Tag: Accounting

A variety of issues – including the increasing ability to work remotely and concerns over succession planning – are causing a rise in M&A activity among accounting firms, according to published reports, including an August article in the Journal of Accountancy. Does that mean it’s time to add smaller CPA firms to the Endangered Species list?

“Not at all,” say CPAs like Michael H. Karu , a member of Levine, Jacobs & Co. LLC who is in charge of the Business Valuation and Litigation Support Group at the approximately 30-person firm. “Even the one-and-two person firms will always have a niche. Without the overhead that larger firms have, their fee structures mean lower hourly billing rates. Small businesses do not always have the same need for [big-firm] services nor may they have wherewithal to hire mid-sized or larger firms.”

Levine, Jacobs has engaged in some dealmaking, and Karu said it “is a way to grow a practice,” but cautioned that “one needs to be exceedingly careful as to the merger partner.”

As he sees it, organic growth has some advantages, including offering the ability for “both the client and the CPA to grow together.” And natural growth gives a client the ability to stay with an individual CPA “based on criteria determined by the client.”

But organic growth usually means slower expansion, and “We are in an ‘I want it now’ society,” he cautioned. In addition, “If a partner nearing retirement brings a new client into the firm and leaves shortly thereafter, the client may decide to go with the [departing] CPA.”

Still, besides offering rapid growth, a merger or acquisition may give a firm the ability to “acquire talent along with the clients,” he noted.

But M&A isn’t necessarily all roses. “Partners may have differing management styles and expectations, while some clients may not be a great fit for the merged practice,” warned Karu. “Also, there may be conflicts between existing and newly acquired clients, while there may also be differing internal compensation methods between the merged forms,” which could spark conflicts.

However, like the proverbial porridge that’s just right, Karu believes that Levine Jacobs – which he said is “on the small side of medium-sized firms” – is in a good spot. “Our corporate client base is mostly in New Jersey and New York, and as such, it is easier to pitch a local business.”

At the same time, Zoom video calls and other technology offer an extended reach for the firm. “Our individual clients can be located almost anywhere,” Karu explained. “We handle tax work in 30 or more states, including Florida, North Carolina, Colorado, California, Maine, Massachusetts and Virginia. Most were New Jersey residents who moved [but retained the firm’s services]; some came to us by referral.”

Phillip Goldstein — a CPA and CEO of Goldstein Lieberman & Co. LLC — also said the field is wide enough for a variety of players, but noted that “as the ‘pie’ of locally owned businesses shrinks, some firms feel they have to get somewhat larger.”

His firm, ranked by NJBIZ in 2021 as the ninth-largest in New Jersey with about 100 people, has completed some deals—the most recent one was completed earlier this year with Valhalla, N.Y.-based ABD Associates LLP.

“Organic growth is good, but to get double-digit growth you generally need M&A,” said Goldstein. “We have clients in every state and some overseas. Many of our national ones started here and them moved and took us with them.”

Organic growth is good, but to get double-digit growth you generally need M&A. We have clients in every state and some overseas. Many of our national ones started here and them moved and took us with them.

– Phillip Goldstein, CEO, Goldstein Lieberman & Co. LLC

The firm’s offices are in New Jersey and New York, but Goldstein said that “we’re registered to do business in many states, and we can access clients’ books and records electronically. Further, we can use Zoom and FaceTime for conversations. Our size enables us to be trusted advisers to clients. We know them, their family, their finances and as a result we’re friends as well as advisers, whether we communicate face-to-face or electronically.”

Environmental, social and governance reporting is not generally required for non-public companies, but Mazars – an audit, tax, and advisory firm – recently helped a privately owned client in the food and beverage industry to put together its first non-financial reporting statement, according to Mazars Partner Kristen Walters. She said it could represent a trend.

“The company is in our middle-market practice which means revenues are below $500 million,” she noted. “This client implemented a sustainability report to respond to requests from customers to provide information on ESG metrics, and their will to organize and formalize their reporting to these clients.”

For a long time, large publicly held companies were the only businesses that had to be concerned with potentially costly ESG reporting. But now, it looks like privately held enterprises are increasingly being held to similar standards, often without regulatory mandates.

