Letter to the Editor: Small Firms Are Suffering in This Market, Does Anyone Care?

We received the following from a small firm owner who is suffering under the weight of talent shortages, massive workloads, and hoards of would-be clients shopping around because their accountant (rightly) raised their fees. What’s a small firm to do?

I have a small firm in [redacted].

I have been reading constantly about how the large firms are merging, paying more for top talent, taking people away from other firms, etc. due to the natures of the current accounting marketplace.

The profession is clearly in a transition. Big firms turn away clients. Those clients turn to the next rung. That rung cuts clients loose. All the way down.

After a while, it trickles (more like a raging waterfall) down to small firms and sole practitioners. This is the problem. Those who have been sole practitioners are dying or retiring in droves. New accountants coming into the job market are being wooed by larger firms to the point we can’t hire them. In addition, where historically many accountants who, after 10 years or so decide to become a sole practitioner by either buying out a retiring person or just hanging out a shingle, this type of accountant doesn’t exist anymore.

I am overworked to the hilt as new prospects call on me all the time because their accountant died, retired, or tripled their fees. I can’t hire anyone because I can’t compete against the top 100 firms for talent.

Do you have any thoughts about addressing this?

Happy to address it but not sure what can be done about it? Ah well, let’s break it down anyway.

75 percent of AICPA members were eligible to retire by 2020 (per an AICPA estimate) and as we know the pandemic only accelerated many CPAs’ exits from the profession, be it due to illness or just coming to the realization that chasing clients down over receipts is not worth dying over. The flood of retirements was well underway prior to 2020, Covid just helped it along. The AICPA has 421,000 members, 75 percent of that is…315,750 which leaves 105,250 people to do the work of 421,000. Not to say that all those people are actively leaving, just know that they can in coming years. Boomers make up 47% of AICPA membership (58-76 year olds) and new accounting graduate numbers are trending down after a peak in 2015-16 meaning there will probably come a point where the Boomer vacuum becomes obvious. Maybe we’re already there.

The 2022 AICPA Private Companies Practice Section (PCPS) CPA Firm Top Issues Survey tells us that finding and retaining staff are not the top concerns for sole practitioners and very small firms (5 professionals on staff max), once you get to firms with 6-10 professionals ‘finding qualified staff’ becomes the #2 concern and for firms with 11-20 professionals and 21+ it is the top issue. At the bottom of the ladder, the smaller firms are most bothered by challenges working with the IRS, keeping up with changes and complexity of tax laws, and keeping up with Covid relief programs.

If we look ahead five years, even the small firms are stressing over staff. ‘Staffing (recruitment and/or retention)’ rises to the #1 issue impacting small firms of 2-5 professionals:

via Journal of Accountancy

We tend to focus on the pros of the current market — an accountant shortage means wage pressure and leverage for the workers both of which benefit your average Going Concern reader — because we focus on Big 4 firms making $40 billion a year that can afford to pay their staff higher salaries (or can they?). But what happens when there’s no one to do the work at the bottom rung? Where do clients go? The PCAOB is already concerned that turnover at audit firms of all sizes could be a disaster for audit quality. Are these clients going to end up at shady strip mall tax places with dollar signs in the name? WON’T SOMEONE THINK OF THE CLIENTS.

Would anyone care to propose some solutions? Automation seems to be the obvious one but can we even automate our way out of this?

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6 Comments

  1. I have a serious question for small firm owners. I’ve worked in both settings – small & big 4. Are margins really so tight that you cannot afford to pay a staff $10k (or whatever) more? Should you be billing at higher rates so that you can pay your staff more? If clients are this desperate, which they seem to be based on my experience, I wouldn’t think that should be such an issue.

    And even if we skip past margins, why should we be willing to take a pay cut instead of, I don’t know, the owners that have built their retirement funds already? If you want to ride off into the sunset, maybe you should consider taking the pay cut.

    1. As a 2-5 employee firm owner: The gross revenue is low enough, that it is hard to justify a new full-time employee when you’re slightly overworked. You’re talking a 20-50% stairstep in revenue. With a new employee, you can probably market that amount of business in 1-3 years. But until then, it puts a massive cut into owners profits, and the owner likely has expanded his or her lifestyle to match the current income.

      If you’re small-time, you also don’t really have a recruiting/HR function to help find & recruit the right people.

  2. You can afford to pay people more and you can offer a much better quality of life than the bigger firms can.

    You can make choices of which clients you take on.

    In the end, as a small firm or sole proprietor, you cannot count on selling to a younger partner or to another firm. The CPA business is just not an attractive place to be. Plan on grinding it out and making good money on your own, but also plan on sending your clients a going out of business letter and walking away from the business when you are ready to retire.

  3. Smaller firms can and should dramatically increase fees. The days of a $500 1040 should be long gone. Need to value the work you do more. If clients leave because its too expensive for them that’s fine. Better clients that will pay will fill the void. As a small firm owner you can fire low margin clients, its hard for an accountant to intentionally cut their revenue but you will likely see an nice margin increase and have more free time and not be as overworked. We do it to ourselves. Also sending work overseas where labor is plentiful is certainly a large part of the future.

  4. Quality of life is key. I joined a small firm in January, and I wouldn’t trade it for more $ or any of the large firm BS. Sure there’s small firm BS but it’s easier to manage. Staffing remains our biggest issue, but mostly on the lower end (we really need another FT staff accountant and seasonal help).

  5. Higher pay isn’t going to solve the issue–not any time soon. The problem is that there aren’t enough people to pay. Retirements far outpace new recruits–so much so that “diversity” is increasing (congrats to all the systemic racist firms touting how diverse they are). The work certainly justifies higher pay, but there’s just too much to spread around. The burnout is causing many people to leave the industry and this will continue. Complexities in tax due to states expanding market based sourcing and pass-through entity taxes, foreign filings (K-2/K-3) on top of recent complications from QBID, PPP, ERTC, etc. has made the profession too multi-faceted. What needs to happen is actual tax reform/simplification, greater thresholds for foreign reporting and somehow a simplification of multi-state issues. Small businesses will have to contend with significantly higher fees if they want to retain qualified advisors, but many cannot or will not. Compliance will suffer and an already stressed IRS won’t be able to do anything about it…Also worth mentioning is that the CPA firms have been more profitable due to the additional work and while most have pushed through reasonable increases, the partners are seeing an excessive amount of the profit in comparison. The staffers know this and all the pizza and Friday closures during summer won’t reduce the resentment and turnover…The sky is falling.

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