those “soft skills” will prove to be a greater predictor of our future success than the technical ones.

This is also supported by sources like the World Economic Forum who recently pushed a list of top 10 skills sets needed in 2020 to thrive in the 4th industrial revolution. They were, in order of importance:

  1. Complex problem-solving
  2. Critical thinking
  3. Creativity
  4. People management
  5. Coordinating with others
  6. Emotional intelligence
  7. Judgment and decision-making
  8. Service orientation
  9. Negotiation
  10. Cognitive flexibility

If you think about working as an advisor, you can quickly see the coloration of skills required that the World Economic Forum is making in their “Future of Jobs” report to the future of our profession. We are not living in a vacuum. All technical jobs that are repetitive in nature are meeting the same competitive challenges. They are being replaced by some form of automation, whether this is in the form of robotics, software bots, augmented reality, blockchain, big data, data analytics, or something else. Therefore, the opportunity professionals will have will be less about getting the information, and more about what to do with it, and what to do about it.

The Global Landscape of the Accounting Profession Is in a State of Flux

There are mergers, amalgamations, or joint ventures that cross national borders for the United States/United Kingdom, Australia/United Kingdom, and Australia/New Zealand that are in a state of flux. Several years ago, the American Institute of Certified Public Accountants (AICPA) formed a joint venture with the Chartered Institute of Management Accountants (CIMA), to create a worldwide platform supporting the Accounting Profession, now with about 670,000 members, in 179 countries.

Many organizations worldwide have either started to move in this same direction, or are contemplating similar moves. The professional bodies supporting the accounting profession are facing the same challenges as are the members within the professional bodies. This is no different than what we are seeing in the merger and acquisition market within CPA firms, or even in the S&P 500. As everyone at every level looks for better ways to deliver value to their members/clients, be prepared to expect some unexpected changes in the global accounting marketplace. As those changes occur, they will eventually trickle down and impact CPA firms and CPAs working in public accounting in the USA on a day-to-day basis.

The Licensure Model is being Challenged in Most Every State

The licensure issues within the United States with 1) young people less interested in following a rigorous path to licensure and 2) many grass roots campaigns underway in various states legislatures to eliminate licensure, even at the CPA level, all of this together could quickly come together and have a major impact on our profession.

What makes this movement so dangerous, in my opinion, is that both the right and the left sides of our democracy are coming together to fight the same fight. On the right, you have the idea of smaller government and on the left, you have the idea of barriers to work or right to work. Licensure is perceived, by some powerful political organizations, as an impediment to our future success. Some of the conversations, and introduced bills in various states, have gone so far in their wording to allow people to practice law, medicine, accounting and more, unlicensed, as long as they declare they are unlicensed. As someone who earned his CPA license, who considers that our ethics requirements, our continuing educational requirements, our standards, our quality process, and more to be foundational to doing what we do, and protecting the public interest, the fight against licensing is a scary discussion. Without bogging this article down with a lot of details about the legislative activity that has occurred in the last 12 months, I simply would like to leave this idea with the thought that there nothing about our world, and the world we practice in, that isn’t undergoing change, challenges, obstacles, and quite literally, game changing events.

Where Does This Lead Us?

So where does all of this information, change, and evolution lead us? On one hand, it can sound very ominous for us. A great deal of our work is predicted to disappear, more and more global competitors will enter our market, our licensing process itself could be at risk, our soft skills are not where they need to be, technology abilities are becoming foundational in everything we are doing, demographically we are poised to have a shrinking profession which could change how we are perceived and the services we can competitively hold onto, we have thousands of retiring CPAs with many having their largest assets – their firms – at risk, and more. To be clear, this article isn’t about us holding on, hunkering down and protecting ourselves so that we can ride out the storm. It is about the opposite. Many of these changes are offering opportunities for us. The best news of all is these opportunities are easy for us to seize, because they are what we are noted and trusted for already. All we have to do is grab the brass ring dangling in front of us.

We need to ensure that everyone in our firms understand that our job is to be an Advisor first and foremost, without losing sight of our professional standards. When you do this, you will hold on to the transactional work longer, and for those who are so inclined, even disrupt yourself and help your clients find all of the constantly evolving automated solutions that will assist them. With this mindset, you will create opportunities to grow your revenues rather than see them shrink. You can look to the global market as a way to lower your cost structure, increase your capacity and offer services in ways that are beneficial to both your clients and your firm. You can embrace all of the changes going on around you rather than fight them. At the end of the day, the waves of change are identified, they are definitely coming towards us, and they are not coming as ripples but rather as very large waves. You can decide to ride those waves, or be beaten down by them.

Yes, I see this as a perfect storm coming towards us that can be devastating to our profession. But I also see this as a perfect storm, one that if we start acting now could become that once in a lifetime change facilitator that we need to allow our profession to grow, become stronger, and be more successful than we have ever been. We need to respect our past while understanding that our future success we be based on our willingness to evolve and change with market demand and expectations.

Simply put, tomorrow’s CPA will be different than we are. But to be fair, it was yesterday’s leadership that allowed today’s CPA to be just as different as they were a decade or two ago. There has never been a better time to be a CPA.