Survival of the Fittest

A Panel Discussion
Moderated by James L. Craig, Jr.

In a competitive, free market system, success comes to those who are the most innovative and the best prepared to deal with change. The signs are there that CPAs can no longer expect to achieve and maintain a successful career or practice on the basis of business as usual. Technology, changes to ownership and regulation, new forms of competition, increased complexity in the way business is being conducted, and a lack of growth in traditional service areas of audit and tax compliance are creating an environment that is spinning and turning in all directions. Only those who are prepared for change will survive.

The New York State Society of CPAs, as have other state CPA societies, recently conducted a program to help CPAs focus on the many factors that will impact the profession in the next few years. Called "survival skills workshops," they sought to inform attendees of what is in store and to begin to equip them to take advantage of opportunities that will inevitably exist for those who are able to recognize and respond to them. The programs were moderated by Sidney Kess, the noted tax lecturer, and Jack Brooks, recently retired executive director of the Connecticut Society of CPAs. NYSSCPA director of professional programs, Walter M. Primoff, and director of tax policy, James A. Woehlke, joined life insurance expert Lee Slavutin in presenting the program. Also, important to the program were a series of AICPA and NYSSCPA videos that were prepared or modified for the workshops. The videos, among other things, developed hands-on approaches to the broad issues being addressed by the profession's comprehensive Vision Project involving over 5,000 CPAs nationally. The specifics of the Vision Project are presented in an accompanying sidebar.

The workshops began with a video of Robert K. Elliott, chair of the AICPA Special Committee on Assurance Services, talking about a decline in the value of the audit in the marketplace and the resulting need for the profession to reengineer itself. It followed with discussions on non-CPA ownership of CPA firms, proposed changes to the regulation and structure of the profession, opportunities for new tax services, and tips to give clients and others in the area of life insurance. Excerpts from a PCPS video, Small Firm 2000: Your Link to the 21st Century, challenged CPAs to keep pace with technology and highlighted innovative and specialized services being offered by some CPAs. The program concluded with detailed coverage of the new six pack of services (described in an accompanying sidebar) Elliott's committee and the AICPA
have developed for CPAs to begin using immediately.

CPA Journal managing editor, James L. Craig, Jr., met with Messrs. Kess, Brooks, Primoff, Woehlke, and Slavutin, to discuss the workshops and the lessons learned from having presented them.

The CPA Journal: From your own perspective and background, what did you think could be accomplished by the workshops?

Jack Brooks: We all felt the need for a wake-up call to inform CPAs of the changing, perhaps ominous, world they will shortly be facing. We felt many, especially those in public practice, had all they could do just to meet the existing needs of clients and were spending little or no time looking toward the future. The workshops confirmed this is the case for many. But there turned out to be another aspect. The workshops taught us that some CPAs are already addressing the issues, at times in innovative ways.

Sidney Kess: I saw a lot of apprehension on the part of many, especially those in tax practice, who see a declining market for compliance services caused by new forms of competition and taxpayers who are doing their own returns using low-priced software. They are finding it hard to find the resources and people to meet their client commitments, and here we are telling them there is a need to shift gears and get reoriented to the new challenges. They are having a hard time balancing long hours and family, and all the other demands of a complex world. We had to reassure them that they can do it, but it will take hard work.

Lee Slavutin: I used to practice medicine. And just as medicine has changed drastically in recent years, accountancy is experiencing or about to experience unheard of changes to the way it is practiced. Doctors today do not control their practices--HMOs and insurance companies control them. There is a similar lesson for accountants in what has happened to the Encyclopedia Britannica. Remember how that very fine reference was a staple in American homes. A year or two ago it almost went out of existence because its $2,000 price tag could not compete with the $50 price of a CD ROM competitor. Now Britannica has reinvented itself with its own low-price, award-winning CD-ROM and Internet versions. CPAs need to wake up to that kind of threat and opportunity. My role in the workshops was to use my world of insurance and insurance consulting as an example of how CPAs can immediately bring added value to clients. CPAs have a wonderful opportunity because of their client base to fill the role of objective trusted advisor and identify planning gems that will have an immediate payoff.