Investors and others are driving the move to expand ESG reporting, Walters added. “It is very much on the agenda of smaller middle-market and below companies. In these markets the drivers of ESG reporting are different stakeholders, like investors or clients for example.”

Some investors “have sustainability goals that affect their investment decisions and therefore companies that want to tap into such capital or are owned by such investors are reporting or working on their ESG reporting plans,” added Mazars Partner Jerome Devillers. “Likewise, a number of companies are entering the ESG reporting space because they are responding to requests from clients. These clients, either publicly held, foreign held, or simply on the forefront of sustainability reporting are now monitoring ESG metrics beyond the walls of their own organizations and throughout their supply chains. Satisfying requests from important customers is leading to a broader penetration of ESG reporting into smaller companies’ markets.”

ESG reporting certainly “will be perceived as another compliance cost or burden by many companies,” Devillers added. “There is no question that starting from scratch a new reporting function – that is implementing a process, training people, modifying systems, collecting, checking and aggregating a report – can be seen as overwhelming.”

Mazars helps clients of varying sizes “to elevate and update their understanding of this quickly developing field, assess the need and benefits of such reporting, organize a non-financial reporting function, or provide some assurance on their non-financial reporting,” according to Walters. As part of a global firm, “Mazars is uniquely positioned to helps clients in these markets on this area of non-financial reporting, with the combination of practical experience, locally trained consultants, and expertise in standards.”

Other professionals are seeing similar moves. “ESG creep is absolutely affecting an increasing number of smaller companies,” according to George Gallinger, a CohnReznick principal and Advisory, Governance, Risk and Compliance national director. “Like public companies, private companies have multiple stakeholders such as employees, regulators, and investors. The communities they operate in often identify an ESG strategy as being a key component of the company’s value proposition. More and more, a company without a stated ESG strategy is being viewed as a risk to these stakeholders given the public’s heightened concern with environmental and social issues.”

CohnReznick works with clients “to help them understand the various material ESG risks relevant to their organizations,” he added. “This includes related standards that may fit their needs from a goal setting and reporting perspective. We are also advising them on the need to develop and refine their ESG goals, establish various governance structures within the organization, and develop the infrastructure needed to maintain an effective, goal- driven ESG reporting program.”

Gearing up for the new gigs

To handle the expanded scope of activity, CohnReznick is “ramping up our capabilities and services to become our client’s strategic ESG advisors,” Gallinger explained. “But we’re not doing this alone. We’re working in tandem with some of the best minds in the environmental space to deliver solutions. We are currently in the process of piloting and rolling out an ESG readiness assessment. This would be leveraged to help organizations identify and prioritize their specific ESG risks and develop an action plan to address them. The assessment process enables us to understand a company’s level of ESG readiness by evaluating a range of governance, process, risk, and controls protocols and develop oversight mechanisms within the organization to ensure the ongoing monitoring of goals and quality ESG reporting.”

In some cases, private equity funds are pushing target companies to engage in ESG reporting, said Joe Holman, ESG practice leader at Withum, an advisory and accounting firm. When private equity funds consider buying a company or making a loan, they often “analyze target companies using ESG factors,” he said. “PE firms and others are pushing companies to adopt ESG standards and reporting.”

And it can be expensive. “Bloomberg and other large companies can spend $100,000 or more on 100-page-plus glossy reports, but smaller companies can easily scale down the cost, by reporting on readily available metrics like employee turnover and diversity activities,” he noted. “And I don’t think you’ll see mom-and-pop companies get too involved in ESG initiatives and reporting, unless they see a marketing advantage.”

Other countries are pushing for mandatory ESG reporting, and stateside, the SEC has been tinkering with the idea. But Holman doesn’t think that mandatory reporting will occur anytime soon here. “The SEC has created task forces to study ESG, but the likelihood of broad ESG reporting requirements is unlikely,” he said. “SEC. Commissioner Elad L. Roisman in June stated that the SEC should wait until there is more agreement on what ESG information should be reported and who is responsible for setting ESG standards.”

