You can look on practically every website of any CPA firm today, and you will find the current business model revolves around tax, audit, accounting, advisory and financial services.
That business model has driven increasingly high growth through the decades to the point where the strategy of growing a CPA firm is not to provide its clients with other needed services outside of the financial realm, but to buy up other CPA firms and cannibalize their clients.
The business model has been this way ever since accrual accounting was introduced in the 19th century, before the computer, and when bookkeeping was performed by actual bookkeepers in ledger books. It was a daunting task and still is, and the accounting industry required a myriad of personnel.
When the computer entered the CPA’s business model, it had both a positive and negative effect. ERP systems all began with digital accounting systems first, then integrated data from all departments so that a single point of entry made an efficient database. That was positive by automating the tax and accounting elements of the business model, but still requiring a CPA’s expertise. Or did it?
Over time, software technology began infringing upon another element of the CPA’s business model, the audit, one of the key profit-makers for CPA firms.
Auditors would focus on using metrics that analyzed financial records and statements showing the performance of the business, and a CPA’s audit report was a key ingredient in showing viability. Now, programmers automate entire audit processes, including the report.
Advances in technology have made a “transformation” in the work of a CPA’s entire business model, not a reformation of one element, from bookkeeping and appraising financial data to preparing financial statements and even auditing the books.
It’s much more effective for a CEO or executive to transform the organization following an annual continuous improvement project throughout the entire organization, and this relates to CPA firms, as opposed to having the transformation thrust down into the industry as it is today.
In most cases, this transformation has commoditized the profit structure of the elements of the CPA’s business model, to the point where smaller bookkeeping and accounting companies can provide the same service at a lower price than the CPA provides, and they are flourishing. When it comes to pricing, CPAs are finding that the bulk of their services are elastic, not inelastic, and that’s the business model problem.
The need for a professional certified workforce is under duress, and lower-level accounting expertise is now the rule. That flies in the face of most professional CPA firms, but it’s no different than what doctors are feeling from a more professional nursing group.
However, a phenomenon is occurring, which is having another potentially devastating impact on the business model of the CPA firm.
According to a recent Wall Street Journal article, “more than 300,000 U.S. accountants and auditors have left their jobs in the past two years, a 17% decline, and the dwindling number of college students coming into the field can’t fill the gap.” Young professionals between the ages of 25 to 34, and mid-career professionals between the ages of 45 and 54, also left in high numbers beginning in 2019, frequently moving into finance and technology jobs, the article noted, citing figures from the U.S. Bureau of Labor Statistics.
But recall that the only method of growth for most CPA firms was not enhancing the services provided to their clients. No, growth occurred by merger and acquisition and cannibalizing the merged clients. In the future, mergers might not bring the stable of high-paying clients with them, as well as the inability to raise prices while maintaining the client base.
The short-term solution is to reduce firm costs, and CPA firms are doing so.
Another recent WSJ article discussed a national shortage of accountants that’s prompting small and midsize firms to hire overseas to meet the demand for workers to “audit U.S. companies’ books and prepare Americans’ tax returns.”
It’s called outsourcing. Problem solved, right? Wrong!
As a management consultant, we mentor executives on proper decision making, and the first key competency is to solve the real problem, not the apparent problem or symptom.
It appears that CPA firms are resolving the symptom, and not the change in the CPA firm’s business model. Think of Uber, and how a change in the business model of the personal transportation market affected every taxi company in the world.
The same appears to be occurring in the CPA profession. The business model continues to be transformed, and the alternatives for the customer are long overdue.
