March 2001
A Basis for Comparison: The National Results of the 1999 Management of an Accounting Practice Survey
By Raymond A. Zimmermann, Mary Ann Murray, and Daniel Flaherty
The annual Management of an Accounting Practice Survey sponsored by the Texas Society of CPAs examines the management policies and performance of accounting practices. The survey, which is limited to non-national firms, examines firm size, sources of income, employee benefits, overhead expenses, salary expenses, and administrative procedures. In addition, the survey reports the extent to which respondents address international issues for their clients.
The report also categorizes responses by income; size of city; number of owners; and top 25% most profitable firms versus the total respondents. This article addresses the responses concerning income level and the number of owners. Readers interested in the full report should contact Dianne Jones, Texas Society staff liaison for the MAP Survey Committee, at (972) 687-8519.
A copy of the results can be purchased online at www.tscpa.org/peerreview/ mbrsection/maps/default.html.
Survey Participants
Participation in the survey was voluntary and anonymous. Each of the 1,484 participating firms fell into one of six groups, determined by firm size (sole practitioner or multiowner) and net fees generated. Performance measures were based on financial characteristics, sources of fees, marketing activities, and administrative policies. Salary and fringe benefits such as insurance, retirement programs, overtime compensation, and sick leave also were examined for each group.
Firms can use the following sample of the survey’s results to determine how they measure up. (The averages are weighted according to the response rate for each category, and numbers in parentheses are the 1998 results.)
Financial Characteristics
Income. Accounting practices prospered during the past year. Respondents to the survey reported a weighted average annual net income per owner of $121,700 ($114,200). An examination of sole practitioners reflects a weighted average of $98,500 ($93,800). This represents an increase of approximately 5.01% over the previous year (7.07% increase from 1997 to 1998). Multiowner firms reported a weighted average of $146,800 ($138,100). This represents an increase of approximately 6.3 % for multiowner firms (8.4%). Figure 1 reflects the averages across the past three years based on firm size and category.
As seen from the survey results, practicing as a sole practitioner reduces earning capacity. Sole practitioners wanting to increase individual earnings should expand their practice and generate more revenue by offering additional services, after a careful evaluation of the advantages and disadvantages of operating a larger firm.
Billing. Although respondent CPAs generally earned a good income, it is apparent from the survey that their salaries did not come easily. One-person firms reported the total number of hours worked as 6,501 (6,221) per firm, with billed hours of 3,926 (3,641), representing a billing rate of approximately 60.4% (58.5%). Meanwhile, multiowner firms reported a weighted average of 38,251 (34,976) total hours worked with 22,294 (20,438) actually charged, resulting in a billing rate of approximately 58.3% (58.4%). The net fees realized per charged hour range from $50 to $94, with an average of $64.40 per hour for single owner firms and $72.60 per hour for multiowner firms.
Compensation. In 1999, the average starting salary for new professionals was $25,800 ($23,200). Sole practitioners with net fees of less than $100,000 paid the low of $20,900 ($16,400), while multiowner firms with net fees in excess of $1 million paid the high of $29,500 ($28,300). Overall, sole practitioners paid a weighted average of $23,900 ($21,500), while multiowner firms paid $27,900 ($25,300). Annual compensation for salaried professionals with more experience varied greatly, but, in general, accountants at all levels experienced a pay increase in 1999 (See Exhibit 1).
Professional personnel received overtime pay from 42.8% (42.8%) of the firms. Of these, 18.4% (22.4%) of the firms paid premium rates (i.e., time and one-half). The majority of the firms, 52.3% (52.1%), offered compensatory time off in lieu of overtime, and approximately 31% (31.2%) offered employees a choice between compensatory time and paid overtime. A number of firms also compensated their employees through incentive bonuses [41.6% (41.4%)] and profits [13.4% (15.1%)].
