Hello. Yes, long time no speak. Since there’s been a global pandemic going on, I’ve been taking it extra easy. No need to exert myself when no one else is.
Oh, you have been exerting yourselves? I get that being stuck home hasn’t been great for a lot of people, and lots of accountants don’t know what to do without work, so you’re saying lots of you have just been working the whole time? Am I in the ballpark? Oh, man. That makes me sad.
Look, I don’t know what to tell you; the last couple of years have been weird. So weird in fact that no one—and I mean no one—would blame you if you said, “You know, I’m going to take it easy until this blows over.” And if your manager or partner threatens to fire you, or hangs a guilt trip on you, just quit. Lots of people are doing it! You’ll find another job. Probably a better one! Don’t settle for shitty employers, please.
Alright, alright. This is supposed to be a post of predictions, and as I’ve stated previously, I don’t like making predictions. It’s just one more thing that I am not good at. But it feels like a good exercise in planning for things that we could reasonably expect to happen. And also to try imagining things that we can’t reasonably plan for at all. Things like PwC screwing up the Oscars or corrupt audit partners at the top of KPMG or a fucking pandemic upending the whole world aren’t all that surprising when you think about it. It’s just that virtually everyone didn’t take the possibility of these things seriously. So when they do happen, everyone is SHOCKED and can’t believe how the thing that could have never happened, happened.
So let’s try to be better than that. Or worse. I’d be a fool if I didn’t admit that there’s a greater than zero chance that I’ll get every single prediction wrong.
Here we go.
The metaverse will be the next big overhyped thing in accounting
I’m old enough to remember when all anyone could talk about was how the blockchain would revolutionize accounting. So what happened on the way to this triple ledger revolution? Oh, yeah. It’s actually super technical and boring. “How does it work?” an auditor in the near future might ask. Someone with a Ph.D. in computer science will provide a response that will be nearly incomprehensible to virtually every auditor in practice today (which is OK with Barry Melancon, apparently).
Not that I doubt the impact that blockchain will have on accounting and auditing. It will provide better security and improve the quality of data.
The same cannot be said for Mark Zuckerberg’s latest pipedream: the metaverse. Oh yeah, it’s not even his idea. He stole it from Neal Stephenson. The general idea is that people will plug into a virtual world to hang with friends, go to work, concerts, and do countless other activities they can’t or won’t do in the real world.
So naturally, I recently came across an article that posited how the metaverse will change accounting. These changes mainly revolve around people interacting with each other in a virtual environment, which sounds only slightly worse than how we’re interacting with each other online right now. I can only imagine the other disappointing uses for the metaverse that accounting will come up with. Among them: filling out timesheets in the metaverse, cheating on ethics exams in the metaverse, and paying lip service to diversity in the metaverse. I’m already over it.
The next big accounting fraud is …
I’m not going to name names because that’s a fool’s errand, but I think it’s reasonable to assume that there will be a giant corporate fraud in one of the following:
- Electric vehicles
- Trump Media & Technology Group
OK, so one name. But, honestly, there’s so much stupid money flying around right now, it’s inevitable that something somewhere is going to unravel. Do you think anyone learned anything from l’affaire Thearnos? Nope! No one seems to care much if they’re faking it until they make it, or even if they don’t make it. When it comes to investing in early-stage companies, the only wrong move is not getting in early enough.
Full disclosure: I have a conflict of interest here, namely, a fraud podcast. One new accounting fraud gives me material for at least a few episodes. Keep your fingers crossed.
The PCAOB … attempts a comeback
There’s a new audit sheriff in town—Erica Y. Williams—and the deck is stacked against her. Still, it’s bound to be an improvement from her predecessor, William Duhnke III. His tenure was rocky, to say the least. There have been allegations that the environment at the PCAOB was toxic under Duhnke, including his “using anti-Chinese slurs in reference to the Covid-19 pandemic,” which was cited in a lawsuit filed by Sue Lee, the Board’s former chief administration officer.
