The CPA Journal

By Raymond A. Zimmermann, Mary Ann Murray, and Daniel Flaherty

Many people argue that benchmarking is inapplicable to the accounting profession because it is impossible to quantify the quality of accounting services. They find daunting the thought of comparing their productivity against the best in the field.

The primary benefit of benchmarking is the maximization of profits. Satisfied clients are more likely to pay their bills, request additional services, and refer new clients to the firm. In addition, more profitable firms have an easier time attracting and retaining new professionals.

Identifying a firm’s customers and the services provided to each customer provides a starting point for determining a benchmark. An examination of the volume of services provided, customers’ needs, the competition from other firms, and the firm’s specific goals help fine-tune the benchmarks. A firm should examine its financial and operational statuses and compare them against its competitors’, and it should analyze the processes and procedures needed to reach the relevant goals.

After the benchmark data set is determined, it is necessary to obtain as much information as possible. The information that has been collected must be analyzed in order to identify what is adaptable to the firm. Sources of data can include university libraries, professional associations, trade associations, government organizations, clearing houses, and consultants. Firms that are not direct competitors are another excellent source of data, because competitors may provide tainted or distorted data.

Each year the Texas Society of CPAs sponsors a survey that examines the management policies and performance of nonnational accounting firms over the past year. The survey allows small firms to compare their performance to that of other small firms from across the nation. The survey provides benchmarks for small firms to compare and analyze.

The Texas survey measures factors such as firm size, sources of income, employee benefits, overhead expenses, salary expenses, administrative procedures, and adoption of technology. The full report categorizes the responses by income, local population size, number of owners, and top 25% most profitable firms versus the overall response.

Characteristics of Survey Participants

Each participating firm was categorized into one of six groups, based on firm size and net fees generated. Performance measures were based on financial characteristics such as sources of fees, marketing activities, and administrative policies. Fringe benefits such as insurance coverage, retirement programs, overtime compensation, and sick leave were examined by category. This classification allows users to compare their firm with similar participating firms.

In the following figures, the reported averages are weighted according to the response rate for each category. The numbers in parentheses are the figures reported by the top 25% most profitable category of respondents.

Income

Accounting practices prospered in the year surveyed. Respondents reported a weighted average annual net income per owner of $110,500 ($201,300). Sole practitioners reported a weighted average of $99,500, whereas partners of multi-owner firms fared better, at $152,600. Small firms owned by sole practitioners reported the total number of compensated hours worked per firm as 6,558 (7,643) with billed hours of 4,038 (4,841), representing a billing rate of 61.5% (63.3%). Multi-owner firms had an effective billing rate of 57.7% (58.9%). The net fees realized per charged hour ranged from a low of $46 to a high of $95. The average was $65.2 ($83.9) per hour for sole practitioners and $76.7 ($90.0) per hour for multi-owner firms. It is obvious the main reasons for higher profitability were the higher percentage rate for billed hours and the substantially higher realization of net fees realized per charged hour. (See Exhibit 2).

Compensation

In 2000, starting salaries for new professional personnel averaged $27,100 ($28,900). The weighted average paid by sole practitioners was $23,700 ($26,300), and that paid by multi-owner firms was $27,100 ($31,600).

Overtime was paid by 45.3% (48.5%) of the firms. Just over one-fifth [21.2% (20.2%)] of the firms paid professional staff overtime at premium rates. Around half of the firms [48.0% (56.7%)] offered compensatory time off in lieu of overtime, and approximately 34.4% offered the option of choosing between comp time or paid overtime.

Of the respondents, 40.7% (39.8%) used incentive bonuses for client development as a method of compensation. Additionally, 16.9% (17.3%) of the participants based employee compensation on profits. Total annual compensation for salaried professional personnel varied greatly.

Sources of Fees

Fees derived from various service categories were, in many instances, reflective of firm size (see Exhibit 1). As firm size increases, audit fees increase. This can be attributed to many factors, such as peer review requirements and increased manpower needs. Meeting peer review standards is much more difficult for smaller firms that may not be able to afford personnel with expertise in every area. The additional expense associated with the audit function may be somewhat restrictive on smaller firms. Overall, audit fees represent approximately 11.4% (11.0%) of all fees collected. Audit fees constitute only 6.9% (8.1%) of the fees generated by sole practitioners versus 16.5% (14.2%) for multi-owner firms.

Tax services provide the bulk of the business for most firms. Overall, tax services or tax engagements account for approximately 48.9% (46.3%) of the fees collected. Contrary to the trend in auditing fees, as firm size increases tax services decrease as a source of fee collections. This can be attributed to the fact that an individual practitioner is better equipped and able to handle tax issues, especially for the many small companies that require them, than to handle audit engagements.

Review services represent approximately 3.0% (4.1%) of fees generated. Management advisory services are relatively uniform across firm sizes, with multi-owner firms with revenues greater than $1 million providing somewhat more of these services. Such firms are better situated to hire the necessary expertise to handle these fast-growing engagements.