Still, Nasdaq-listed companies — including those with smaller boards — will generally be required to have at least one diverse director by Aug. 7, 2023 — or explain why they don’t. And “in September the Commission has stated that a number of its disclosure rules may require disclosure related to climate change,” Holman said.

ESG is also “a big topic at organizations like National Association of Corporate Directors,” according to Ralph Albert Thomas, the NJCPA chief executive officer and executive director. “People — including investors, potential employees and employees — are asking public and non-public companies about they’re doing about ESG, and companies are responding because they want a welcoming environment that attracts talent.”

Will ESG reporting become mandatory? “That’s hard to say,” said Thomas. “But I believe it will be expected in large companies and the next-tier firms. If I were on the board of a privately owned company I’d be asking what we’re doing with regard to ESG and D&I (diversity and inclusion).”

The number of candidates for the CPA exam dipped to its lowest level in 10 years in 2018, according to the latest AICPA (American Institute of Certified Public Accountants) Trends Report. At the same time, the AICPA estimated that – as of 2020 – 75% of its members were eligible to retire.

Does this mean a CPA drought is ahead? Actually, it’s here already, according to some experts.

For Tifphani White-King, a principal and National Tax practice leader at the international audit, tax and advisory firm Mazars, the shortage hit home when a colleague at a peer firm mentioned that “a tax professional left to become a TikTok star,” after realizing they were earning about $60,000 a year “for spending one hour a day on the online platform.”

A CPA shortfall has persisted for at least a decade, she noted, but it’s gotten worse as the path to the top doesn’t offer the guarantees it used to. “You’ll always have a job as an accountant, but the partner-level security has been eroded. At one time a retired partner could count on a significant buyout or other income stream, but as people live longer firms can’t support the same level. CPA firms need to focus more on these kinds of issues.”

White-King also pointed to a series of surveys that indicate a growing number of people don’t view CPA certification as being as important as they used to. According to a state and national survey released in 2021 by the Illinois CPA Society, 15% or fewer of respondents older than 22 plan to become CPAs. And while a CPA generally establishes a degree of “instant creditability,” according to White-King, it’s just not as important in some cases. The Illinois report, for example, highlighted a 2020 Wall Street Journal article that noted just 36% “of CFOs at the 1,000 largest U.S. public companies were CPAs in 2019, which is the lowest figure in the six years Korn Ferry has collected the data.”

To attract and retain qualified people, Mazars is working with human resources, diversity and inclusion and other professionals to ensure its pay and hiring practices remain competitive, “and we also try to keep people motivated, engaged and happy with mentorships and other formal and informal programs. A long time ago I noticed those people who came in smiling and those who did not. I want my teams to be happy.”

Other CPAs are also sounding the alarm. “No CPA firm has enough people,” said Glenn Friedman, co-managing partner at Prager Metis CPAs. To a large degree, that’s due to the AICPA itself, he added. “Some years back, in a bid to elevate accounting educational standards to more closely represent those for lawyers and doctors, the AICPA instituted a 150-credit hour educational requirement. At the time I said it was a bad idea, because it meant more barriers to entry, and that – along with a relaxation of the requirement to work for a CPA firm for two years – meant that fewer people choose to work in a CPA firm.” In New Jersey, besides passing the national CPA exam, a CPA candidate generally needs one year of experience in the practice of public accounting or its equivalent, under the direction of a licensee, according to the NJCPA.

Tech to the rescue

But the news is not all bad. “Between technological advances and COVID-related remote work requirements, the whole country is now open for recruiting regardless of your physical location,” he added. “We’ve hired people from places like Chicago, Arkansas and Atlanta. And many firms are also hiring qualified people from India, the Philippines and other competitive-cost locations to take on some work.”

CPA firms are also shifting their business model. “The development of artificial intelligence means that CPAs will be doing less compliance and review work and will be able to deliver more high-level advisory assistance,” Friedman said. “So having a reduced number of candidates isn’t necessarily bad. But the profession will have to adapt.”

Some firms have already taken steps to adjust. “I remember when just about everyone at a firm would study and sit for the CPA exam,” said Ren Cicalese, managing shareholder at Alloy Silverstein Accountants and Advisors. “But today, if you pressure people to take it, they’re likely to quit. So finding new staff is a full-time job. We never used headhunters before, but now we are.”

