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Accounting Firm Managing Partners Give An Inside Look Into Priorities, Challenges, And Adjustments For The Upcoming Year

Date

August 11, 2020

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17 minutes

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To better understand the current landscape of the public accounting field, we asked managing partners for insight on issues ranging from pandemic-related challenges to diversity initiatives and what is on the horizon for the upcoming year.

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, mergers and acquisitions, and the enforcement of restrictive covenants. 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 a longstanding member of Levenfeld Pearlstein’s Executive Committee, is Chair of the firm’s Transaction Department, and is former Chair of the firm’s Compensation Committee and the firm’s Corporate Group. He incorporates this firsthand management and leadership experience into practical legal and related business advice and guidance to firms.

Last month, I interviewed 12 highly respected accounting firm managing partners and one prominent chief operating officer. They are all leaders in the industry and run high-performing firms with revenues ranging from $20 million to $300 million (with one exception). This is the second in a series of interviews designed to help us all better understand the “state of affairs” within the accounting industry. You can read the first-round responses from mid-second quarter interviews here.

To capture what it feels like to be an accounting firm managing partner right now, I asked for their unvarnished truths and best insights. This feedback and insight help other business leaders who might be facing similar challenges to learn from each other – What’s working? What isn’t? What we can look forward to for the future in our field?

Rather than provide an interpretive narrative of my conversations, I thought it would be more authentic and impactful to convey the story in their own words, edited for clarity. I have also provided my key takeaways (which are in italics) regarding what this means for the accounting firm world.  – Russell

  1. How have things been going at your firm from a financial perspective (in terms of both production and collections)?

Accounting firms are generally doing fine financially. Compliance work has continued unabated. Some consulting areas are down. Firms are concerned about the economy going forward and view accounting firm performance as a lagging indicator.

  • Billings are up over 10% on an FTE basis and collections are down slightly. Uncertainty about the second half. Has demand been pulled forward? Will consulting work materialize?
  • Top line in up through June 30, but not as much as budgeted. We are managing expenses carefully and bottom line is near budget. We have focused a lot on collections. Compliance work is holding up fine. Transaction advisory work is down somewhat but system implementation work is doing well (although we worry this will decrease if the economy faces more of a reckoning).
  • Revenue is up by 4% over last year through July 15. Collections are even with last year. We are being more proactive and start contacting clients at 60/90 days versus 90/120 days as we used to do. We let some underperformers go as we usually would but did not otherwise cut or reduce compensation. Our M&A advisory practice is about at 75% of budget, but it has been picking up recently.
  • March and April were down sharply, but we have caught up. Collections are now ahead of last year. We are seeing a lot of opportunity outside of compliance.
  • Revenue is ahead of last year through June 30 on a firm-wide basis, with collections being off slightly.
  • Revenue is up about 7% and collections are up about 3% without considering acquisitions.
  • Revenue is a little ahead of last year and collections are slightly off last year, all on an FTE basis. There is some lag because the tax season was extended. We did not furlough or cut anyone.
  • Revenue is 90% of where budgeted and we are getting more productive. Collections are up from last year. Our clients are generally in good shape. We are not experiencing fee pressure. We did not furlough or reduce staff and gave the normal bonuses and raises.
  • Revenue down about 1%.  Collections down about 3%. There have been no compensation or payroll reductions. Expenses are down, particularly travel.
  • Collections are ahead of last year by 2 or 3%, but we are used to 15% year-over-year organic growth. Tax is doing better, and audit is doing worse (because it’s more difficult without a team environment and clients are less responsive). Overall, we are less efficient.
  • Revenue is a bit higher and collections are flat.
  • Revenue is running ahead, and collections are running behind, both in the single digits. We are concerned about the fourth quarter as work may have been pushed forward. People are less productive.
  1. What will be better at your firm for the long-term as a result of COVID-19? 

MPs see reduced space needs, and increased remote work (but not exclusively), and less travel. This has accelerated automation. The watch words appear to be “adaptability” and “flexibility.”

“There has been an acceleration of automation and adaptation around working remotely.”