Write-up services represent approximately 15.5% (12.9%) of all fees generated. These fees are less closely related to firm size than audit or tax services. However, there are differences to be found. Sole practitioners tend to generate a larger percentage of their income from write-up services than do multi-owner firms. Smaller multi-owner firms generate write-up fees substantially higher as a percentage of the total fees generated than other groups.

Other services constitute only a small percentage of revenues. Audit, tax, and write-up services comprise more than 75% of all fees generated. The remaining 25% are generated from other sources, such as personal financial planning, trustee services, technology consulting, litigation support, insolvency assistance, and estate planning. (See Exhibit3).

Office Technology

Over 88% of all firms reported using the Internet as a resource in their practice. The Internet is an excellent tool for researching IRS rulings, IRS tax audit procedures, or announcements by various accounting agencies. Internet websites, however, are not always reliable; frequently they are out of date or contain errors. A website that is not from an authoritative source (e.g., the IRS) should be viewed with due care.

Approximately 34.9% of all firms use the Internet for planning purposes, such as obtaining investment advice and information. Some go even further and use it for operational and strategic planning. Amazingly, 72.1% of all firms use the Web for tax research. Larger, multi-owner firms are more likely to use the Internet for tax purposes, perhaps because they encounter more unique tax issues.

Overall, approximately 41% of firms provide electronic filing of tax returns. The average charge for this service is $30, but nearly one-third of firms provide this service at no “charge.” As expected, the use of e-mail, especially to communicate with clients, has grown dramatically over the past few years. Overall, 78% of the respondents use e-mail as a means of communication, both internally and externally. Since e-mail has become so ubiquitous, any firm that hesitates to use e-mail in its day-to-day operations is at a disadvantage.

Fringe Benefits

Some compensation experts have estimated that fringe benefits can represent as much as 40% of the salary base. The results of the survey were surprising. Medical insurance was provided by only 68.8% of the firms, with 48.0% providing life insurance coverage. Disability income insurance was available in 24.8% of firms, and 65.0% of firms provided some form of retirement plan.

Approximately 55.2% (62.8%) of all responding firms fund their retirement program. It is interesting to note that overall 60.3% of sole proprietors fund retirement while the multi-owner firms had a funding rate of 46.8%. These percentages reflect only those firms that made the benefits available.

Professional license fees were paid by 72.4% of the firms, and 82.2% reimbursed employees for continuing education expenses. In contrast, only about 25 to 30% of the firms provide financial assistance to employees in the certification process. Surprisingly, approximately 18% of the firms do not provide continuing education. Continuing education is extremely important to all parties involved, and it is in the employer’s own interest to ensure that all employees receive adequate continuing education.

150-hour requirement. Many individuals currently practicing under the supervision of a CPA have only a bachelor’s degree. Under the 150-hour rule adopted in many states, these individuals will have to return to school to qualify to sit for the CPA exam. This additional educational expense is normally borne by the individual. To avoid this expense, many personnel may elect to switch from public accounting to industry or government positions, or chose alternative certifications (e.g., the CIA, CMA, or CFE). Implementation of the 150-hour requirement will likely result in fewer “qualified” graduates available each year. Competition among firms for this shrinking pool will probably drive up entry-level salaries and benefits.

Future Issues

The expansion of firms into new areas of service has created a growing need for professionals that are not accountants, such as actuaries or lawyers. When asked whether their firm would be willing to consider hiring non-CPA professionals, 41% (53.2%) of the firms replied affirmatively. Allowing non-CPAs to become owners was acceptable to only 11% of respondents.

Approximately 13.4% of firms think securities sales will become an important service offered in the future. As the baby boom generation approaches retirement, its members will need investment services and tax advice; the CPA who can provide both these services will be at a distinct advantage. The sale of insurance products was also predicted by 11.2% of the firms to become increasingly important. The graying of the baby boom generation is probably also why eldercare services is anticipated as a future service by 22.2% of responding firms.

Surprisingly, providing legal services was an issue anticipated by about 2.7% of the firms. There are more than a few legal and regulatory barriers preventing CPA firms from offering legal services, and the customer demand for them remains uncertain at present.

Conclusion

The future contains many opportunities for the accounting profession. In order to meet the demands of competition, accountants must be willing to diversify their services, learn new skills, and adapt to a constantly changing environment.

The full survey results contain helpful information on international activities, seasonal staffing, and office technology, along with key balance sheet ratios and summary balance sheet information. This information can prove valuable to the local and regional firm interested in measuring its performance against other firms.

Readers that are interested in obtaining the full results of this survey should contact Dianne Jones, staff liaison for the MAP Survey Committee, at (972) 687-8519.

Raymond A. Zimmermann, PhD, is an associate professor of accounting at the college of business administration, University of Texas at El Paso.
Mary Ann Murray, PhD, is an associate professor of quantitative management in the department of finance and quantitative management, school of business administration, St. Mary’s University, San Antonio, Texas, and
Daniel Flaherty, PhD, CIA, CMA, CFM, CFE, CCE/A, CPA, is a professor of accounting in the department of accounting, school of business, Southwest Texas State University, San Marcos, Texas.