Cicalese said he is also looking beyond traditional help-wanted ads. “I’ve been at restaurants and other locations, and when I see someone who displays a good work ethic, I ask about their educational background. You’d be surprised at how many are finance or accounting majors, and I’ve been able to hire some. After all, when you get right down to it, at some level we’re all in the client service business.”

Phillip Goldstein, the CEO of Goldstein Lieberman & Co. LLC, observed that his profession involves “meeting a lot of deadlines, including taxes, financial statements, SEC reporting, sales, and payroll taxes. So we usually put in long hours, and many of the younger generation just aren’t interested in doing that. And I think that the AICPA and the state societies exacerbated the problem when they rolled out the 150-credit hour requirement.”

Still, Goldstein’s firm is bringing in new talent. “We’re fortunate enough to be right around the corner from Ramapo College, and we have a huge internship program,” he said. “And at the other end, unlike some forms we do not have a mandatory partner retirement age. If you’re still sharp and want to work, why should we push you out?”

To retain people — “tax season is still a killer,” he noted — Goldstein Lieberman offers competitive salaries and benefits, advancement opportunities, and flexible schedules. “We also promote a collegial team environment, and we try to help people to enjoy themselves. No one ever says, “I’m too busy to help.”

During busy times, the firm also brings in meals and massage therapists and engages concierge services to run errands for employees. To promote a team spirit, the firm also sponsors dinners and trips to sports games, concerts and other outings — although the COVID pandemic put a dent in that. “It’s an investment, because this way we’re able to attract and retain qualified people, and people are happy they’re more effective,” noted Goldstein. “But it’s also more pleasant to work with smart people who enjoy what they do.”

Ted Carnevale, co-leader at the New Jersey office of the accounting and advisory firm Grassi, has also felt the pinch. “Across firms, it’s getting harder to find licensed CPAs, and fewer people are sitting for the exam,” he said. “We try to hire new accounting graduates and then train them, coach them and otherwise try to get them to stay with our firm. Salary and benefits are part of the attraction, but we also maintain team-building and other programs to foster a collegial environment.”

A different take

Not everyone agrees that a shortage of CPAs exists. “Through our hiring efforts, we are currently not seeing a crimp in CPA candidates,” according to Theresa Richardson, a partner and chief talent officer at Withum. “Our entry-level candidates are continuing to pass the exam as fast as possible, and we continue to find quality CPA candidates in our recruiting efforts.”

To attract and retain CPAs, Withum starts “by providing a culture and benefit that promotes passing the exam as quickly as possible,” said Richardson. “In terms of benefits, we help our team members in many ways to pass the exam. We help with providing discounts for CPA review materials, financial help with paying for the materials, time off to take the exam and financial rewards when someone passes the exam. The sooner someone passes the exam, the greater the bonus for passing.”

At the same time, at Withum “and in most in the industry, you cannot be a manager without your CPA license. So, if you are interested in making it to the higher ranks of the firm, obtaining your license is key.”

Professionals at Marks Paneth are also upbeat about the CPA pipeline. “We do a lot of college recruiting and we’re seeing a fairly consistent flow of candidates,” said Richard Jania, partner-in-charge of the accounting and advisory firm’s New Jersey office. “There’s an expected number of retirements at the partner- and staff-level, but many of our new recruits stay and grow within the firm. We have succession plans, and as existing partners transition new partners come in.”

Marks Paneth Director of HR Steve Sacks has noticed a slight uptick in people leaving for corporate accounting but pointed out that the firm attracts a steady stream of applicants, including “college interns who get hired and advance from associates to seniors and, if they’re qualified, ultimately to partners —Rich joined the firm more than 20 years ago and followed this path.”

Added Sacks, “At Marks Paneth we try to develop a sense of community. Pre-pandemic we had events like Taco Tuesday, kickball teams and other social activities during busy season. Now we buy lunch and dinner for people while they’re working remotely, and we offer virtual classes on topics like mixology and yoga. It’s all about achieving a work-life balance to make things a bit easier for everyone.”