  • There has been an acceleration of automation and adaptation around working remotely. M&A activity will increase as firms are looking for better platforms. Big 4 will lose non-audit work to us given our lower cost and greater flexibility.
  • Adaptability and flexibility with working remotely. We used to want people in the office when they were not at clients’ offices. Going forward, we will allow more work from home, but still also have office time. It will be a more flexible hybrid. Tax people will no longer need dedicated offices. Also we think our culture will be even stronger because we have been through this together and were loyal to our employees. We strengthened relationships with clients.
  • Collaboration across groups borne of necessity.  Operational efficiencies have resulted from increased reliance on technology, especially in the tax area. There is also more clarity around costs and what expenditures are really needed.  
  • Willingness of people to make and embrace change. Better at maintaining client relationships through communications which will create a better client experience. More adaptive as a partnership. We will be nimbler. Interviewing and making offers remotely.  Passed a tipping point in culture to be more virtual and accepting of remote working. 
  • We see a 50/50 blend of in-office and remote work. There will be less travel.
  • Movement to acknowledge that working from home is okay. We will need less real estate.  Some areas like outsourced accounting can be done completely at home.
  • Ability to function with remote workers and reduced travel.
  • We will need less real estate, especially for the tax practice that we discovered does not have to be in the office all of the time.
  • Acceptance of remote working.
  • Increased acceptance of working remotely, and a reduction in space needs.
  • More use of technology and the understanding that working from home is feasible.
  1. What action items are you taking at your firm to address systemic racism?

Most firms are trying to figure out how to best address systemic racism and its implications in their firms. There is a new urgency to address systemic racism, and to include their plans to address it among the firm’s foundational tenets. Most firms are engaging in training and encouraging open dialogue. Many are supporting social and racial justice organizations. Many firms have committees or positions that focus exclusively on diversity. Some firms are viewing it as critical and urgent, most firms are viewing this as important, and a minority of firms have made the decision to do little.

  • We are looking at our numbers and trying to measure whether people feel included. We have training across the organization and foster an open dialogue. We are fortunate to have a few black partners who have recounted life experiences that helped others understand the problems that they faced.  We also have a lot of women leaders. We are donating to equal justice organizations. We have signed the CEO diversity pledge. We have made celebrating differences as one of our core behaviors.
  • We have a Diversity Committee. The first step is to admit it exists. We are talking about it and fostering open communication within the firm.
  • We are hiring a D&I leader and programing with professional speakers on systemic racism.
  • We have a credo of dignity and respect, with zero tolerance for any racist or sexist behavior. We encourage people to help the less fortunate, [and offer] time off to do so.
  • We have encouraged an open dialogue. We have had several panel discussions with people from inside the firm recounting their experiences and discussing racism and inequality. We have focused on recruiting designed to find diverse talent. We have partnered with the National Association of Black Accountants. We will work to translate our culture of conversation into change and action. We added a pillar of our grant making to organizations that focus on racial and social justice.
  • We are focusing on students in high school and early college from disadvantaged backgrounds to get them interested in accounting. Going to the schools to talk to them and bring them back to the office and interacting. We are involved in organizations that do this and we provided financial support to the organizations. We also support organizations that combat systemic racism.
  • We had a town hall on racism. We have had further partner training. About 1/3rd of our equity partners are women, and we need to use what we learned from gender diversity for racial and other diversity. We are having uncomfortable conversations. We are supporting organizations that promote racial justice. This needs to be integrated into the day-to-day working of the firm, not just something off to the side.
  • Internal and external statements made.  There was a misstep and we had to backtrack to correct a communication not realizing some of the sensitivities.  We are still learning.  I have read White Fragility by Robin DeAngelo and What If by Steve Robbins.  It doesn’t fly to say that you are color blind. We are forming an internal group to address this.
  • Firm is in a conservative part of the country and it does not speak to political or societal matters.  There have been no internal or external statements.
  • It is difficult because we don’t have a critical mass of diversity to help others overcome their biases. Training on unconscious bias and other similar things is more difficult to do remotely.
  • No action taken.
  • We are developing a plan. No steps taken yet.
  1. What will be the headwinds and risks at your firm as a result of COVID-19? 

MPs believe that what will happen to the economy will have a direct effect on their firms and many MPs believe that the economy will suffer in the coming 6- 24 months. This may lead to pricing pressure. Training and developing younger people are more difficult and may be less effective remotely. Business development will be different, and some are concerned about their ability to adapt. Also keeping up employee morale is a challenge and building culture is also more challenging.