Walter M. Primoff: I came into this project because of increasing evidence that too many CPAs are blissfully ignorant, and dangerously so, of the changes in technology, regulation, and competition that are swirling around. This topsy-turvy situation is a real threat to those CPAs that don't adapt in time--that is over the next several years. My interaction with CPAs has led me to conclude that many are not taking advantage of affordable technology in the broad sense. Their approach is to use software to get the traditional work done, rather than making an investment and learning to use technology in a leading edge, problem-solving way. Also I see a trend that the growth in public accounting--principally consulting services--is not CPA driven. Rather it is coming from the work and services performed by non-CPA consultants. They are computer and systems engineers, valuation experts--consultants of all different stripes. A challenge to state societies, the AICPA, and the firms themselves, is what areas of service can be grown that take advantage of the basic competencies and the unique mindset of the CPA. Don't get me wrong--to do this the CPA cannot stand pat, but must learn to use technology and acquire new skills, but building upon the ingrained CPA values of objectivity and sensitivity to client needs.

And so I saw the workshops as a place to inform CPAs of the challenges and threats that lie ahead and to begin to show them that there are enormous opportunities for those who are willing to change their ways.

James A. Woehlke: The vast majority of the over 40,000 CPA firms in the country are small businesses. Their success in this changing world, and perhaps even their survival, will depend on their entrepreneurial skills. CPAs may not generally think of themselves as entrepreneurs, but as owners of small businesses they must anticipate market conditions and try to meet them with an entrepreneur's vision, energy, and commitment. CPAs who think they will remain "busy as usual" with no need to change are saying the future will be exactly the same as the present. That kind of thinking flies in the face of reality. The future will be radically different for business advisors, including CPAs. For their businesses to survive, CPA entrepreneurs need to make serious changes. The workshops were a place to explore new service ideas for CPAs, not just those already being developed by the AICPA, but in all areas such as tax and financial planning.

CPAJ: Having gone through the 11 workshops and met face to face with about a thousand CPAs, did you find that CPAs needed a wake-up call? That they did not fully comprehend what was on the horizon for them?

Kess: I sensed that for many, this was a rare opportunity to get away from their practices and examine the forces and factors that will shape their futures. Some intuitively were aware of the need to change. But few had been spending much time in an organized way thinking about what they themselves need to do to adapt and take advantage of the changes that are inevitable.

CPAJ: So you don't feel that CPAs are focusing on the future as they should?

Brooks: I think it is generational. Clearly there were three generations of CPAs in the workshops. The younger participants were right in step with what we discussed. They knew the important place of technology in their practices and the need to adapt to a changing world. The second group--I'll call them the contemporaries--knew that conditions were changing, but hadn't gotten around to actually making any plans to cope. They were receptive, however, to new ideas and the discussion. The third group--I don't have a label for them--had never thought about the need for change, were fearful of change, and did not even contemplate a world other than the one they know and have known for years. I fear that this latter group are not going to try to cope, but will drop out. The key will be how the middle group, the contemporaries, respond and ultimately meet the challenge. They are the critical mass to a successful transition to the new age the workshops attempted to describe.

Kess: But it's not chronological age, Jack. There are some old-timers that
are more advanced than some of the
young kids.

Slavutin: I saw representatives from firms that are getting involved with new kinds of services, are doing valuations, and have registered as investment advisers. But I noted that some of the small firms, one or two partners, are finding it difficult to keep up.

Kess: I also saw a need that CPA firms, especially the smaller ones, have and that could be filled by their state CPA societies. CPAs cannot be all things to all people. They need a network of specialists they can call on to help clients in knowledge areas and not feel threatened that the referred person will undermine the work they are doing. The specialties would include such areas as insurance, investment advice, and technology consulting. The large firms have this internally. The small firms need to build alliances and a referral network.

Primoff: That is something we definitely would like to do with LUCA.com, the Internet site available to all CPA Journal readers. LUCA can be the place for firms to connect with specialists and other firms who could be a resource, when needed. Lee Slavutin and frequent CPA Journal contributor Mel Maisel, for example, have agreed to be on LUCA to help users with live insurance questions. We are asking others to join in.

Woehlke: A lesson from the workshops was that for CPAs to survive they'll need to offer a wide array of services, but they cannot do it all themselves. They need
trusted advisors that they can call on
as needed.

Primoff: In every workshop there were one or two CPAs, sole practitioners or partners from small firms, who had put together a network of advisors. The CPA was the objective overseer and coordinator of the advisors on behalf of the client. And clients pay the CPA for this valuable function. The fact that the CPA was not taking a commission or getting a referral fee gave value and credence to the CPAs advice. These CPAs of all ages worked diligently to educate clients about the value of their independence and objectivity. As a result, the clients recognize the value.

Woehlke: Some of the participants lamented the fact that, as practicing CPAs, they could not earn commissions from advising clients on insurance and investment matters and felt this was a competitive disadvantage.

