What Does The Future Hold For Local Accounting Firms? The Nation's Top Consultants Give Their...

More regulation? A growing gap between aging partners who want to retire and younger partners' willingness to pay them for their practices? Changes in compensation systems as tools

Steve Erickson (Albuquerque, N.M.):

1. Leverage will increase significantly by increasing the use of non-CPAs. "This is happening at the operational level. Leverage at the IPA 100 is now 6.4:1. Smaller firms have less leverage, but they will have to increase their leverage to be competitive. When I ask partners how much of their work could be done by people with less experience, they generally say 50%. Firms will turn to non-CPAs for more work. CPAs will become supervisors sooner and manage more non-CPAs to get the work done."

2. Efficiency will increase significantly. "Most of the increases in efficiency will happen when older partners retire. There's a technology disconnect among older partners. Many think they don't have to understand technology because they're over age 55. Technology will standardize more procedures. I think somebody will standardize and franchise the back-office function of accounting firms. Scheduling is one area where this can really happen. You must assign your best and brightest to the right work. This is mission-critical: be sure you're scheduling strategically and for profitability."

3. There will be more female-owned CPA firms. Currently 70% of AICPA members are men. The average age is over 50. The average age of female members is 40, and 57% of accounting graduates, are women. "Move this trend forward by 10 years, and you'll see that accounting will be a female-dominated profession. Guess what? Women have babies! How will we utilize our work force and keep our three- to eight-year people? I suggest not using hourly arrangements. Do it on a project basis. Give them responsibility for the client relationship. People are the only true differentiator of accounting firms. You must keep good people."

4. Firms will increasingly customize compensation. "Firms will need more position players, and they must put people where they get the best results, which requires customized compensation plans."

5. The profession will see brain drain. "Most succession planning talk deals with replacement theory." But a bigger challenge is keeping top talent in public accounting and reducing defections into other sectors of business.

Robert J. Gallasher (Pittsburgh)

1. Training will shift from compliance-based CPE tofirmwide learning cultures. "We give everybody a CPE budget, but we should be creating a learning culture instead. Individuals have that thirst for knowledge. I think we'll start seeing training budgets of $4,000 per professional and learning task forces so that people are learning what they need to know to keep the firm competitive."

2. The succession dilemma will accelerate. "Today there are 45,000 accounting firms in the U.S. There will be 42,000 or less in five years. The big issue is the transfer of knowledge. It calls for us to revisit the whole succession issue. Firms will recreate their partner admissions policies to address equity, non-equity and contract partners and build succession planning into their compensation systems.

3. More internal conflict will arise at the national firms. "There will be another Enron. You can't legislate integrity. It means local and regional firms will have an opportunity to get more people. There will be a 40% reduction in SOX 404 work in 2006, so there will be a reduction of people at the Big Four."

4. Staffing will continue to be an issue. "It is what it is. Create a rerecruitment committee for your three- to eight-year people. Come up with deferred compensation systems for them."

5. Privacy will become a bigger issue. "Some CPA firm in the next few years will be called on the carpet for Privacy Act violations. Make sure your firm is complying with the law. Nobody wants to be blindsided."

Jeffrey S. Pawlow (St. Louis):

1. Firms will use real-time dashboards to keep everybodyis goals and progress toward them at a glance. "Everybody has a specific goal to drive the firm's desired results, both in terms of financial performance and softer goals. Firms will provide dashboards on computer desktops so people continuously see their goals and their progress toward them."

2. Compensation systems will shift toward pay for performance. "Pay for performance is replacing lockstep. We give people raises every year because it's easier, but pay for performance will become a mechanism for winning the war on talent."

3. Leadership training and mentoring will take on new importance. "Public accounting is evolving from a profession to a business. In the new economy, the business model is starting to differentiate accounting firms. The perfect storm is arising: raising taxes is taboo but costs are rising, and there's potential for a flat tax to be enacted. What will that do to tax compliance work? We're faced with the possibility of government-sponsored auditing of public companies and the possibility of another Enron. What happens to the audit franchise if that occurs? Leadership training and mentoring are essential for firms to position themselves for the changes that lie ahead."

4. Mergers and acquisitions will increase. "There are 0.7 CPAs to replace every retiring partner. Will you sell your firm at a discount or at a premium? Those that sell at a premium will do so only after investing the time, doing the planning and making the changes necessary to maximize the value of their firms."

5. Look for polarization of accounting firms. In the future, we may see three types of firms: assurance firms for SEC companies, full-service local and regional firms serving complex private companies, and "Mom & Pop" compliance shops.

Bill Reeb (Austin, Texas):

1. Aging partners will force a retirement burden that is too large. "The traditional retirement model doesn't work anymore. Some firms will collapse as a result."

2. Firms will increasingly realize that all partners are not created equal. Successful firms increasingly will adopt corporate structures and abandon the illusion that partnership should be a democracy.

3. Partners will be required to handle more business. "There aren't enough younger partners to replace each older partner who retires. The ratio is simply less than 1:1. Consequently, younger partners must handle bigger books to maintain the same level of business for the firm as older partners retire."

4. Firms will increasingly need to snatch business from their competitors. "There's a saturation point for traditional services. SOX and GAO business will go away. As a business model going forward, it will be about taking business away from the other guy," Reeb said.

5. There will be an oversupply of firms for sale. "If you don't plan to be bought by your partners when you retire, nobody might buy your firm. If you think you can sell your firm whenever you want, you're nuts. Make sure your partners will buy your firm."

Marc Rosenbers (Wilmette, Ill.):

1. Part-time partnerships will increase. Today, 57% of accounting graduates are female, but only 12% of partners are female. "There's a tremendous disconnect. More small and medium-size firms will be going to part-time partners and developing plans to create a part-time partner track."

2. Outsourcing will increase. "Firms will have no choice. Outsourcing will supplement staffing."

3. Mergers will increase. "Mergers will be staff-driven, and there will be a feeding frenzy for firms looking for opportunities to merge upstream. It's now a seller's market, but it will become a buyer's market. Larger firms will be able to cherry-pick the firms they want to acquire."

4. Systemization or franchising will increase. "Practices and procedures will become more franchised. Lots of firms now are practicing as a consortium, but technology will fuel systemization, and we'll see increased franchising of practices."

5. There will be more large firms. An increase of larger firms will result from an increase in mergers. Accounting firms will look more like law firms in terms of firm size.