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News & Knowledge

Talent shortages, technology, and M&A: Thoughts on key issues the accounting industry is facing

15th March 2022
Russell I. Shapiro, Levenfeld Pearlstein

Russell I. Shapiro of MSI's Chicago law member Levenfeld Pearlstein LLC has been interviewing managing partners of accounting firms and industry insiders on the key issues of talent shortages, technology, and M&A affecting the profession. In this article, he shares and summarises his findings.

To better understand the current landscape of the accounting industry, I have been interviewing managing partners and industry insiders regularly for the past two years. I recently asked managing partners, consultants, and other industry experts for insight on the top issues facing the industryThe interviewees varied from managing partners of mid-sized, high-performing firms to Top 100 firms to industry consultants.

While managing partners and industry experts may have different viewpoints on specific aspects, across the board most interviewees characterized 2021 as transformative.

The managing partner of a Top 50 firm noted that willingness to change was at an all-time high. But change doesn’t come easily for everyone. One managing partner of a mid-sized firm said the year was filled with anxiety, even though their firm had its biggest growth year ever. Similarly, a consultant noted that 2021 was filled with uncertainty about the future of the accounting industry and whether the success of the past year can be repeated or sustained.

Change, transformation, and adjustment were paramount in 2021, and many of those changes were manifested in the following areas: talent shortages, technology, and M&A activity.

Talent Shortages

Nearly everyone I talked to – whether a managing partner at a Top 50 firm, an industry consultant, or a managing partner at a mid-sized accounting firm – identified talent shortages as a top concern. As one managing partner put it, “We realized that we cannot recruit our way out of this.”

Whereas firms used to be able to hire enough people to satisfy client needs, they haven’t been able to meet client needs through recruiting alone. One reason for the talent shortage is a decrease in the number of people sitting for the CPA exam. Another possible cause may be a decrease in employee loyalty due to the remote work environment.

Firms are handling talent shortages in a variety of ways. Almost all are offering salary raises and bonuses, along with flexible work arrangements, individual check-ins, and stay interviews. Other accounting firms are finding ways to strategically use technology and outsource work to address the talent shortage. And some firms have had to turn clients away due to talent shortages. An industry expert noted that the industry is “desperate for people and turning down work.”

One industry expert said that “partners are scared to be critical because they might quit,” he said. Accordingly, less experienced employees may not get the constructive feedback necessary to develop.

“The winners will be those who can recruit, retain, and build culture,” said the managing partner of a Top 50 accounting firm. “Finding business isn’t as important as it used to be. It’s more important to build culture so we can retain people.”

“We realized that we cannot recruit our way out of this.” – Managing Partner

Technology

As noted above, several firms are relying on technology to deal with talent shortages. Not only can technology cut down on the number of people necessary to meet client needs through process improvement, but some managing partners also noted that technology can be used as a recruiting tool to attract top talent. Top talent likes a strong technology platform.

Several of the firms are investing in creating their own software applications. Most firms are trying to maximize existing technology. The managing partner of a Top 50 firm indicated that their approach is to “use what we have better.” Similarly, the managing partner of Top 100 firm said they are evaluating the technology they have and ensuring that employees are adequately trained in using that technology.

Other firms are taking a wait-and-see approach, with one managing partner at a mid-size firm noting that any moves to new technology will be driven by the Big 4.

“Private equity deals are creating a platform to provide services to the firm’s clients outside of accounting, but there may be challenges in the long run with this model.” – Managing Partner

M&A and Private Equity

Two words from an accounting consultant best sum up the current M&A landscape: “It’s hot.”

Without a doubt, 2021 was one of the most active years for M&A transactions. “Big is getting bigger; small is getting smaller,” said one managing partner.

“Cash has been a game-changer,” remarked the managing partner of a Top 100 firm. “Private equity deals are creating a platform to provide services to the firm’s clients outside of accounting, but there may be challenges in the long run with this model.”

Private equity’s move into the accounting industry has had a significant impact on M&A transactions in general. Traditionally, M&A transactions involved retirement payouts and interests in the acquiring firm. Private equity firms offer a cash payout on closing. Some accounting firms can pay cash at closing, but not all firms can or are willing to do so.

One managing partner is unsure whether the private equity model will last in the long run. “I’m not sure if the private equity model will work or not because the owners aren’t accountants and private equity firms need a return on investment.”

“Private equity will reinvent the profession,” said one accounting industry consultant. “Disruption is coming from outside the profession whereas M&A transactions used to be a solution to business succession issues, now they are strategic ways to access capital and technology.”

At this point, only a few deals have been done by PE and most deals remain with limited or no cash.  However, PE and some firms are raising the stakes and putting upward pressure on pricing, and making cash a material component of more deals.

 

Levenfeld Pearlstein is the law firm for accounting firms and the people who run them. Partner Russell Shapiro is a leader in advising on the legal and business aspects of accounting firm partnership agreements and mergers and acquisitions. He has twice been recognized by Accounting Today magazine among the “Top 100 Most Influential People in Accounting.” What’s more, Levenfeld Pearlstein is a thought leader in the industry, and Russell has substantial management and leadership experience with the firm. He is currently Chair of the firm’s Transaction Department. He incorporates this firsthand management and leadership experience into practical legal and related business advice and guidance to firms.

 

 

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Chicago-based Levenfeld Pearlstein, LLC provides legal and business counsel to sophisticated clients across a broad range of corporate, tax, estate planning, real estate, and litigation matters.

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