“Working from home with kids is taking a toll on some people. We are also concerned about a shake-out in the economy and are cautious about the second half.”

  • We have not seen the tip of the iceberg in terms of bankruptcies. Some clients will not survive.  There will be a mixture of work-from-home and work-from-office and we will need to be flexible.
  • Concern with employee burn-out. Working from home with kids is taking a toll on some people. We are also concerned about a shake-out in the economy and are cautious about the second half. Potential client attrition as a result of economic downturn; some clients may hold off on big decisions like systems implementation. Business development will be more of a challenge.
  • Will we be able to train and develop people remotely and how will we instill our culture remotely so we can retain people? We hire dozens of new accountants each year. On-the-job training is more difficult when remote. It is difficult to build and utilize a leverage model remotely. It is easier for people to silo. People seem to be doing more work that would typically go down to a lower level – it is easier to do some things yourself when you are not in the office together. Newer people are bored and don’t feel part of the team. Additionally, will we be able to add extra value without in-person meetings at clients? There may also be pricing pressures. We are planning an in-person partner retreat this fall to address these issues.
  • This has shown us the strengths and weaknesses in the next generation. We are a close group and had a partner retreat at a county club where we socially distanced. People are feeling isolated and on call 24/7.
  • Reduced ability to foster comraderies and team building. More difficulty in professional development like taking younger people to client meetings and training in client interaction.  More difficulty in staying connected to out-of-town clients. Harder to introduce new people into relationships. Economic uncertainty. We are trying to understand what we don’t have in term of technology – we do not want to fall behind. Cybersecurity.
  • Ending the high rate of growth which has allowed us to hire the best people. Fear that partners will lose motivation to do business development. People may leave large cities, and this could cause us to struggle to hire. People will get too comfortable at home and the loss of face-to-face contact will stifle development. Also concerned with the mental health of some of our people. Education and training of young staff may not be as robust.
  • Some people seem to be coming back with less drive and different priorities. There is a heightened level of sensitivity.
  • People are now in the habit of working from home for better and for worse. Concerned that people will develop the intangible skills without being in the office. Development will have to be more thought-through and planned. Concerned that people will lose touch and there are risks to our culture.
  • We worry about maintaining our culture and knowledge transfer. The freshman class is not where they should be. A certain percentage of people will work from home and we have to adapt to that. We also are concerned about how bad the economic damage will be.
  • The economy. Accounting is a lagging indicator. We are digging a big hole on a national level. Potential pressure on pricing; being efficient while working from home; concern about isolation for some employees.
  • Concern with what will happen to the economy. Accounting firm performance is a lagging indicator. Historically have marketed in person at industry centered conferences. Will we be successful in new ways of marketing with webinars and video conferences, etc.? We need to do better on generating new leads. We have told our partners to get more personal with client on phone calls and conferences. Keeping people engaged and maintaining relationship. We are trying to hold partners accountable for employee engagement.
  • The longer COVID lasts, the weaker the economy will become.
  1. What is your current view on M&A and how does it differ from the past?

With respect to M&A, MPs believe that all the reasons that existed pre-COVID continue to exist and that, in fact, more firms will now want to merge up. Activity has been slower to get off the ground because firms have not been able to sit across the table from each other, but this seems to be thawing. Some MPs see pricing remaining about the same while others see pricing coming down. There is concern about how acquired firms will perform that is giving some firms pause on reembarking on acquisitions.

“M&A is hard to do without sitting across the table with your future partners.”

  • We are full throttle for both traditional and non-traditional acquisitions. We think pricing will decrease for old school firms.
  • No different from the past.  We are still looking for opportunities.
  • No change.  Seeing lots of activity.
  • This will continue to be part of our strategy, but we have taken a breather for the time being.  We want merged-in partners to be energized after they join us, and we are not sure how to do that in this environment. The dating process is also difficult now. In the long-term, we think there will be more opportunities as firms reevaluate their viability. The other raw ingredients still remain in place. Also we will have to figure out how to assess 2020 results as we enter back into doing transactions.
  • Not part of our strategy.
  • M&A is hard to do without sitting across the table with your future partners. We have had deals stalled due to remote access issues in due diligence. There are more people wanting to sell now. We see no difference in pricing or terms.
  • We will continue to be opportunistic. We are not looking for more compliance work. We like niches. We see consolidation. We think that smaller firms cannot afford the technology investments required and the retirement payments to the Baby Boomers.
  • It will be easier for some firms to merge up. As an acquirer, we will be more cautious. I believe that prices are coming down. Generally, a lot the good firms have already been absorbed.
  • It is a buyer’s market now. Some firms will want to hang up the towel. Prices are coming down.
  • Pricing is probably lower.  Selling firms will have to guaranty revenue.
  1. How are you measuring employee morale and engagement?

