By Larry J. Rankin and Florence C. Sharp
In Brief
Toward Higher-Profit-Margin Services
CPAs in increasing numbers are embracing the opportunities presented by new and emerging client services. The results of a recent PCPS-sponsored survey show a relative shift in the mix of client services away from traditional accounting, attestation, and tax practices toward higher-profit-margin consulting and assurance services.
This change is being driven by the marketplace. Many CPA firms are "catching the vision"--anticipating and creating new opportunities--and following the AICPA's lead. At the same time, the attest market is still ripe for firms that focus their energies. Niche practices can leverage specialized skills and expand upon a solid foundation. With firms exiting the audit market, there is newfound demand for attest specialists.
Though there remains a bright future for CPAs that build on their strength in traditional services, the overall outlook seems to confirm that the trend toward consulting, assurance, financial, and other value-added services already under way will only continue.
Assurance services. Consulting work. Niche practices. One-stop shopping. New accreditations. The accounting profession and its CPA firms are in the midst of change: "CPAs working in public practice will expand markets and services, focus on the ever-changing needs of their clients and the public, as transactions and structures are increasingly more complex" (CPA Vision: Focus on the Horizon, www.cpavision.org/vision.htm).
To help CPAs understand some of these changes, the AICPA Alliance for CPA Firms (PCPS) recently sponsored a survey of its member firms. It asked managing partners to describe past and predicted changes in their mix of client services, in percentages of total billings, over a 10-year period.
Shift Toward Consulting and Assurance
The overall results of the survey support the widely held view that CPA firms, as a group, have reduced their reliance on traditional accounting, auditing, and tax services and are relying more and more on consulting services for revenue growth (see Exhibit 1). The results also suggest that firms are moving into the practice of new assurance services, as developed and encouraged by the AICPA and the Vision Process.
The first group of managing partners was asked about their firm's mix of services from 1993 to 1998. Respondents indicated that, on average, consulting services grew from 9.7 to 14.2% of billings. Assurance services represented a very small proportion of billings but increased from an average of 0.6 to 1.0% of revenues during the 19931998 period. These increases were accompanied by decreases in the other service areas. Firms indicate a decreasing proportion of accounting services (from 25.2 to 22.5%) as well as slightly decreasing proportions of audit, review, and other attestation services (from 21.9 to 20.8%) and tax preparation and planning (from 42.6 to 41.5%).
The second group of managing partners was asked to predict changes in their mix of client services from 1998 to 2003. On average, respondents expect to see the greatest growth in consulting services: from 12.9 to 20.5% of revenues. They also expect assurance services to increase from 1.3 to 4.6% of billings. At the same time, partners expect the biggest relative decline to come in tax preparation and planning (from 43.6 to 38.3% of revenues). They also anticipate a decrease in accounting services (from 22.9 to 19.2%) and in audit, review, and other attestation services (from 19.4 to 17.3%).
Relying Less on Audits
A significant number of CPA firms are relying less on audit, review, and other attestation services for their revenues. Over the past five years, 37.4% of the firms experienced a reduction in the percentage of billings from these services. Over the next five years, 40.1% of the firms predict that the percentage of billings from audit, review, and other attestation services will fall.
Further analysis of the responses shows that a significant number of firms gave up attestation services altogether. The percentage of firms reporting no audit, review, and other attestation services jumped from 15.8% in 1993 to 20.2% in 1998. Looking forward, 21.9% of the second group of firms reported no attestation services in 1998, but 23.4% expected to be out of this market in 2003. Between 87 and 89% of the firms not offering attestation services are single-partner firms.
Managing partners reporting a reduction in billings from audit, review, and other attestation services were asked how important 18 different factors were in causing the change; the ranking of the top contributing factors is shown in Exhibit 2.
Looking back, the first group of managing partners attributed the decreasing proportion of revenues from these services between 1993 and 1998 to several factors. The two factors rated highest were difficulty competing with other firms' low audit fees and higher profit margins for nonattest services.