Slavutin: The one thing that distinguishes the CPA is his or her objectivity and integrity. I hear that from my insurance clients. They want the CPA to look at the proposal, because they know he or she has no vested interest. That's what the client relies on. I think it may be a shortsighted view by CPAs who want to earn commissions on product sales. That would be taking away the differentiation that brings value to the CPA credential. The CPA is often the client's most trusted advisor.

Primoff: This may be the place of the CPA professional societies to inform CPAs how to form alliances, both within and without the profession, to build that service array that clients need. Also if a specialist comes from a state society referral list and he or she breaks this bond of trust, the specialist should be immediately deleted from the referral list.

Kess: It is essential that the small CPA firm develop these alliances to compete with the consolidation that is going on in the marketplace, creating one-stop shopping for small businesses services. I refer to such organizations as American Express Tax & Business Services. There are others, of course.

Primoff: There are models for small firms to compete with this new breed. The CPA can assemble a team of advisors that can match, or even exceed, the typical quality and responsiveness of the big one-stop corporate model.

Brooks: An issue that was raised at the workshops was whether the existing
regulatory structure is conducive to this new way of operating. And to entering new practice areas?

Woehlke: A number of CPAs expressed the view that the current regulatory structure acted as in impediment to their business and what they were trying to do.

Brooks: It is important for the state CPA societies and the AICPA to work toward a regulatory system that will assist members and be parallel to their intent to go into new areas of practice.

CPAJ: Are you saying CPAs want to be free of regulation so they can pursue new areas of client service?

Brooks: I think they want a level playing field so that if they are regulated as to a particular activity, so are others who provide that service. They want to be free to enter a new field where others compete and not be disadvantaged because they are CPAs.

CPAJ: They don't see the competitive advantage that Lee discussed earlier of being subject to an ethics and regulation framework that distinguishes them and actually tilts the playing field in their favor?

Brooks: No. I don't think it is
as apparent to the CPA as it is to
others. They want to be empowered, but without new forms of regulation.

Woehlke: A problem that exists with today's regulatory system is that, in many cases, there is not sufficient funding to permit the regulators to carry out their responsibilities. And there is little benefit from a regulation that cannot be enforced.

Primoff: I don't believe that CPAs have thought nearly as much about the benefits of being licensed and regulated as they have about the responsibilities and costs. Between the tax law and the plethora of requirements that all manner of entities be audited by CPAs, regulation has been extremely beneficial for many CPAs. We need to define the key ingredients that are essential to preserving the CPA credential and its perceived value of protecting the public interest. Then we should open up the rest to market forces.

CPAJ: What are the core values that need to be protected?

Woehlke: Answering this question is a primary goal of the profession's Vision Project.

CPAJ: Turning to some of the other topics, what lessons were learned from the presentations on technology? A video was presented that talked about the pace of change in technology and the benefits of keeping informed about and using the latest developments.

Primoff: CPAs, to a large extent, are employing technology to automate traditional services--tax returns and financial statement services. To the client, the appearance is the same accounting records, financial statements, and tax returns that were delivered 50 years ago. I don't see nearly enough CPAs using technology to help their clients improve their position. I don't see them visualizing how the rapidly growing capacity of computers, as witnessed in the chess victory of IBM's Deep Blue, will increasingly displace many of the traditional services they offer and even move into some planning arenas such as estate planning. CPAs have got to learn how to use the computer to deliver new strategic services that leverage their accounting, tax, and broad business expertise.

Slavutin: I think CPAs should not overlook the very fine software packages that are available for financial and estate planning. Number Cruncher from Leimberg & LeClair, for instance, is a good program to work through the numbers on such things as GRITS and GRATS. A good
program for retirement distributions is Brentmark.

Kess: A program mentioned by one of the participants was Methuselah. And CPAs should look for software to help with the calculations demanded by the 1997 Taxpayer Relief Act. The BNA
tax planner is out at the high end of
the market.

Brooks: A concern I have is whether the technology and software tools the CPA will need to perform some of the new services the AICPA is talking about are available. The large firms no doubt are developing their own software tools--but what about the local firm?

CPAJ: One of the great things about our market-driven economy is that third-party vendors and software developers such as Practitioners Publishing Company will see a need and provide products to the CPA market.

Brooks: I sensed from some of the participants that they feel they may be left in the dust--not able to keep up with the large firms in providing new services.

CPAJ: Let's talk about the new kinds of services the AICPA is suggesting the CPA should begin to offer. It all starts with the work of the AICPA Special Committee on Assurance Services. During the workshops, the six pack of services that the committee has developed was explained. In the committee's mind these services have a market potential of up to $14
billion--about twice today's value of traditional audit services.

