Alternative CPA Firm Structures Gaining Ground
There is no shortage today of issues that founders, partners and staff at all levels of accounting firms need to keep an eye on.
Pipeline concerns, the increasing use of automated accounting work and the demand for non-traditional financial reporting are leading accounting professionals to seek out competitive advantages, such as alternative structures.
Private equity (PE), as well as other alternative investors, have made their presence known in the accounting profession, and there continues to be much discussion around the alternate ownership of CPA firms. While some may be content that PE has finally taken a look at the accounting profession, this involvement is something that should be undertaken only after carefully weighing the pros and cons of doing so.
At a fundamental level, PE firms have much higher earnings expectations — with double-digit returns being the norm rather than the exception — and almost always have an exit strategy and timeline from the start. Pressure to reduce costs and grow revenue can often take partners or other firm leaders by surprise, and it needs to be planned for accordingly.
We are currently seeing the tip of the iceberg related to private equity. The concept of moving from a merger transaction where there typically is no money exchanged at closing, to one where there is cash up front, is starting to become the norm. This can be very exciting for CPA firms that are looking to transition. PE has already entered many CPA firms clients’ industries. Private equity and other strategic investors in the accounting industry will continue to grow for the foreseeable future.
Partner with Non-CPA Firms
Strategic partnerships other than PE are also becoming common. See chart 1. These can be a way to build out service lines and typically are turnkey. The strategic partner usually has invested the necessary capital, is passionate and is expertly knowledgeable around the new service lines. The only requirement is for the typical CPA to think differently about what and who they bring to the client relationship and how they will operate.
Building Out New Service Lines
Expanding and building out new service lines is also an option for growth. These service lines can include environmental, social and governance (ESG) reporting, other types of non-financial reporting, cybersecurity considerations, fractional CFO offerings and other client accounting services (CAS) packages.
Expanding Non-Attest Services
Increasing non-attest services is not necessarily new in and of itself but the reality is that clients are in need of an increasing number of non-attest services. Technology tools have finally developed enough to allow practitioners to offer those services. Most common is the alternate practice structure where all attest services are segregated under a separate entity. This helps especially where you have states that prohibit the ownership of CPA firms by non-CPAs. For tax and other advisory services, there is no requirement that the firm register as a CPA firm.
Regardless of the kind of alternative structure being considered, CPA firms need to be diligent and do their homework before embarking on ways to increase revenue growth.
Sean D. Stein Smith
Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York – Lehman College. He is a member of the NJCPA Board of Trustees, participates on several interest groups.
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This article appeared in the Summer 2023 issue of New Jersey CPA magazine. Read the full issue.