Looking forward five years, four contributing factors were emphasized by respondents predicting a reduced share of billings from audit, review, and other attestation services. Consistent with the first group's report on past changes, the second group also considered profit margins and other firms' low fees significant. But two other high-ranking factors, decreasing market demand for audits and development of a niche practice, reveal a clear belief that market forces are driving this change.
Beyond the top-ranked responses, certain other factors still affect a significant number of firms. Almost a third of the firms whose percentage of attestation revenues fell in the last five years lost clients due to mergers, and a fourth of those looking ahead anticipate such losses. Other factors were ranked by a number of firms as "not at all important": peer review requirements, the complexity of standards, the new fraud standard, public expectations of fraud detection, and lack of technical ability. These responses reinforce the conclusion that it is primarily market forces driving CPA firms to diversify their practices, not an inability to deliver high-quality attestation services.
Audits as a Niche Practice
The survey provided evidence that, although a significant number of firms are reducing their reliance on audit, review, and other attestation services, this segment of public practice continues to offer considerable opportunities for CPAs. A surprising 28.8% of firms reported an increase in the share of billings from these services between 1993 and 1998. In addition, 18.4% of firms predicted a relative increase in these services from 1998 to 2003.
As some firms moved out of audits or diversified their practices, it appears that others saw an opportunity for the audit specialist. Managing partners reporting a relative increase in audit, review, and other attestation services rated the importance of 19 factors; the top 10 are shown in Exhibit 3. The firm's development of audits as a niche market was the single most important factor cited by managing partners reporting an increase in their percentage of audit, review, and other attestation services revenue from 1993 to 1998. Firms that had more than one partner also noted an increased market demand for audits during this period.
Managing partners predicting a relative increase of these revenues in the future appear to be looking at the market from a different perspective. For example, they cite increased market demand for audits, reviews, and other attestation services as important factors affecting their practice plans. The large number of firms scaling back these services may be creating market opportunities for other firms, even if overall demand is flat. These partners also cited the development of niche markets in both audits and reviews as important. It seems some have rushed to fill a demand created by the withdrawal of many firms from the audit market.
In most cases, responses from various types of firms were quite similar. However, firms with four or more partners also noted internal changes that contributed to increasing the share of revenues from audit, review, and other attestation services: improved efficiencies from the use of audit software and a risk-based audit approach.
Emerging Assurance Services
Although assurance services currently represent a small proportion of billings, the results indicate a considerable upward trend. Only 11.3% of firms experienced a relative increase in billings from assurance services between 1993 and 1998, but 43.4% of firms predict that assurance services will increase by 2003. In fact, 26.3% of the second group of firms offer no assurance services currently but plan to do so within the next five years.
Managing partners from both groups ranked the importance of 18 factors related to the increasing proportion of billings from assurance services (see Exhibit 4). The 58 managing partners from firms that had an increase in assurance services between 1993 and 1998 selected, on average, five important reasons for the increase: increasing market demand for assurance services, higher profit margins for assurance services, the firm's development of assurance niche markets, ease of entry into the assurance services market, and assurance engagements resulting from audit or accounting service relationships.
The 264 managing partners from firms predicting an increase in assurance services by 2003 rated the same five factors to be important reasons for the increase. They also indicated that the AICPA's identification of assurance service opportunities (No. 4) has affected their plans for increasing these revenues.
Types of Assurance Services. Respondents also portrayed the types of assurance services provided in 1993 and 1998 and the services they plan to offer in 2003 (see Exhibit 5). Managing partners from the first group of firms indicated that a low percentage of their firms offered business performance measurement and information systems reliability services in 1993 (5.3% and 3.7%, respectively). However, by 1998, a slightly higher percentage of their firms offered both (9.7% and 6.4%), and CPA ElderCare services and risk assessments became more significant (4.5% and 4.1%). It must be noted that, in general, the 1998 estimates of the share of revenues from assurance services were considerably higher for the group looking forward than for the group looking back.
