In a late 2013 Milwaukee Biz Blog, economist Kay Plantes questioned whether consolidation in the professional services sector has been a good thing.
I agree with her assessment that this wave of consolidation has not been good – especially for smaller businesses that suddenly are no longer big enough nor cost effective enough to be served by a larger consolidated firm.
In the accounting industry specifically, three key factors are driving consolidation.
The universities
Our universities do a great job of teaching accounting but they tell you from day one that you MUST work for a large public accounting firm or you are simply wasting your time. As such, too many young CPA’s follow the big CPA firm path and one of three things happens:
1) They thrive there and become a partner.
2) They wash out, but have a very narrow skill set that doesn’t translate to a small firm.
3) They become the CFO of one of their audit clients.
When I graduated in 1997 there were still many small to medium sized CPA firms. But now many of them have been gobbled up and we aren’t seeing new firms stepping in to replace them.
150 credits
In 2000, the CPA community thought it would be a good idea to require a minimum of 150 college credits in order to become a CPA. It didn’t matter what subject you got the additional 30 hours in, so long as you had 30 additional credits to take the test.
That means tacking on at least one additional year of school to all these kids. That adds one more year of cost and ages the person one more year before they enter the work force. So the big corporate firm job just became all the more appealing to a recent graduate.
It’s not like the extra 30 credits are getting us better CPA’s, which leads me to my next point:
The graying of the profession
Like most industries we are faced with a graying of the CPA population and quite frankly a lot of the old guys haven’t gotten out of the way to make room for the new people or even given them a chance. In a recent article in Accountant’s World they reported that only 8 percent of the partners at CPA firms were under the age of 40 while a staggering 59 percent were above the age of 50.
These CPAs have aged in line with the expansion of services they’re offering to their clients in order to get a bigger portion of the client wallet. From human resources consulting to wealth management, accounting firms are continuously looking at new ways to get more revenue. This concept was pioneered by the guys who are in their late 40s, 50’s and 60s and they aren’t going to turn off the faucet.
Meanwhile, the younger CPAs at big firms have not been able make partner because they are too busy being managers for partner level CPAs. The trouble is these younger CPAs are paid a good enough salary that the thought of leaving paralyzes them. And after all, they’ll be partners someday right? If that doesn’t keep them there it’s likely they have a non-compete that makes it very difficult to ever build their own practices without the threat of expensive legal action.
When I started at a large CPA firm, almost all of the partners were in their 30s. Those same partners are now all into their 50s and a new generation of 30-year-olds isn’t around to replace them.
Small businesses get squeezed out
This wave of consolidation is leaving small businesses underserved. As their accounting firms get larger, the level of personalized service gets smaller. Larger firms increasingly lack the flexibility to perhaps cut a new business a break on fees during startup mode. Fees need to go up to feed the larger firm machine and often times smaller businesses either have to suck up those fees or possibly work with someone less experienced.
None of this says that a big firm can’t or doesn’t do a good job for their clients. They do. The problem is they aren’t the right fit for every client and unless a new entrepreneurial spirit enters the accounting world all we’ll be left with is massive firms.
Mike Bark, CPA/CVA/MST, is a principal of Edge Advisors LLC, an accounting and consulting firm in West Allis.
