By Raymond A. Zimmermann, Daniel Flaherty, and Mary Ann Murray
Local and Regional Firm Results
The annual Management of an Accounting Practice Survey conducted by the Texas Society of CPAs looks at more than 1,500 local and regional firms from across the country. National firms are not included in the study. The respondents are grouped by firm size, location, and profitability so that users can easily find the data that is most applicable and relevant to them. The survey allows small firms to compare their performance to other comparable entities on those attributes that impact a firm's operations, such as sources of income, employee benefits, overhead and salary expenses, and administrative procedures.
The 1998 survey's general conclusion is that accounting practices are doing well. Income and billable hours are generally up. The bread and butter work for most firms is tax services, although they are more important for smaller firms. Audit work is also an important part of practice, especially for larger firms. Management accounting services, write-ups, and compilations also, in varying degrees, round out the primary services.
Each year, the Texas Society of CPAs sponsors a survey examining the management policies and performance of accounting practices from the previous year. The 1998 Management of an Accounting Practice Survey examines many aspects of an accounting practice but is generally limited to non-national firms. It does attempt to include large regional firms. The full report (available upon request from the Texas Society) categorizes the responses by firm income, population of the city of the respondents, number of owners, and top 25% most profitable firms versus the overall response. In addition, information on both national and international activities is reported.
When comparing the 1998 results to prior years', it should be kept in mind that the responding firms are not necessarily the same from one year to the next. The total number of responses during each year, however, is sufficient to ensure statistically representative averages.
Each participating firm was categorized into one of six groups based on firm size and net fees generated. Performance measures based on financial characteristics, sources of fees, marketing activities, administrative policies, and fringe benefits were calculated for each group. This allows readers to compare their firms with the reported average of similar participating firms and examine which attributes impact a firm's operations. For example, a small, multiowner firm with annual fees between $400,000 and $1 million can compare itself to responding firms in its peer group. In addition, the survey reports the increasing extent to which respondents must address international issues for their clients. Firms that are willing to take on new expertise and desire to expand their practice can find lucrative opportunities in the international area.
Participation in the survey was voluntary and anonymous. A total of 1,554 firms chose to participate. Participants were categorized as either sole practitioners or multiowner firms. An additional subclassification, based on annual fees generated, was used to further divide the respondents into more relevant categories. The number of respondents in each category is displayed in a sidebar.
Highlights of the survey, with comparable amounts from the 1997 survey (in parentheses), demonstrate trends in the profession. The averages reported are weighted according to the response rate for each category.
Income. Accounting practices prospered during the past year. Respondents reported a weighted average annual net income per owner of $114,200 ($106,600). Sole practitioners reported a weighted average of $93,800 in 1998 ($87,600), an increase of 7.07% over the previous year. Multiowner firms reported a weighted average of $138,100 ($127,400), an increase of 8.4%. Figure 1 reflects the averages across the past three years based on firm size and category.
Overall, sole practitioners reported total hours worked per firm of 6,221 (6,508) with billed hours of 3,641 (3,835). This represents a billing rate of 58.5% (58.9%). Multiowner firms, on the other hand, reported a weighted average of 34,976 (32,086) total hours worked with 20,438 (18,936) actually charged. This results in an effective billing rate of 58.4% (59.0%). The strong national economy seems to be benefiting the larger firms more. The net fees realized per charged hour ranged from $50 to $85. The average was $64 per hour for sole practitioners and $70 per hour for multiowner firms.
Compensation. The survey does not yet reflect the overall increase in starting salaries that would be expected because of reported staff shortages in some areas (See the following section on fringe benefits). Significant increases were reported at the larger practice units. In 1998, average starting salaries for new professional personnel averaged $23,200 ($23,700), ranging from the $16,400 paid by small sole practitioners to the $28,300 ($26,500) paid by large multiowner firms. The weighted average paid by sole practitioners was $21,500 ($21,500); for the multiowner firms, $25,300 ($23,200). Overtime for professional personnel was paid by 42.8% of the firms (43.8%). Reportedly 22.4% (23.8%) of the firms paid professional staff overtime at premium rates, and the majority of the firms, 52.1% (53.8%), offered compensatory time off in lieu of overtime pay.
Of the respondents, 41.4% (42.7%) reported using incentive bonuses as a method of compensation for client development. Additionally, 15.1% (13.5%) of the participants based employee compensation on profits. Total annual compensation for salaried professional personnel varied greatly, as seen in Exhibit 1.
Sources of Fees
Fees derived from various service categories were, in many instances, reflective of firm size. Based on averages across the various firm sizes, aggregate revenue sources (categorized by firm size) are provided in Exhibit 2..
An examination of the data reveals that audit fees, as a percentage of fees collected, increase directly as firm size increases. This confirms the widely held assumption that many smaller firms choose not to do audits because of the additional costs of peer review and quality control systems required for audits. In the aggregate (weighted average across all reporting firms) audit fees represent approximately 11.7% (11.6%) of all fees collected. Audit fees constitute only 7.1% (6.7%) of the fees generated for sole practitioner firms versus 17.1% (17.1%) for multiowner firms.
