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By Scott I. Jerris and
Timothy A. Pearson

Productive and efficient CPA firms can be large or small, and their ability to be productive varies with their mix of services. The July 1996 CPA Manager column in The CPA Journal demonstrated that ranking firms based on the production of revenue by the resource utilized can provide more useful benchmarks. In this update, the Big Six CPA firms continue to produce the most revenue, but are not necessarily as efficient or effective as smaller CPA firms in utilizing firm resources. The pattern of outstanding performers in productivity and efficiency measures are found to vary based on their relative percentages of revenues from accounting and auditing (A & A), tax services (taxes), and management advisory services (MAS). The top performing CPA firms for both 1995 and 1994 had significantly higher percentages of revenue from MAS, and significantly lower percentages of revenue from taxes.

Many CPA firms compare their total revenue to other firms in assessing overall productivity and the returns to their partners. For comparisons or benchmarking to be reliable it is often assumed that these comparisons of firm performance should be restricted to a relevant peer group. For CPA firms, it is not only difficult to clearly identify a peer group based solely on total revenue, but there is also much to learn from the performance of firms of different sizes. Benchmarking only on similar-sized firms ignores the potential for improvement by comparisons to high performing other-sized firms.

CPA firms could benchmark and evaluate firmwide performance relative to other firms using ratios of firm revenue to resources such as revenue per partner, professional, employee, or office. Each of these revenue ratios provide measures of the average productivity or efficiency of the resources used within a firm. The following paragraphs examine the distribution of total revenue and resources--number of partners, professionals, employees, and offices--of the top 100 CPA firms providing A & A, taxes, and MAS services in 1995 as published by Accounting Today. These results are compared to the distribution of like revenues and resources for 1994.

Productivity and Efficiency Measures

Most CPA firms today have diversified their efforts, providing clients with services not only in A&A, but also in taxes, and MAS. Only those firms with revenues in all three components were examined in this study. In the 1995 Accounting Today survey, there were six non-CPA firms (e.g., H & R Block), three firms with revenue generated from only one or two areas (e.g., Campos & Stratis), and one firm had incorrect data. These ten firms were excluded from the analyses. In analyzing the 1994 Accounting Today survey, six were excluded due to non-CPA status and two because their revenues were generated from only one or two service areas. Thus, ninety and ninety-two firms of the top 100 were analyzed in 1995 and 1994, respectively.

The following paragraphs and tables examine how the productivity and efficiency ratios of the firms vary with the percentage of total revenue subdivided into revenue from A&A, taxes, and MAS. Five separate ratios as shown in the accompanying exhibit are calculated to provide an evaluation of accounting firm production and efficiency for 1995 compared to 1994.

In the following seven tables, these five productivity and efficiency measures are used to create alternative rankings of the top firms. The use of these ratios as benchmarks should help firms of all sizes to assess themselves and determine the need for structural changes in their delivery of client services.

In Table 1 the largest ten CPA firms in total revenue for 1995 and 1994 are listed in descending order. Not surprisingly, the Big Six are the top producers of total firm revenue with Arthur Andersen (name change to Andersen Worldwide in 1995) ranked first. In 1994 the other firms included Grant Thornton, McGladrey & Pullen, BDO Seidman, and Kenneth Leventhal & Co. In 1995 Kenneth Leventhal & Co. merged with Ernst & Young, allowing Crowe, Chizek and Co. to become one of the top ten revenue producers.

Table 2 lists comparative summary statistics of the productivity and efficiency measures for the combined firms analyzed. In comparing the 1995 average revenues to the 1994 averages, there was a 15% increase per firm, a 5% increase per partner, a 24% increase per professional, a 2% increase per employee, and a 9% increase per office. The increase in revenues is primarily due to increased productivity on the part of professionals and increased efficiencies in utilizing office capacity.

Table 3 lists the top ten CPA firms in descending order of revenue per partner. The Big Six are all included while the other four firms rank as low as number fifty-three in total revenues for 1995 and forty-seven in total revenues in 1994. Size alone does not result in greater returns per partner. Smaller firms can be as effective as the largest firms in generating revenue from their partners.

Table 4 lists the top ten CPA firms in descending order of revenue per professional. Only three of the Big Six are included in 1995 and two for 1994. The other firms rank as low as 90 and 92, when measured for total firm revenues in 1995 and 1994, respectively. These results also indicate that size is not a guarantee of the most effective use of professionals. Smaller firms can be as effective in generating revenue per professional as the Big Six. Larger firms may have excessive numbers of professionals which is consistent with the current reduction in workforce for many firms.

Table 5 lists the top 10 firms in descending order of revenue per employee. Only three of the Big Six are included for each year. The other seven firms rank from number 10 to number 90
in total revenue for 1995, and 10 to
92 in 1994. Smaller firms can be as efficient in their use of support personnel as the Big Six.

Table 6 lists the top 10 CPA firms in descending order of revenue per office. The Big Six are all included in 1995 while only four are in 1994. Other firms in the top 10 measured by total revenues, in revenue per office rank as low as number 29 in 1995 and 38 in 1994. Size alone does not result in more effective use of office capacity.

How have performance ratios been affected in the case of the merger of Kenneth Leventhal & Co. with Ernst & Young? Kenneth Leventhal & Co. was the top rated firm in 1994 for revenue per partner, professional, and employee. The impact on Ernst & Young's position in the top ten has not been significant. Ernst & Young continues to rank sixth in revenue per partner, and fifth in revenue per employee. Their ranking in revenue per professional fell from sixth to ninth--1994 to 1995.

Services Mix of Top CPA Firms

The combined firms examined had the following service mix:

1995 1994

MAS 24.4% 21.1%

TAXES 29.0% 29.9%

A & A 46.6% 49.0%

Comparing the service mix for 1995 and 1994 illustrates the continuing shift toward MAS, and a decline in core A&A services. Combining the percentage changes with a 15 percent increase in total revenue highlights the importance of MAS in the future of CPA firms.

Table 7 shows the distribution of total revenue into three components for each measure of productivity discussed above. This table demonstrates that the top ten firms for each measure of productivity have significantly larger percentages of their revenue from MAS. In addition, the top ten firms for each productivity measure have significantly smaller percentages of their revenue from taxes. Last, there is no significant difference in the percentage of revenue from A&A between the top ten firms in each productivity category and other CPA firms. All the firms for 1995 show a large increase in the percent of their revenue generated from MAS, a small change in their percent of revenue from taxes, and a significant decline in revenue from A & A as compared to 1994. This shift is consistent with all firms leveraging their growth through the expansion of consulting services.

Major Conclusions

* While CPA firm rankings are often determined by total revenue, this is not a complete picture of firm performance. Total revenue rankings ignore how well the firms used their resources. Alternative measures of productivity clearly show that total revenue does not result in increased productivity or effectiveness in utilizing resources in CPA firms. One reason for smaller firms to generate greater returns can be explained by the mix of services they provide to their clients.

* The most efficient CPA firms have approximately the same percent of their revenue from A&A, as with less efficient firms. The difference between the top 10 and other firms is a significantly greater percentage of revenue from MAS, and a proportionately lower percentage of revenue from taxes.

* CPA firms should periodically review their productivity and mix of services to benchmarks against firms of similar size and distribution of revenues from A & A, taxes, and MAS. For both 1995 and 1994, smaller firms were as or more productive than the Big Six in their use of resources. *

Scott I. Jerris, PhD, CPA, is an associate professor of accounting, and Timothy A. Pearson, PhD, CPA, is an assistant professor of accounting, both at West Virginia University, College of Business and Economics.

Michael Goldstein, CPA
The CPA Journal






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