The next four years will be much harder for accounting firms than the past four, and many are going to have to make deep investments in real transformation to remain abreast of changes, some say.
“The beauty of public accounting is everybody can play, everybody can compete but there’s an upper third, a middle third, and a bottom third – you just shake your head and say they can be in business, they just won’t have great clients, they just won’t have great people and they won’t make profit,” Allan Koltin, chief executive officer of Koltin Consulting Group, Inc, said on February 14, 2024. “But there’s a place for everybody.”
Most public accounting firms fall into one of three categories: fiercely independent, transformative, and so continue to thrive; a fatal flaw in their partnership model; and “stuck on Groundhog Day,” said Koltin, who advises top accounting firms on governance and leadership matters.
“Many, many firms will just continue to grind until they can’t, they’re oblivious to the changes going on – not only do they not know what the fourth industrial revolution is, they think the accounting profession was sort of grand-fathered out of it. Nothing could be further from the truth,” he said. “It reminds me of an elderly couple on the titanic – the ship’s going down but they’re staying in their bedroom because they think it’s not possible.”
This grim prediction stems from changes that started in 2020 that forced firms to work remotely due to COVID constraints and make tough changes, which streamlined their businesses in a good way. The rewards of those changes peeked in 2023 when they saw great clients paying great fees, the benefits of offshoring, the great resignation finally cooling off, and other strict business decisions being made. All that has now cooled down.
“From 2020, 2021, 2022, 2023, not all, but many firms had year, after year of increased profitability and growth, and what I’ve said to the firms is ‘it was like a catch-up journal entry’ — but it’s over,” said Koltin. “2024, 2025, 2026, 2027 – the next four – we’re going to have to make deep investments in real transformation and what I’ve said to a lot of firms is ‘average partner income may go down’ because the kids today are opting to go into technology, data analytical, and to financial services – they’re going where the money is and our wage rate has not kept up and now we have competition,” he said. “Does that mean that some firms won’t have a banner year in 2024? of course they will.”
His advice is that firms do real strategic planning, get their partners together, “talk about what you want to be – and we can’t not talk about the merger frenzy and the entry of private equity.”
Everything Comes at a Cost
Others noted that “everything comes at a cost,” pointing also at the combined rules and regulations from various bodies that companies need to get ahead of.
“Broadly, all accounting standards, pronouncements, changes whether they are compliance changes or disclosure requirements will affect earnings in some way,” said Rich Brady, IMA’s (Institute of Management Accountants’) Global Board Chair and CEO of the American Society of Military Comptrollers (ASMC). IMA represents about 140,000 finance and accounting professionals worldwide.
“Here in the US, we’re tracking SEC pronouncements, PCAOB pronouncements, and the FASB, and so when we look at it in its totality there are a lot of pronouncements coming out,” he said. “There are a lot of new compliance and that is challenging for most companies, particularly the small and mid-size companies, and it all comes at a cost. And so eventually in some respect it all kind of affects earnings.”
Big AI Push
The big bet many firms are making this year is on Artificial Intelligence (AI), and its role in terms of their business needs, accounting practitioners said. Last year there was a lot of talk but not a lot of substance around AI, but this year things have changed.
“I think what has happened is people have figured out how we can use AI for ourselves, in our products and our solutions. People have thought about customer-facing interactions and where AI is going to work well. In the initial euphoria of it, it becomes a panacea for everything and it’s going to be helpful in certain areas, but not all,” Jim Cox, Chief Financial Officer of Clearwater Analytics, said. “We’ll see a more mature discussion about what AI can do and how it could be used to deliver real tangible benefits across the markets,” he said. “AI is table stakes for 2024 and beyond.”“
Others added that the most well-positioned firms are going to be ones that have the leadership teams, that have the vision and the foresight to make investments well ahead of time, including in AI, and cultivating talent.
“The reality is that there’s been a lot of accounting firms out there that have been scared of AI and not willing to address the change and impact that it’s going to have on their business model, people, and on the way that they work with their clients,” Dean Quiambao, Partner and Northern California Market Leader at Armanino, said on February 15. “You have a lot of folks that are going to be retiring out of the industry – so succession planning will be a challenge and how well has the accounting industry invested and planned in its next generation,” he said.
IPOs Coming Back?
Other areas of focus this year are initial public offerings (IPO) and mergers and acquisitions (M&A), both of which typically generate a lot of scrutiny.
For the past two years, IPOs and M&As have slowed down compared to the heydays of 2021. Specifically, there were 1,035 IPOs filed in the US, largely influenced by the significant rise in the number of special purpose acquisition companies (SPACs) which went public, according to Statista. In 2022 and 2023, that number dropped to 181 and 154, respectively.
Right now, everyone is watching what happens to those that filed IPOs recently such as Arm Holdings, whose IPO price almost doubled since it went public last year because the company is being associated in AI, Quiambao explained.
“And if those go well and the next three to four go well after that, then that window’s going to open and you’ll see a rush of companies go public,” he said. “The same thing – if you’re an organization that’s looking to sell – how well are you preparing yourself for that transaction to find that strategic buyer? The best leadership team knows where people are going to look and they’re making sure those areas are really tight ahead of time. If buying, it comes down to unit economics and making the dollars and getting the return and the return on investments to work and there’s been a disconnect on that.”
This article originally appeared in the February 20, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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