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Practice survival; planning for the next generation.


Planning for the Next Generation

Local accounting firms rarely survive into the second generation. Once the founder retires or dies, the firm often disbands with individual practitioners going their separate ways or, in growing numbers of cases, "merge" themselves out of existence. To survive into the next generation, local accounting firms first must solve the single biggest problem they will face upon the founder's death or retirement: a lack of effective leadership.

Generally, because the founders of the firm are entrepreneurially and technically focused, there often has been no need for a formal structure in the office. Employees' hard work is typically rewarded with a promise of future ownership. Founders tend to change their firm's way of practicing only in response to clients' needs. Suddenly, the founders are ready to retire, and the firm's primary leadership is about to disappear. To survive, the firm must identify leaders who will give the firm direction and be acceptable to the founders given their natural unwillingness to step aside. These new business managers must be individuals with strong technical expertise as well as the business skills necessary to consider and implement new horizons in areas such as:

1. Talent (obtaining and

retaining qualified staff) 2. Specialization 3. Organizational structure

(formalizing the environment) 4. Competition

Needed Skills


Local firms must recruit and retain talented people. The demand for accountants from both public firms and industry has risen, but the supply has not kept up. From 1973-77, many accounting firms interviewed an average of 3.9 people for every person they hired. In recent years, the number has dropped to 2.9.(1) Firms may find themselves accepting less qualified applicants to fill staff requirements in the future.

Fewer young people are graduating with degrees in accounting. The number of freshmen planning business majors increased by 36% between 1977 and 1986.(2) The number planning to major in finance increased 160%. The number planning to major in marketing increased 78%.(3)

But the number of freshmen who planned to be accountants fell 23%. In this nine-year period, the total number of accounting graduates increased by only 6.4% while demand increased 35.8%. Demand for graduates was up 5.7% in 1987-1988, though the total number of graduates increased only 1.4% in that same year.(4)

Salaries for entry-level accounting positions are climbing. In 1976, the average starting salary for national firms was $16,000. In 1984 it was $22,000 and in 1988, $29,000. Price Waterhouse, for example, recently raised its entry-level base salaries 25 to 30% and increased significantly its overall staff compensation by including a bonus program to recognize exceptional professional contribution.(5) Many small firms, however, cannot compete at this level. Firms numbering five or fewer accountants offered an average of $19,800 to new graduates in 1988. The number increased to $22,300 for firms with 6 to 15 accountants; to $23,400 for firms with 16 to 50 accountants; and to $25,400 for firms with 51 to 100 accountants.

In order to survive, a small firm must have a steady supply of qualified staff. In order to find the individuals who will be the company's future leaders, the firm needs to take advantage of several available opportunities. A 1986 Massachusetts Society of Certified Public Accountants study reported that students select firms because of the firm's personality as projected by the recruiter.(6) Another survey indicated students' overall dissatisfaction with present on-campus recruiting practices.(7)

In light of these findings, local accounting firms should take part in high school career programs, update the accountant's image and use better trained, more interested interviewers who ask appropriate questions. Local accounting firms must also make themselves known on college campuses. National accounting firms enjoy name recognition on college campuses while local accounting firms have not made the opportunities at their firms as well known. Local accounting representatives should take an active role in selected institutions by working with accounting faculty, making classroom presentations and communicating through student organizations.

The tight supply of both entry-level and experienced personnel means that firms may be forced to be less selective in hiring their staff or find new means to add the "best and the brightest" to their ranks. It also means that retaining the experienced senior-level staff becomes vital. Firms cannot afford to continue to pour significant resources into the training and development of recruits only to have them leave before they make their greatest contributions. The results of several studies on motivation, productivity and turnover, including one of almost 1,000 accountants, indicate that turnover is directly correlated with work motivational factors.(8) Staff members will be better motivated to stay with their present accounting firm if the firm can tap their motivational needs and alter the work environment accordingly.

The firm should begin by identifying both the positive and negative aspects of working in public accounting: prestige, variety and responsibility vs. lower salaries, extensive overtime and personal insecurity. The firm must emphasize the positive attributes and mitigate the negative by placing a people-oriented partner in charge of staff, paying competitive salaries, encouraging all partners to show sincere interest in their people and providing ongoing challenges and advancement opportunities. To promote the feelings of prestige and responsibility that staff desire, they can be encouraged to become more active in professional organizations -- both those dealing with accounting and those of specific industries, e.g., national and state accounting associations, the local Chamber of Commerce, industry groups and banking organizations. Staff members can use these groups to develop their leadership skills and to make contacts that will serve them their entire careers.

Firms should encourage staff to enroll in professional education courses. The firm should reimburse the staff member for taking important, high-quality courses such as classes toward a masters in taxation from a well-recognized program of study. Staff should also be encouraged to take public speaking courses and professional image programs.

