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The Business of Public Accounting
- 1. THE BUSINESS OF PUBLIC ACCOUNTING: A GUIDE FOR PRACTITIONERS & STUDENTS e rob.farrow@robfarrow.net
- 2. AGENDA PUBLIC ACCOUNTING Strategies for a Changing World PART 1 – BUSINESS STATISTICS (about our clients) PART 2 – CPA FIRMS by the numbers PART 3 – STRATEGIES for profitability & succession
- 3. PART 1 – STATISTICAL OVERVIEW OF CANADIAN BUSINESS • How Small Are Canadian Businesses? • How Business Size Affects Compliance Needs • Makeup of Small Business by Sector
- 4. 2 Views of SMEs (“Small & Medium Enterprises”) Statistics Canada BC Stats
- 7. …BC STATS ignores medium-sized businesses as a category…
- 9. How Business Size & Type Affects Compliance Needs The WASP Barcode Study Small Business by NAICS Code Outsourcing Guide
- 10. The WASP Barcode Study This study is particularly interesting for CPAs since it studies attitudes of small business owners and managers to accounting services – particularly traditional public accounting services (e.g. tax, assurance, bookkeeping and payroll). What’s more it looks at businesses by size and also examines internal accounting staffing as a function of size. This has implications for CPA firms wanting to provide outsourced controllership functions.
- 11. Composition of Public Practice Revenue by Line of Service - Canada CPA firms primarily provide assurance and tax compliance services. In the table below – pulled from STATISTICS CANADA – the 6 year average for ASSURANCE, TAXATION and COMPILATIONS is between 83% and 81%. Clearly assurance services skew towards larger clients. The trend for assurance services is also clearly downwar At the same time the trend for taxation services is increasing.
- 12. BC Small Business by NAICS Code Every year BC STATS publishes SMALL BUSINESS PROFILE which provides invaluable information for companies looking for a better understanding of the business market. What is clear, is that small businesses in BC are almost exclusively in the service sector. The major exception is the 14.9% of businesses in the construction sector – which is considered to be a “goods”. However electricians, plumbers, carpenters and other trades bear more resemblance to other service providers than to manufacturers or primary industry.
- 13. CPA FIRMS by the Numbers
- 14. CPA FIRMS by the numbers IN CANAD A TH ER E AR E MOR E TH AN 2 TIMES AS MENY in Canada there are more than twice as many CPA s in public practice as there are in the US. [1.75 p er 1,000 vs 0.83 p er 1,000 in t h e U S]
- 16. COST CONTROL Key to Profitability
- 17. COST CONTROL Key to Profitability
- 18. COST CONTROL Key to Profitability
- 19. COST CONTROL Key to Profitability
- 20. STRATEGIES TO INCREASE PROFITABILITY & IMPROVE WORK LIFE BALANCE Controlling Costs Specialty Services
- 21. WEB-BASED TRAINING & ARTICLING
- 22. OFFSHORING
- 23. OFFSHORING
- 26. e rob.farrow@robfarrow.net THANKS FOR LISTENING
Editor's Notes
- In our view STATISTICS CANADA over-emphasizes the importance of LARGE business and SMEs – while pretty much ignoring the self-employed which account for 2.3 times as many jobs as large business
- If you include the self-employed, SMALL BUSINESS as defined by STATISTICS CANADA (less than 100 employees) is far more significant – accounting for more than 75% of all private sector employment
- We prefer the definition used by BC STATS which defines a LARGE BUSINESS as having 50 or more employees. In our view this corresponds better to the reality in terms of the way these organizes behave and what their needs are. In my personal view we tend to overstate the importance of our largest companies for a number of reasons – which we won’t go into here. Note that the data here is CANADA-WIDE using the BC STATS definition.
- We prefer the definition used by BC STATS which defines a LARGE BUSINESS as having 50 or more employees. In our view this corresponds better to the reality in terms of the way these organizes behave and what their needs are. In my personal view we tend to overstate the importance of our largest companies for a number of reasons – which we won’t go into here. Note that the data here is CANADA-WIDE using the BC STATS definition.
- We'll go through this together (click link on next slide)
- Interestingly this study looks at companies with between 11 and 100 employees. This eliminates about 95% of small businesses (as defined by BC STATS). It does however provide insights as to how small businesses Use public accounting services as well as internal accounting resources – we’ll go through the survey highlights.
- For those of us serving smaller businesses – typically the 95% of small businesses NOT addressed within the WASP BARCODE study – assurance isn’t generally valued by our clients. Those that require audits, are more likely to see them as a compliance issue, and are more likely to be served by larger CPA firms.
- The majority of small business clients initially require straightforward tax compliance services. They are less likely than larger, small businesses with 25 or more staff, to require assurance work. Since CPA firms compete with other tax and accounting service providers for compliance work, we need strategies to reduce cost or increase fees to achieve profitability. Later on we’ll look at how practitioners appear to achieve better profitability through controlling costs. (HINT: It isn’t pretty!)
- 55% of Canadian CPA firms are run by sole practitioners. Clearly we skew very small – like our clients.
- In relation to population, there are more than twice as many CPAs in public practice in Canada as opposed to the US. What’s more 60% of Canadian CPAs work for very small firms (less than 5 CPAs on staff). This compares with about 36% of US CPAs. * {NOTE: population figures are for 2015 – while Nos. of CPAs are for 2016 Canada & 2009 US] The Chartered Institute of Management Accountants (CIMA) and the American Institute of Certified Public Accountants (AICPA), are joining forces to create a new association to represent the entire breadth of the accounting profession combined in 2017.
- 55.9% of public accountants of every stripe are over 55 years old. Presumably they are looking to retire. However as we’ll see later, they mostly don’t have much of succession plan. When I worked as a senior manager with one of Canada’s most prestigious firms, we paid lip service to the notion of “work-life balance”. As we’ll see below , today’s public accountant seems to be doing everything him or herself since students are expensive and under-skilled AND there is no clear path for training our replacements.
- In this section we’ll look at financial results compiled by STATISTICS CANADA for Canadian public accounting firms in 2017. We looked at unincorporated practices since there was no issue distinguishing between profit and wages. In this chart we can see that the most profitable 25% of firms had virtually no labour cost. I take that to mean that the practitioner is doing everything him or herself. Sounds exhausting to me.
- In this section we’ll look at the profit by quartile. This is measured as profit calculated as a percentage of revenue. In this case, the upper middle quartile has lower profit than the lower middle quartile. It is however much more profitable as a percentage of revenue, since the average revenue is only about 63% of the revenue for the lower middle quartile. (Profit percent is about 74% vs 52%)
- I wonder how the practitioner managed to earned $304K in revenue with only $400 in labour cost. The practitioner probably worked pretty hard.
- Clearly controlling costs appears to be more important than growing revenue. Unproductive labour and rental costs are likely significant issues for the least profitable quartile.
- The cost of professional staff in the Philippines is a fraction of that in Canada. Over the past 8 years or so we have developed the tools and processes to facilitate offshoring.. By paying somewhat above market in the Philippines – and treating them professionally (as they deserve) , you can build a loyal and productive workforce
- The benefits of “arbitrage” in wages is potentially even greater in India.
- Another approach – outsourced training
- In our firm we are SR&ED specialists – these skills can be either developed or added through ‘partnering’ with other practitioners….