Woehlke: It was my observation that participants felt that finally the AICPA was doing "something for me." I found this to be very encouraging.

Kess: The video on the new six pack of services, which the AICPA prepared at our request, uses a number of local practitioners to explore the opportunities, which shows the new services are not just for the large firms.

CPAJ: Did the video get the participants turned on to the potential of the new services as we hoped it would?

Primoff: The tapes did a very good job of giving good examples of how small firms can get started with the new services and the investments that will be required. If we accomplished nothing else, I hope we convinced attendees that the CPA who ignores these trends will get rolled over; but if the CPA harnesses these forces, he or she will be able to use them to become more profitable.

Kess: One of the things that state societies and the AICPA must do is inform small businesses of the kinds of new services CPAs will be offering--in effect, they need to help create a demand for them. Perhaps joint meetings with organizations like the National Federation of Independent Businesses (NFIB) can help to do this.

CPAJ: Learning new services that the marketplace is not aware of is not fruitful.

Kess: CPAs that are ready to provide "risk assessment services" may find the average small business has no idea what he or she is talking about. That's why we need some advance efforts by the CPA associations to lay the groundwork for what will be a beneficial service. And if the CPA sees there is a demand for
the new service, she will be more
willing to make the investment to learn the new service.

Primoff: The AICPA is making a huge advertising and marketing commitment to inform the public and businesses about the Webtrust^TM electronic commerce assurance service, one of the six pack.

Brooks: At the workshops I saw skepticism, initially, as to whether participants could make the new service ideas work. The jury is out for some, and perhaps it will take a show of demand as Sid is suggesting before they will make the investment to learn them.

Kess: We can't forget the tax area as a place for new and expanded services. There are even some old services that can be resurrected and repackaged. Jim Woehlke, during the workshops, showed the enormous capacity here in relation to the new tax act.

CPAJ: What is being said here, is "yes" there are new service areas to take advantage of, but there are also lots of opportunities in areas where the CPA is already quite comfortable.

Woehlke: Yes, we cannot overlook the enormous opportunity that exists for CPAs who use their present skills in creative ways in the traditional planning areas. Remember that the automobile market was a very mature market when Chrysler introduced the minivan and Ford introduced the Taurus. For many CPAs the same sort of present service improvement may be in the cards. For example, complexity exists in the tax area that only the most skilled and informed can handle. As a general rule, the CPA profession comprises the most skilled and informed practitioners in these areas. But the message of adjustment for massive change and needed innovation is no different here. It can be just as challenging to meaningfully refine a service in a mature market as to create a new service altogether.

CPAJ: When you think about the new six pack of services, some are really not that far removed from what CPAs are already doing. The performance measurement group of services is just everyday consulting on operations and operations improvement.

Brooks: What made the participants somewhat nervous in thinking about the new services was how to bill for them. They were used to talking with a client about operating results, but now how do you bill for the discussion? That was the new part. In the past, time was the factor in the billing for compliance services. They need to think in terms of the value of the consulting which might, in the
long run, be the most important service they perform.

CPAJ: Some professionals have increased their total revenue by unbundling services--charging separately for the financial statements and for interpreting those financial statements. Isn't that a little of what we are talking about here?

Kess: Exactly.

CPAJ: What other lessons were learned from the video on the new assurance services?

Brooks: What became very clear, was the need for CPAs in seeking to explore new opportunities to develop and hone their interpersonal skills. In some respect, what we saw in the videos was that opportunities would occur almost naturally when a good open dialogue exists between the CPA and his or her client. I heard negative reactions to new services: "My client wouldn't want me to do this or do that." "She wouldn't want to pay for that." The video showed practitioners who were able to develop new services by being open with their clients and asking them about their needs. We cannot overlook interpersonal skills that will enable the CPA to confidently go to
clients and ask the right questions and sell the service.

Primoff: As Barry Brownlow said on the assurance services video, once the CPA asks the client to provide the service, the CPA faces the problem of having to deliver when the client answers yes. And by the way, successful CPA clients that sell things are continuously talking to their customers about the quality of their products or services and are always trying to sell new ones. As Jack Brooks noted, many CPAs seem mired in the days when advertising and solicitation were ethically prohibited. Rightly or wrongly, the Supreme Court told us these prohibitions were against the public interest. Today, CPAs must talk to their clients and market their services.

Slavutin: To have a product or service but not the mechanism to create a business engagement is useless. An approach I learned from Practitioners Publishing Company is to focus on your 10 best clients--those who trust you and will listen to you and implement your advice. You don't have to know everything about everything. You need to be aware of some of the basics--in my field that would be estate and succession planning--and ask a lot of questions. What a wonderful opportunity. If you don't have the expertise after you identify the need, you bring in an expert you can trust and have him or her work out the details. Clients pay for this type of quarterback service.

