Now may be the time to find accountants with upgraded skills, lower prices, and customized services.
Finance
The chaos in accounting today is no joke. But now may be the time to find accountants with upgraded skills, lower prices, and customized services
To get a sense of the scope of the changes that have been whipsawing the roughly $40-billion accounting industry in the United States, listen to John Cicco Jr., whose marketing-research and consulting firm is based in Murrysville, Pa. Since 1988 Cicco has been surveying the attitudes of a group of small-business owners--most of them with fewer than 20 employees--that are clients of large corporations. Although he tracks their attitudes toward 12 major industries in all, the accounting profession has been a standout in his survey--because of its bad ratings.
"I've always asked my respondents to name any large companies within these 12 industries that seem particularly responsive to small business," Cicco explains. "When we did our first survey, the accounting industry ranked first, with 45.8% of the respondents citing one or more of the big firms." No longer.
"Accountants have been vying for the bottom of the list for the last couple of years now," he notes. Ironically, the decline comes during a decade when most large accounting firms targeted entrepreneurial customers as being crucial to their growth.
Sagging popularity ratings are only part of the problem for many of today's accountants. The industry is roiled by new competition, spiraling capital costs, declining profit margins, and an increase in lawsuits. Arthur Bowman, who tracks the industry with his monthly newsletter, Bowman's Accounting Report, notes, "Over the past 20 years, it seems as though accountants have been in a period of constant change. But the scope and speed of those changes just keep accelerating."
Until fairly recently, traditional accounting firms monopolized two essential business services: auditing and tax work. Then the late 1970s brought the industry's first real waves of competition, when state accounting boards (the regulatory bodies that govern the industry) began permitting accountants to advertise their services. That competition began pushing prices down on those bread-and-butter lines. The pressure on prices continued during the 1980s, with the large firms aggressively wooing one another's clients, often with lower prices. A similar process unfolded at the small end of the market, where practitioners needed to cut their fees to avoid losing their customers either to competitors or to do-it-yourself software packages. Today pressure on prices still continues throughout the industry.
What was once a cushy tax-and-audit monopoly has become a low-growth commodity. "That's had major ramifications on career paths, compensation, and investments within all the large firms," says Bob Nason, the executive partner and chief executive officer of Grant Thornton, the United States' seventh-largest accounting firm. "From the point of view of top management--present company included--we've all spent a lot of time looking at that trend and strategizing."
Putting accounting angst aside, the havoc within the profession adds up to great news for company builders. Competitive pressures are forcing accountants to upgrade their skills, lower their prices, and, best of all, redesign the ways they serve business customers. As a result, there's never been a better time to shop for the best accounting services at the best prices.
The Big Six
The nation's largest accounting firms--the so-called Big Six--dominate the industry. Known as the Big Eight until they carried out a series of megamergers and acquisitions during the 1980s, these goliaths now range in size from $4.5-billion Arthur Andersen to $2-billion Price Waterhouse. As a whole, the Big Six represent nearly half of the accounting world's total revenues in the United States. (See "How Big Are the Big Six?" below.)
During the early 1990s conditions seemed bleak for the Big Six. Not only were prices dropping on audits; lawsuits were increasing so quickly that audit work began to seem like a pure lose-lose proposition. Some firms, most notably KPMG Peat Marwick, had to downsize. Others switched leadership teams. Meanwhile, many of those once-publicized efforts to boost growth by branching into the entrepreneurial market just fizzled out. Three of the firms--Peat Marwick, Price Waterhouse, and Deloitte & Touche--seem to have made strategic decisions to retrench entirely.
But within the last few years, most of the Big Six appear to have found their salvation in the form of management-consulting services. (See "Forget the Number Crunching," below.) During 1995 alone, consulting revenues grew by an average of 30.8% at the Big Six firms. "That's more than 15 times faster than their accounting and auditing services grew," reports Bowman.
One sign of the times: Chicago-based Arthur Andersen split off its large-client consulting business into a separate division, Andersen Consulting. Next, as the gossip hot line has it, that consulting business--or a similar branch of another Big Six firm--may try to launch the accounting industry's first-ever initial public offering. (Firms are searching for ways to expand their capital base, to help partners cash out and to raise money for marketing and new technology. Accountants have traditionally had a hard time raising capital, with partners generally limited to their personal savings and borrowing power.) Even within Andersen's Enterprise Group, whose clients' revenues range from $5 million to $100 million, expectations are that the consulting line will grow from bringing in 30% of revenues to 50%.
The Big Six are always looking for ways to push customers in the direction of their consulting services. One tactic: accountants identify a company's problems during an audit and then aim to solve those problems with the help of the consultants. That process may provide the answer to your problems, but expect to pay a hefty price for it.
Other changes within the Big Six reflect their search for high-profit businesses. Coopers & Lybrand, for example, recently registered with the Securities & Exchange Commission to become a broker-dealer. KPMG Peat Marwick set up a short-lived strategic alliance with an investment bank so it could sell commission-based products. Ernst & Young gave birth to "Ernie," an Internet consulting service aimed at small-business customers.
"Rumor has it that Merrill Lynch is interested in buying a large national firm, maybe even one of the Big Six," says Ed Ketz, an associate professor of accounting at Penn State's Smeal College of Business, in State College, Pa. He adds, "They've refused to comment, but if the rumor is true, it opens up all kinds of questions--including how Merrill Lynch, or any brokerage firm, could control its certified public accountants, since those CPAs would also be auditing public companies whose stock their own company might be selling." But whether or not the Big Six reconfigure themselves one more time, one thing is certain: their management strategies have changed forever.