Sources of Fees
Audit services. An examination of Exhibit 2 shows that audit fees, as a percentage of fees collected, increase directly with firm size. In the aggregate (weighted average across all firms), audit fees represent approximately 11.4% (11.7%) of all fees collected, but audit fees constitute 17.0% (17.1%) of the fees generated for multiowner firms and only 6.2% (7.1%) for sole practitioners.
Tax services. According to the survey, tax services are still the bread–and- butter fees for most firms. Overall, tax services or tax engagements account for approximately 47.5% (46.4%) of fees collected (see Exhibit 2). Contrary to the trend in audit fees, the percentage of firm income generated by tax services is inversely related to the size of the firm. Sole practitioners should be encouraged by IRS findings that indicate more taxpayers are using paid preparers each year.
Other professional services. Review services, which represent a small percentage of revenues, constitute approximately 3.3% (4.2%) of the fees generated. In general, management advisory services appear to be nearly uniform across all firm sizes, generating approximately 6.6% (7.1%) of all fees. The exception is that multiowner firms with revenues greater than $1 million more typically provide this service, which is not surprising because their larger client base would support demand for such unique services. Additionally, multiowner firms are better equipped to hire the expertise necessary to handle such clients.
Write-up services. Write-up services are responsible for approximately 15.4% (15.4%) of all fees generated. The fees generated by this service are not as dependent on firm size as are audit or tax services; however, trends do exist: Sole practitioners tend to generate a larger percentage of their income from write-up services than multiowner firms [16.5% (17.5%) versus 13.1% (12.3%), respectively] and the largest multiowner firms reported a substantially lower percentage of fees from write-up services [10.6% (9.7%)].
Other services. While important in fulfilling the needs of the client, other services constitute only a small percentage of the revenues produced. Tax, audit, and write-up services combined provide nearly 75% of all fees generated. 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.
International Activities
As the economy becomes more global, it is no surprise that firms are engaging in international activities with their clients—most commonly, by providing tax services. As firms grow in size, so too does the likelihood they will have to render more international advice. Of all respondents, 20.4% (22.3%) have clients that own material interests in an active business in a foreign country, over half have clients that buy and sell goods or services outside of the United States, and approximately one-third have clients that possess passive investments in foreign countries. The survey suggests that even small firms should expect to encounter foreign issues in their everyday practice. Maintaining the expertise for these clients can be difficult and time-consuming. Approximately 12% of firms charge premium fees for these services, with about 34% assessing a 110% premium rate, 44% assessing a 110–120% premium rate, and 8.7% assessing a 130% premium rate.
Fringe Benefits
The standard paid staff benefits of an accounting practice are reflected in Exhibit 3.
Insurance. Medical insurance was provided by 70.2% (53%) of firms and life insurance was provided by 52.0% (48%). Disability income insurance was available through 27.8% (25%) of the firms, and 63.8% (59.6%) of the firms provided some type of retirement plan. The questionnaire did not ask the respondents to indicate whether the benefits were employer- or employee-funded.
Certification. Approximately 72% (65.9%) of firms paid professional license fees and about 82% (73.2%) of the firms reimbursed employees for continuing education expenses. Only about 25–30% of the firms provided financial assistance to employees seeking certification. CPA examination review fees were paid by 22.2% (23.9%) of the firms and examination fees were paid by 28.9% (29.3%). From these findings, it appears that firms leave the responsibility of obtaining the license to the individual.
Currently, many individuals that hold only a bachelor’s degree are practicing under the supervision of a CPA. Under the 150-hour rule, which has been adopted in many states, these individuals must obtain more university credits to sit for the exam. Usually, these individuals pay for the additional education from their own pockets. As a result, it would appear that many noncertified personnel elect to switch from public accounting to industry or government work, which may not require certification, or choose to pursue alternative certifications such as the CIA, CMA or CFE. The result for CPA firms could be the need to hire new, more extensively educated professional staff. CPAs will become more difficult to locate and hire. How this will affect pay scales and benefits for new personnel is unknown, but it is anticipated that pay scales and benefits will increase.
Editor:
Robert H. Colson, PhD, CPA
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