Kess: That is why investment advisors are working so hard to develop relationships with CPAs.

CPAJ: And here, we are not talking about some future assurance service.

Slavutin: No. We are talking bread and butter services for the here and now. Also, readers should know that the AICPA's Statements on Responsibilities in Financial Planning Practice has a wonderful section on working with other advisors. It shows exactly who does what, how you state your responsibilities, and gives examples.

Primoff: We heard the constant refrain at the workshops from some CPAs that their clients are not very sophisticated. But we also sensed that the more successful CPAs brought their clients along, educating them as they explored new needs. These CPAs were directly responsible for making their clients sophisticated and keeping them that way. With the cost of computing coming down while simultaneously becoming ever more powerful, even the smallest business can be doing sophisticated financial analyses of its operations.

CPAJ: A portion of the program was devoted to the issue of non-CPA ownership of CPA firms. The AICPA and NASBA in the newly revised Uniform Accountancy Act are saying the ownership by CPAs of a simple majority of the voting and financial interests in a firm are all that is needed to protect the public interest. We also have the issue of commercial organizations such as American Express Tax and Business Services with no CPA ownership providing services by CPAs that CPA firms also do. What was the reaction of participants?

Brooks: I don't think the participants reacted to the issue as strongly as we thought they would. The discussion often switched to the strategic alliance issue and the desire to be able to accept commissions. I don't think most felt they had enough business to be considering taking a non-CPA type into partnership. But I also don't think they were all that happy with the idea of having non-CPA co-owners/partners in the profession. And they wondered how a regulatory scheme that would allow it would work.

Kess: The larger firms have the need for non-CPA owners. But the small, local firms don't have the kind of practice that gives rise to the need for them. Strategic alliances, yes...non-CPA owners no.

Woehlke: Sid, on that point, I disagree. Nobody knows for sure yet what the market structure for CPA services will be in 10 or 15 years. But it is altogether possible that a significant number of CPA firms will be "boutique firms," offering a combination of specialized services in two or three narrow areas with tremendous nimbleness that enables the firms to move into new specialized areas as older ones mature and wither. If that type of market structure develops, it will be common for smaller firms to admit non-CPA professionals to their ownership.

CPAJ: One of the important goals of the workshop was to convince the participants that it is worth the time and investment to learn about and explore the new service opportunities that have been developed and will be developed. The AICPA does not plan to stop at just the
six pack of services. Unless CPAs make an investment of time and energy in changing their ways, it will all be for naught.

Woehlke: Actually, I'm told Elliott's committee believed there are at least a couple hundred assurance services. The six pack are just the six service areas the committee thought should be first explored. In spring 1997, the AICPA transformed Elliott's "special committee" into a senior technical committee called the Assurance Services Executive Committee. That committee is carrying on the work begun by Elliott's special committee.

Kess: If CPAs do not invest time and energy in their future, they will fall by the wayside.

Slavutin: CPAs have to force into their daily routine a piece of time devoted to learning or developing new services. In the short-term, it means picking up the phone and calling one of their 10 best clients and starting to get their feet wet now. I wouldn't wait three or six months before making that first call. I would learn as I went along. I would also force into my weekly routine some time for longer-term strategic planning and marketing.

CPAJ: Where do we go from here, having conducted what from all indications was a very successful
program?

Brooks: The CPA societies have to continue the programs that have been started. In a major and coordinated way, they must assist CPAs in coping with the rapid pace of change and equip them to take advantage of the many opportunities that presently exist and will be created in the years ahead.

CPAJ: Gentlemen, thank you for
participating in this discussion. *

In Brief

Come in from the Cold

CPAs are facing difficult times ahead. Technological advances, changes in structure and regulation of the profession, new forms of competition, and shrinking demand for traditional services are some of the factors at work that threaten the livelihood of CPAs in public practice. State societies of CPAs and the AICPA are conducting programs to help CPAs cope and look at the up side of a changing world. The New York State Society of CPAs conducted a series of "Survival Skills Workshops" last summer to help its members adjust to and take advantage of the changes that are occurring. The workshops developed some hands-on approaches for dealing with issues that are simultaneously being explored in the CPA profession's vision project, involving over 5,000 CPAs nationally. Managing Editor James L. Craig, Jr., assembled the five principal presenters of the program to discuss what they hoped to accomplish from the program and the lessons learned. The world is not bleak for those who will take the time, explore new opportunities, and then put them into practice.