Then there’s this:
At a meeting in October 2019, then-board member Jay Brown and Duhnke got into a heated argument sparked by a news leak. According to three people who were briefed on the dustup after it happened but asked to remain anonymous to discuss an internal squabble, Duhnke whizzed an empty soda can toward Brown. (He was near a trash can, which may have been the intended target.) Then, as Brown tried to leave, Duhnke physically blocked him from the door. Shaken up after the confrontation, Brown discussed with an SEC official the possibility of reporting Duhnke to the police.
This all happened after the conspiracy between KPMG auditors and PCAOB officials was revealed. It hasn’t been going well!
As the PCAOB’s new chair, Williams has the opportunity to clean things up this year. Or at least start to. Or attempt to? That will take the form of some new rule proposals that will probably offend the audit profession’s delicate sensibilities. I mean, it has to! Half-measures will only reinforce the doubts that people have had about the PCAOB all along. That it’s a mostly sleepy, outmatched regulator hobbled by the revolving door, sparse resources, and low expectations.
No place to go but up!
Pay lip service: SALY
Stop me if you’ve heard these before:
- The accounting profession is committed to diversity and inclusion.
- The accounting profession needs to adapt to change.
These are layups as far as predictions go. For decades now, accounting leaders have been paying lip service to building a more diverse profession. Yet, the most recent AICPA Trends Report found that 84% of CPAs in accounting firms are white, and 91% of accounting firm partners are white. To make matters worse, the forthcoming changes to the CPA exam will make it even harder for many Black and Brown people pursuing accounting to obtain the credential. At this point, you could suggest doing the exact opposite of what the accounting profession is doing and its diversity would improve.
Elsewhere in broken records, the accounting profession will continue its time-honored tradition of paying lip service to the peskiest feature of existence: change. Every year nothing is the same, so let’s make sure we talk about the same thing every year … which is how nothing is the same. The only thing that doesn’t change is change; change is constant, which is why everything is constantly changing. Get it?
More accounting unicorns
Last year, accounting startup Pilot raised $100 million in its Series C round of funding, putting its valuation at $1.2 billion. But don’t call it an accounting firm! Seriously, in the footer of Pilot’s website, it says:
Pilot is a provider of financial back-office services, including bookkeeping, controller services, and CFO services. Pilot is not a public accounting firm and does not provide services that would require a license to practice public accountancy.
This is fine! Maybe you’ve noticed, but the vast majority of services that accounting firms offer these days do not require a license to practice public accounting. The stuff that Pilot is listing—bookkeeping, controller and CFO services, tax preparation—can be done by virtually anyone. Naturally, having some accounting chops is nice if you’re in the field, and it seems that technology-oriented accounting companies have those chops. Companies like Bench and Botkeeper have raised millions of dollars, too, and it seems like only a matter of time before they break the $1 billion valuation.
With money in hand, these companies will continue to pick off small businesses, but eventually, they’ll start gaining the interest of companies with slightly more complex needs and situations. Sure, some businesses won’t want to be a 12-digit number in a massive database of customers, but plenty won’t mind at all! These tech-enabled accounting whatchamacallits (just don’t call them firms!) will compete for all those customers and will build multibillion-dollar companies in the process.
Two (fewer than three) more private equity deals
OK, so with accounting startups raising gobs of easy money, what’s a legacy firm to do? Well, if you’re EisnerAmper, you spin off the audit firm so you can take a chunk of money from a private equity firm, namely, TowerBrook Capital Partners.
There are two firms now: EisnerAmper LLP, the audit firm, and Eisner Advisory Group LLC, which gets everything else. It makes sense in a lot of ways. The advisory, tax, et al. are no longer hindered by independence conflicts that come with the audit practice. And the audit practice can say, “Hey, look at us! We’re an audit-only firm! We don’t have all the baggage any more. Work with us, and you’ll get the most focused, highest-quality audit that any firm can provide.”