The shortage of qualified personnel also means that firms must be more flexible and must offer more incentives to retain existing staff. Firms are offering working women, who now comprise 50% of the new hires, flexible working arrangements and child-care services to help remove the necessity to choose between family and career. Several Detroit offices of national and regional firms have recently adopted such measures as allowing experienced staff to work fewer than 40 hours per week, to work on an engagement by engagement basis, to work "flex time" and to perform certain types of engagements at home. Firms are hiring temporary people looking for jobs rather than for careers or, as another alternative, professional assistants who are mostly liberal arts graduates. The AICPA reports a 25% increase in the hiring of recruits with non-accounting degrees: from 5.2% in 1986 to 6.5% in 1988.(9) During this same period, the AICPA reported a 16.7% increase in the hiring of para-professionals, most of whom worked in auditing and accounting divisions. The assistants should be encouraged to take accounting and related business courses at night if they express an interest in pursuing a public accounting career.


In the early 1950s, accounting was relatively uncomplicated and unchanging. Since then, however, the businesses that accountants measure, prepare reports for and audit have grown more complex. The proliferation of accounting and auditing standards, continual changes in the tax law and clients' needs for non-traditional accounting and tax services have made the practice of public accounting increasingly complex. As such, keeping current is an almost impossible task. Nevertheless, the principals in many firms began as generalists and continue to try to be all things to all people. Successful firms have turned to specialization, either within the profession (auditing and taxation) or within industries (manufacturing and construction). Specialization ultimately brings higher profits by channeling efforts. Dollars spent, for example, on library additions, dues for specialty related organizations and training costs all can be reduced by a focused approach. Some firms will find that they are able to charge higher billing rates for specialized expertise and that there is an increase in efficiency on an engagement (by using the same knowledge repeatedly). Finally, by specializing, chargeable time may increase as the firm's specialization and reputation become known and clients with a specific need are referred.

The new manager must determine the firm's niche and create a target instead of opportunistic marketing culture. If the firm finds itself in an opportunity outside its specialty, it should consider talent outside its office.

In a shared professional service program, two firms work together to service a client. The firms initially agree that the client cannot be taken by the firm being engaged for its expertise, nor will the firms take each other's personnel. The agreement is backed by monetary penalties to prevent breach. A local firm can, thus, serve and retain its clients, gain expertise by working with the other firm and increase profits by co-providing the client services.

Once the leader has determined his approach to specialization and has the talent to support it, he or she must introduce a formal structure.

Organizational Structure

Probably the most critical and time consuming task for the new manager will be turning the informal environment into a formal one. While for many years a local firm may have reacted to events, it is now necessary to develop a mission statement and guidelines for the firm to practice within. The firm needs to begin by developing and posting a "firm philosophy" stating what businesses the firm plans to pursue and how it intends to maintain the highest level of professionalism in its affairs. This policy will be the cornerstone upon which the firm can build its practice. Such mission statements can focus on such areas as delivering quality services, developing internal talent and promoting integrity in all business dealings. Specifics can then be addressed within this philosophy, such as the growing problem of malpractice.

In 1987, the Colorado Society of CPAs surveyed the eight most pressing problems facing small firms and compared the results with those of a similar 1968 study.(10) Not surprisingly ,the number two problem identified in 1988, liability insurance, was not on the 1968 list.

Accountants find themselves increasingly open to lawsuits, and the cost of legal liability insurance is skyrocketing. However, by implementing some formal procedures and policies, a firm can begin to control this cost. The most effective way of avoiding litigation is to manage risk. This means developing procedures and guidelines surrounding client acceptance. A quality client is the best way to avoid litigation. Hence, the firm must know its client, its reputation and that of its advisers and follow a set of predetermined procedures before accepting a new client.

Quality control is an allied problem to developing a quality practice. A local firm should consider establishing teams to review workpapers, statements and tax returns. This review process bolsters professionalism throughout the firm and keeps personnel alert to technical changes. It assures that the firm treats similar transactions between different clients consistently and provides for standardization of engagements throughout the firm. It also provides comments on how to improve performance in an engagement.

In addition, many recent Financial Accounting Standards Board (FASB) pronouncements have become sharper and affect more important areas of accounting. Many earlier FASB standards focused on industry standards or on areas of tangential interest to most practicing accountants (e.g., accounting for the motion picture industry).(11) Now, the standards focus squarely on the heart of accounting (e.g., deferred income taxes, statement of cash flows and pension expenses) and cause major changes in current accounting practices. In addition, standards are being issued at an ever-increasing pace. The Committee on Accounting Procedures issued 51 accounting research bulletins in 20 years of existence, the Accounting Principles Board issued 31 APB opinions in 12 years, but in just 16 years the FASB issued over 100 statements of financial accounting standards.

As the flood of dramatic new FASB and AICPA pronouncements continues, accounting practices are being significantly rewritten, requiring even the most accomplished accounting professionals to learn new and challenging techniques and putting great strain on many local accounting firms to keep up with the changes. Accounting firms must determine company policies for all critical issues. For example, SFAS No. 95 allows companies to choose either the direct or indirect method of accounting for cash flows. The firm must debate the alternatives, choose one and make it the firm's general policy, thereby protecting the firm from legal challenges to its work and increasing its professional image.