Results from the second group of firms show that managing partners predict growth in all seven of the listed assurance services from 1998 to 2003. The percentage of CPA firms planning to offer business performance measurement is expected to more than double (from 16.3 to 34.9%) between 1998 and 2003. Also, the percentage of firms providing risk assessments and CPA ElderCare services is predicted to more than triple (from 5.6 to 19.4% and 8.6 to 26.6%, respectively). The AICPA's Assurance Services Committee suggested that these three assurance services were particularly suited to delivery by small CPA firms. The percentage of firms offering health care services is expected to grow from 6.3 to 15.6% by 2003. Finally, managing partners predict that technology-related services like information systems reliability, electronic commerce, and WebTrust will be offered by an increasing number of firms (from 11.0 to 22.5%, 2.5 to 14.5%, and 0.3 to 8.2%, respectively). These responses suggest that CPA firms will support the AICPA's recent efforts to brand and market certain assurance services, such as CPA Performance View, CPA ElderCare Services, CPA Systrust Services, and, to a lesser extent, CPA WebTrust.
The identification of assurance service opportunities by the AICPA has affected this emerging-practice area for a significant number of CPA firms. While firms that built assurance practices between 1993 and 1998 ranked it No. 7, those planning to expand assurance practices ranked it No. 4. The AICPA's training in assurance services and its marketing and advertising support, both recent developments, also jumped in importance. For all firms, the other major factors contributing to revenue growth are market forces. Respondents expect both an increased demand for specific assurance services and the ability to influence that demand through current accounting and audit clients. CPAs see opportunities to move easily into these high-profit-margin service areas and to establish assurance niche practices.
Rapidly Growing Consulting Work
The survey results confirm the widespread view that CPA firms have seen, and will continue to enjoy, rapid growth in the proportion of revenues they derive from consulting services. While 53.1% of the firms from the first group report an increased share of revenues from consulting services in the last five years, 70.2% of the firms from the second group predict increases in the next five years. Managing partners rated the importance of 16 factors that potentially contribute to increasing consulting services, and the top responses paint a picture of professional firms responding to market forces (see Exhibit 6).
For firms with past and predicted relative growth in consulting revenues, one reason was rated more important than any other by managing partners: increasing market demand for consulting services. Consulting is a well established and growing market. The other four highly rated reasons were also market factors: higher profit margins for consulting services, the firm's development of consulting niche markets, consulting engagements resulting from audit or accounting service relationships, and ease of entry into the consulting services market. The ratings of these factors are remarkably similar to those supporting plans to increase revenues from assurance services. This comparison is not surprising, given the similar requirements for delivering both types of services. In fact, CPAs' consulting experiences probably make them more willing to move into assurance services.
Partners also identified the consulting services offered for each time period (see Exhibit 7). For all the services listed, the actual number of firms offering them increased from 1993 to 1998 and was predicted to increase from 1998 to 2003. Partners were asked to identify their top three services in terms of billings. In both groups, personal financial planning, business valuations, and computer software were chosen most often. The AICPA has accreditations in personal financial planning (PFS) and business valuation (ABV). Although partners did not rank accreditation very highly in contributing to the proportionate increase of consulting revenues in the past, it was ranked higher by firms predicting increases in the future.
Financial services also made a strong showing, with 16% of partners predicting it will be among their top three consulting revenue producers. Other important and growing consulting services indicated by the managing partners were business succession planning, mergers and acquisitions, compensation and benefits, forensic accounting and litigation, strategic planning, and internal control evaluation and planning.
New Opportunities
The results of the survey of PCPS member firms show a shift in the relative mix of client services from traditional accounting, attestation, and tax practices to higher-profit-margin consulting and assurance services. Market forces are primarily driving this change. Apparently, many CPA firms are "catching the Vision" of anticipating and creating opportunities to provide value-added services to meet the changing needs of clients. They are doing this by--
* taking advantage of specialized skills and knowledge to establish niche practices,
* planning strategic entries into the growing consulting and assurance markets,
* providing clients with one-stop shopping for financial and other services, and
* specializing in audits, reviews, and other attestation services.
Has your CPA firm "caught the Vision"? *
Larry J. Rankin is an associate professor at Miami University, Oxford, Ohio (rankinlj@muohio.edu) and
Florence C. Sharp is the Charles G. O'Bleness Professor at the Ohio University School of Accountancy (sharpf@ohiou.edu).
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
©2006 CPA Journal.
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