Then there are the payouts. This whole interview with Allan Koltin is pretty insightful, but the thing that will get most people’s attention is how a private equity investment could result in multiple windfalls, with some coming much sooner than what accounting firm partners are accustomed to:
So the trade-off for the partners is you give up part of your annual compensation today in exchange for a significant payment at closing, as well as one or two significant payments three to seven years from closing? Can you drill down on how that works?
Koltin: The largest payment is at closing, but there is typically a second payment about three years after the deal closes if the firm hits certain milestones. These milestones typically have to do with growing EBITDA and overall firm growth.
The last payment, which typically happens in years five to seven, usually occurs when the PE group sells its shares in the accounting firm to a larger PE group. What’s important to keep in mind is that the accounting firm partners, as owners in the firm, will also benefit in the proceeds of that sale. It’s also important to note that the CPA firm will be part of the approval process as to whom the PE group selects to purchase their investment.
Another benefit, especially for younger partners, is the final payment would be in roughly five years from the close of the first PE deal. So while oftentimes we talk about the benefits to an older partner, let’s assume a partner is 35 years old and planning to retire at age 65. In that scenario they wouldn’t receive their deferred compensation until 30 to 40 years down the road. Compare and contrast receiving payments taxed as ordinary income 30 to 40 years from today versus getting payments with capital gains treatments over roughly five years. You don’t have to be an accountant to do the math on that one.
Not everyone is sold on this idea, however. The late Dom Esposito wrote a column for INSIDE Public Accounting with a rundown of reasons for firms to be wary of a private equity deal. Esposito’s arguments against firms taking a private equity investment aren’t that compelling, in my opinion, but they’re not crazy either. Plus, he wrote this column five months before the TowerBrook/EisnerAmper deal. Clearly, there is some hesitation on the part of accounting firms to take private equity money.
Despite the risks, some accounting firms won’t be able to resist the chance to grow and line up big liquidity for their partners. Koltin predicted last October that a second top 20 firm would announce a deal in the next month. That doesn’t seem to have materialized, but he also predicted that “no less than three, maybe even as many as four” top 20 firms would have private equity ownership in the next year.
I can’t think of anyone who would know this aspect of the accounting world better than Koltin, but since he missed his first prediction, I’ll take the under. There will be two deals in 2022.
Accounting talent will continue winning
The pandemic seems to have unlocked something that has permanently shifted a key aspect in the balance between employers and employees. Namely, the office is optional. Many younger workers will want the social benefits of an office environment, and they should fully take advantage of those. But there’s also something to be said for doing work on your own time, on your own terms, while not living at the office. Employers that can provide both a great office environment but also allow for flexible and fluid working arrangements have the advantage.
Accounting firms aren’t convinced, though. The profession has relied on facetime and long hours for so long, it took a once-in-a-lifetime pandemic to show them that it was possible to do things differently. Still, they can’t quite let it go, as a study from last summer learned:
In a recent survey of close to 500 managers, executives and senior leadership in banking, financial planning, fintechs, financial services, accounting and other related industries, leaders at accounting firms were far more likely to be working full-time at their firms’ offices; much more likely to expect to keep their current office footprint after the end of the COVID-19 pandemic; and more likely to predict their employees will all be working full-time in their firms’ offices a year from now.
The results of the survey, conducted by Accounting Today’s parent company, Arizent, in mid-April, indicate that the profession has not fully embraced the remote work revolution brought on by the pandemic, viewing it as a temporary solution to an immediate problem.
It’s funny because the accounting profession seems to have forgotten that it has an immediate perpetual problem: finding accountants who want to work in accounting firms. And there’s no solution to it, as far as I can see, especially if, at the very least, most firms are going to try strong-arming people back into the office.
So, prediction: All year long, we’ll be seeing articles in Accounting Today and every other accounting trade with the profession’s leaders offering advice on winning the battle for talent. And most of it won’t even be bad advice. It will center on firms providing a more flexible, inclusive, and dynamic workplace. It’s a proven approach by many companies all over the world. But most accounting firms won’t listen.
Same as last year.