As it formalizes its environment, the local firm will also want to address such issues as independence, assigning personnel to engagements, consultation, supervision, hiring, professional development and advancement. The new structure should also include economic decisions and assign responsibility to key individuals within the firm to see that its direction is carried out.


Finally, the new leader must give direction on how the firm will deal with competition. Competition for clients is increasing as big firms get bigger and smaller ones fight to survive. As a result, profit margins are shrinking. Therefore, firms should look at how to render services more effectively and efficiently. One way is to increase the use of computers.

The automation of accounting brings its own special challenges. Clients now put their accounting records on computers and their information in data bases. Their accountants must have similar systems and data bases to handle their needs. A July 1988 survey of 64 accounting firms, most of them with 25 or fewer employees, revealed the various types of applications and computer training utilized in the field.(12) According to the survey, 81% used microcomputers and 16% used mainframes. The applications, in order of frequency of use, included spreadsheets, word processing, accounting database management, taxes, graphics, financial planning, desk organizers and statistics.

To meet competition, local firms should develop brochures describing their philosophy and operations in order to attract clients. In the office, the firm should encourage staff members to specialize in accounting for a specific industry. They should also be encouraged to become active leaders in their communities, thus marketing the firm to new prospects simply by appearing at community meetings. Members should contribute articles to professional journals and general business magazines, displaying their expertise beyond their own immediate circle and increasing the firm's prestige.

The best source of growth, however, is the firm's own clients, already wedded to the firm and aware of its strengths. Besides asking them to refer possible new clients, the firm should develop and sell them new, attractive services, such as helping them install and expand their computer systems, assisting them with strategic planning designed to help them improve their company's operations and aiding them in succession planning -- all of which help the client to move into the 21st Century and the firm to survive.

Facing the Future

Local accounting firms wishing to survive into the second generation and beyond should take several major steps. They must keep up with the industry by investing in computers, software, personnel and training. They must develop systems for discretionary spending so that funds that could be used to buy much-needed new computer systems are not squandered on unnecessary expenses such as extraneous travel and entertainment. Most of all, the firm must pay proper attention to its employees. Firms prosper when they encourage their staff to develop themselves professionally. Management must strongly encourage and reward their staff to be leaders in training.

In the end, it is not the high cost of doing business that brings a local firm down -- it's the lack of profitable clients. With the increased competition among firms, it is more difficult than ever to find and retain good clients. These objectives become a matter of continuing an unbroken pattern of intelligent and creative firm leadership.


(1)Scanlon, Peter, Managing Partner Cooper & Lybrand. Presentation Before the 1988 Annual Meeting of Accounting Chairs, Fort Lauderdale, Florida, February 22, 1988. (2)Ibid. (3)Brent Inman, Coopers & Lybrand, AAA Conference, February 9, 1988. (4)McInnes, Mary and Beatrice Sanders, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits 1988, AICPA: New York. 1988. (5)VonAiten, Judith W., "The Diminishing Recruits. Where are They Going?" Outlook, Winter 1988, p. 11. (6)Waite, F. Grant "Is the Profession Attracting and Retaining the Best?" Massachusetts CPA Review, 61:4 Fall 1987 pp. 32-33. (7)Lathan, Malcolm H., Barbara Ostrowski, Ernest J. Pavlock, Richard A. Scott. "Recruiting Entry Level Staff: Gender Differences," The CPA Journal, January 1987, pp. 30-42. (8)Lampe, James C., Earnest, Kenneth R., "How Motivation Affects Accountant's Productivity and Turnover" Management Accounting, February 1984, pp. 50-55. (9)McInnes, Mary and Beatrice Sanders, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits 1988, AICPA: New York. 1988. (10)"The Eight Most Serious Problems Facing Small Practitioners Then & Now," The Practical Accountant, December 1987, pp. 60-64. (11)For further examples see SFAS No. 26, Profit Recognition on Sales Type Leases of Real Estate; SFAS No. 31, Accounting for Tax Benefits Related to U.K. Tax Legislation Concerning Stock Relief: SFAS No. 33, Financial Reporting and Changing Prices; and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. (12)Wentling, Rose Marie, "The Computer and You: A survey of Hardware, Software, and Training Used by Accounting Firms," The Practical Accountant, July 1988, pp. 74-77.

Alan Reinstein, CPA, DBA, is professor and chairman of the Accounting Department at Wayne State University in Detroit. Dr. Reinstein is on the editorial boards of several academic and professional journals and serves as a committee chairman for the American Accounting Association and for the Michigan Association of CPAs (MACPA). He has much experience in consulting with many accounting firms and has written numerous articles for professional and academic journals. Cindy Kushner, CPA, is a manager in the Audit and Internal Quality Control departments of Grant Thornton's Detroit office. She earned her BS degree in accounting from the University of Michigan and has been with Grant Thornton for eight years. Ms. Kushner has extensive experience representing Grant Thornton in joint venture relationships with local accounting firms. She is a member of the AICPA and MACPA.
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Title Annotation:accounting firms
Author:Reinstein, Alan; Kushner, Cindy
Publication:The National Public Accountant
Date:Oct 1, 1990
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