Many firms use surveys and some of those firms use software tools to evaluate the surveys and measure changes over time and differences among groups.  Most firms are having firm-wide and departmental meetings. Individual check-ins are done by all the firms. One firm is finding ways to play games and have live contests.

  • We use Office Vibe. It is an engagement survey and we get a lot of data from it. It takes a while to get benchmarking. We have found that this tool also helps with merger integration.  We have town hall meetings. Also, every person in a supervisory capacity has to get on the phone and ask what his/her people need. We have found that people have very different needs. We have found that morale is strained in certain areas and good in other areas.
  • We use the software tool Glint to measure employee engagement. We have been doing this for a few years and have a baseline, including by different groups of employees. One thing we found out was that we were smothering people with meetings and this was detracting from morale. We also use IA tools to measure sentiment by evaluating wording used in responses to open-ended survey questions.
  • Individual and group check-ins.
  • Reaching out on a one-on-one basis to assess needs. Some people are thriving, and some people are struggling.
  • We judge by conversations with people and their supervisors.
  • Supervisors are assessing people on a one-on-one basis and reporting up.
  • We are having all firm meetings every other week. We are bringing in a comedian. We have played games. We have held raffles. We have created other ways for people to get together.
  • Town halls and ad hoc calls. We have also used surveys. The surveys have shown us that most people do not want to go back to the office to socialize. It is hard to get honest feedback.
  • Everyone working from home is not good for our business. There is more family time, which could be a benefit. For now, we measure only through town halls, virtual meetings, and calls.
  • Weekly reporting on those who are vulnerable – goes straight up the managing partner.  Leads report up and are in constant touch with people.
  • We tried surveys.  I find them frustrating when they are anonymous.  I find that we end up chasing complaints of a few.  We are having partners call people.
  • Surveys. But this is a challenging area. It is tough to maintain morale.
  1. What are your top priorities in the next 12 months?

There is a focus on executing on strategic priorities, with an emphasis on growth. Most firms are continuing to invest, including in recruiting, development, and technology.

“We also need to continue to adapt. Maintaining the principles that made us successful but figuring out how to do it in a different way.”

  • Elevate client service. Make sure adding value. Truly being a partner and not just a vendor.  Develop new ways to train and develop teams.
  • Hiring top talent. Several job searches for supervisors and managers.  Recently hired a full-time recruiter. Maintaining culture of teams and community in remote environment. Long term goal of transition from client service provider to client service advisor. Identifying prospective clients.
  • Execution of our digital strategy. Drive organic growth with limited face-to-face interactions.
  • Stay close to what is going on every day in the business. Pushing our strategic agenda which has fallen off to a degree. Expand data analytics offering. Further refine our development tools to individualize leaning goals for our employees.
  • M&A and our existing strategic priorities.
  • We are going to invest into the recession. We are investing into marketing including on mass media platforms. We have recently hired several new partners. We will ride it out with partners whose practices are slow due to the virus and related economic implications. We have an entrainment practice that we are sticking with. We have a significant bonus pool for partners who perform.
  • We had a partner meeting and are moving forward with our strategic priorities. This includes growth initiatives, dealing with leadership voids and digital transformation (and helping client with that as well).
  • Getting growth back up – we have a growth model.
  • Partner level planning. Lead generation and the mechanics of growth in this environment.  Asking partners for what they will commit to. We also need to continue to adapt. Maintaining the principles that made us successful but figuring out how to do it in a different way.
  • Getting everyone back to the offices.
  • Training and sustaining our culture in a remote environment.
  • Innovate particularly within our market niches.  Continue our investments in technology and training.

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