Tax services are the bread and butter of most practices. Overall, tax services or tax engagements account for approximately 46.4% (45.3%) of the fees collected. Contrary to auditing fees, tax services decrease as firm size increases. This may be attributed to the large pools of small clients requiring tax services (versus fewer who need audit assistance) and to the fact that the sole practitioner is better equipped to handle tax issues than audit engagements.
Review services comprise approximately 4.2% (3.5%) of the fees generated and a proportionally small percentage of revenues. Generally, management advisory services are relatively uniform across firm sizes, generating approximately 7.1% (6.6%) of all fees. However, large multiowner firms tend to be more involved in providing these services. This is not surprising, since they tend to have larger clients with more unique needs. In addition, such firms are better situated to hire the necessary expertise to provide specialized services.
Write-up services comprise approximately 15.4% (14.7%) of all fees generated. The fees generated by this service are not as dependent on firm size as are audit or tax services. However, there are differences to be found. Not unexpectedly, sole practitioners tend to generate a larger percentage of their income from write-up services than do multiowner firms [17.5% (16.7%) versus 12.3% (12.4%) respectively]. The largest of the multiowner firms report write-up fees substantially lower [9.7% (10.2%)], as a percentage of the total fees generated, than those reported in the other categories.
Other services, while important in fulfilling the needs of the client, constitute only a small percentage of the revenues produced. Tax, audit, and write-up services provide in excess of 70% of all fees generated. It should be noted from Exhibit 3., however, that the total percentage of fees generated from other sources has decreased marginally between 1997 and 1998. Services that fall in the "other" category include litigation support, computer hardware sales, software selection, business valuations, mergers and acquisitions, payroll processing, securities sales and advice, economic feasibility studies, and executive searches. Figures 2 and 3 reflect the averages across the past three years based on firm size and category.
As the economy and the marketplace become increasingly global, it should come as no surprise that more firms are becoming actively engaged in international activities with their clients. It should also be expected that as firms grow in size, they will have to render more international advice. Of the respondents, 22.3% (26.1%) reported clients owning material interests in an active business in a foreign country. Over half of the respondents have clients that buy and sell goods or services outside of the United States (50.7%), and approximately one-third of the clients (32.6%) have passive investments in foreign countries. Due to the rapid globalization of business operations, even small firms must be prepared to encounter foreign issues in their everyday practice. Because of the more complex nature of providing international services, some firms (approximately 14%) charge premium fees. Forty-six percent of the firms that reported charging a premium assess the premium rate at 110% of the standard fee, another 24% assessed premium rates between 110% and 120%, and a relatively small percentage charged as much as 130% of the standard rate. Tax service is the most common activity for the firms involved in international activities.
Most firms offer some type of fringe benefits. The typical paid staff benefits found in an accounting practice are reflected in Exhibit 3.
When examining the results of the survey, the authors were surprised by the benefits offered. Medical insurance was provided by only 53% of the firms, and only 48% offered life insurance coverage. Disability income insurance was available in 25% of the firms, and 59.6% of the firms had some type of retirement plan. It should be noted that the questionnaire did not ask whether the benefits were paid by the employer or employee.
Professional license fees were paid by 65.9% of the firms. Nearly three-quarters (73.2%) of the firms reimbursed employees for continuing education expenses. In contrast, only about 2530% of the firms provided financial assistance to employees in the certification process. CPA examination review fees were paid by 23.9%, and examination fees were paid by only 29.3% of the firms. Generally, it appears the firms leave the responsibility of obtaining the license up to the individual. It is somewhat surprising that more firms do not support continuing education. It is the firm that will suffer from a malpractice suit, and one way to help prevent malpractice is to keep employees current. Continuing education is extremely important to all parties involved, and the employer should be protecting itself by ensuring that all employees receive adequate continuing education.
The survey showed that many individuals currently practicing have only a bachelor's degree. As the 150-hour rules adopted in many states begin to become effective, these individuals may have to return to school at their own expense to obtain the necessary hours to qualify to sit for the exam. Whether these individuals choose to remain in the profession will have an effect on the economies of accounting practices over the next few years.
More to Learn
These are only a few of the results reported in the survey. The full report contains additional information on international activities, seasonal staffing, and office technology, along with key balance sheet ratios and summary balance sheet information. It breaks out information for the 25% most profitable firms and firms in cities with populations in excess of 250,000. This information can prove valuable in assessing one's performance record in comparison to other firms. It should be kept in mind that the survey involves only local and regional firms and does not include data from the national firms. It is organized to help readers easily find relevant comparative data and breaks out the most profitable firms for closer examination. Contact Dianne Jones, staff liaison for the MAP Survey Committee, at (972) 687-8519 for the full results of the survey. *
Raymond A. Zimmermann, JD, PhD, is an associate professor of accounting at the University of Texas at El Paso. Daniel Flaherty, PhD, CIA, CMA, CFM, CFE, CCE/A, CPA, is professor and chair of the department of accounting at Southwest Texas State University School of Business in San Marcos. Mary Ann Murray, PhD, is an assistant professor of quantitative management at St. Mary's University in San Antonio.
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