The annual Rosenberg Survey's look at the CPA industry shows that steady profits now may be inhibiting the change needed to ensure a sustainable future
In the 25th annual Rosenberg Survey, a yearly study of the CPA industry, many of the themes that dominated discussion last year have bled over into 2023. On one hand, the report describes 2023 as an “amazing” year because profits once again grew faster than revenue and income per partner was up 11.8% at large accounting firms (those with more than $2 million in revenue).
Of course, the big but is that all of this profitability is happening while many tax & accounting firms are still experiencing staffing shortages and a pronounced skills gap, using outdated technology, and facing stiff competition.
To better understand the industry trends and developments discussed in this year’s Rosenberg Survey, we spoke to Allan Koltin, of Koltin Consulting Group, whose insights were included in the report.
Thomson Reuters Institute: For years now we’ve been talking about staffing shortages in the accounting profession due to retiring Baby Boomers, job-hopping executives, and not enough young talent coming up. In the Rosenberg Survey, you warn that young people who don’t want to do compliance work may be dissatisfied and skilled talent could leave if they aren’t getting enough challenging work. Is the outsourcing/offshoring trend helping or hurting this situation? And is there anything tax & accounting firms can do to break this cycle?
Allan Koltin: Yes, firms are investing deeply into offshoring, and I think it’s pretty fair to say that 20% to 25% of future revenue will be done offshore. Another piece will be mundane compliance work that’s done by machine learning, artificial intelligence (AI), and various types of bots. But what nobody wants to talk about is the why. Why aren’t young people going into accounting? It’s happening because kids today have a thousand different opportunities for what they can do, and most of them offer quicker advancement, more challenging work, and higher salaries.
The accounting profession has a public relations problem. Over the past couple of years there has been more than a 10% drop in the number of accounting majors coming out of college, so if we think we’re just going to keep getting talent like we historically have — well, it’s just not there. Some firms are reaching all the way into high schools now to try to paint a picture of what the profession is.
What I don’t think we do enough is highlight successful accountants in public accounting and private industry. Lots of accountants have done incredibly well in business and have been very successful in a whole variety of things, but we don’t talk about that — and we have to start, because today’s generation wants something more than just a job.
The accounting profession has a public relations problem… What I don’t think we do enough is highlight successful accountants in public accounting and private industry.
The other message that we need to send to colleges and universities is that because of technology, AI, and offshoring, young accountants are going to get pushed into the fire sooner. And it’s a good fire — more client contact, more challenging, more interesting work sooner in your career. And from a PR standpoint, we have to show success. We have to show what the upper 5% in our profession does, which is no different from what other industries do, whether it’s law, financial services, investment banking, private equity, or whatever. It’s just that they all have sexier and more appealing labels on them right now.
Thomson Reuters Institute: Another trend discussed in the report is that of accounting firms hiring non-CPAs to fill the talent gap. But if you aren’t a CPA, what sort of skillset is desirable to get hired at a large accounting firm?
Allan Koltin: If you look at the latest numbers, 27% of all new hires in public accounting last year were non-accountants. What are they hiring? They’re hiring people in STEM — people with science, technology, and engineering experience. I think the feeling today is that you can train people to do what you need them to do. That’s not to say that an accounting degree is unimportant — it is. But I’m sure there was a time not too long ago when non-accountants were 5% of hires. Then it was 10%, 15%, 20%, and now 27%. My guess is that in a year or two, it will be 33% to 35%.
Thomson Reuters Institute: Many accounting professionals interviewed for the report mention the need for firms to move beyond compliance and offer a wider range of advisory services. What advisory services are getting the most traction now?
Allan Koltin: Anything that involves client accounting services is on fire — it’s growing by double-digits everywhere. Outsourcing of any kind: outsourcing of accounting, tax, technology, HR and payroll, even the chief financial officer suite — these are all rapidly growing areas. Anything having to do with technology, anything that has cyber in or around it is exploding and growing. Anything that has industry specialization, where you can provide business advisory and consulting services to those industries on something beyond a financial statement or tax return.
Specialized tax solutions are hot — in the area of wealth management or financial services, for instance, or estate and trust planning, business valuation, transfer pricing, or state, local, and international tax work. On the consulting or advisory side, it’s anything that can create value.
Thomson Reuters Institute: The growing use of artificial intelligence in accounting is another hot topic. Many agree that AI has some practical applications, but many are also still skeptical, and others are in “wait-and-see” mode. How do you think the use of AI in the accounting profession is likely to evolve in 2024?
Allan Koltin: To me, the usage of AI is a slow boil, but I do see progress every year of specific bots and AI — not just in tax and audit, but in more industry-specific applications. If a firm is involved in auto dealerships, for example, they have developed software around it, and if they’re manufacturing, it’s the same thing. It’s more niche driven. The big aha moment for me is that they’ve always been creating things in the tax and audit world, but now AI development is more specialized and more narrowly focused on individual industries.
Thomson Reuters Institute: There is also much discussion in the report about the recent involvement of private equity and alternative investors. Did private equity deals in 2023 shake out the way you anticipated?
Allan Koltin: Unfortunately, 2023 was the year that private equity was put on hold. I think 2024 will be what we thought 2023 would be, and the simple reason for that was the cost of debt. With interest rates doubling and a looming recession, some of the larger accounting firms with a big transaction advisory practice weren’t doing a lot of deals. Lots of the big deals that were anticipated to take place in 2023 got pushed out to 2024. So, the feeling is that next year rates will decline, and firms will come back to the table.
Thomson Reuters Institute: Profitability was up significantly in 2023. Do you think that trend will continue in 2024?
Allan Koltin: True, 2023 was a great year — but we’re living in this artificial world right now, where we’ve done more rate increases in the last two to three years than we’ve ever done before. And that’s because we have a capacity problem.
We’re doing what we always knew we should, and that’s to spend more time on our A clients, or converting our B clients into A clients and doubling the rates on our C clients, and if they leave, they leave. Every day somebody tells me a story about how they took their 1040 compliance practice and doubled the rate. Half the clients left, and half stayed. Now you have the same revenue but half the work, right?
So, we’re in this bubble right now of doing things we always knew we should be doing, and we’re actually doing them. The but is that we’re all working insane hours because the work is there, but we don’t have enough bodies. So, in the short term, life is great — except that we still don’t have a sustainable model, save for a few large firms that have figured it out.
