Behind The Numbers (May 2007, CA Magazine)

By John Lorinc

For those who would prefer to see the version at the CA Magazine website, please click on the image (left) to go directly to the article. Otherwise, it is reproduced word-for-word below:

How do small and medium-sized firms organize their practices?

(Quotes form Steve McIntyre-Smith in Bold)

Once in a while, Peter Yaremchuk, an Edmonton practitioner and president of the Institute of Chartered Accountants of Alberta, needs to get a read on how other small firms in his city are doing. Not surprisingly, some of the partners running Edmonton’s smaller accounting firms also find themselves craving that kind of feedback from their colleagues. For that reason, Yaremchuk, co-founder of Yaremchuk & Annicchiarico LLP, a five-partner firm, gets together with members of nine other firms every few months or so to chat informally about staffing issues, market conditions, clients, standards and anything else that has crossed their professional radar screens. On the other side of the country, Susan McIsaac, who runs a two-person partnership based in Amherst, NS, does much the same sort of thing, although her professional network is rural and more dispersed across Atlantic Canada.

Through the AC Group, a network of accountants in Atlantic Canada, McIsaac and other independent accounting firms conduct regional surveys on practice concerns such as wage levels. Like all professionals, accountants have a need for self-appraisal done in a systematic way. For small and medium-sized firms, it’s a tough challenge, and this is where the CA profession’s three-part Managing a Public Practice Survey (MAPP) proves invaluable. The survey — set in motion by the profession’s Member Relations Task Force — provides a snapshot of how small and medium-sized firms organize their practices across Canada. The first part of the MAPP survey — “Billing rates, compensation and benefits” — was summarized in the December 2006 issue. Some of the findings of the second and third parts — “Computerization” and “Practice management” — are summarized below.

The “Practice management” part of the survey offered for the first time a national snapshot of the business environment for small and medium-sized firms coast to coast. Not surprisingly, there are significant regional variations, as well as distinct changes in the sort of work firms de-pend on, based on the size of the partner-ship (see “Summary fee analysis by firm size” above).

The leading types of engagements overall are, in order: assurance, notice to readers/compilations and tax preparation.

Assurance formed a larger component of fees once the firm size exceeded five full-time equivalents [FTEs], while compilations comprised a significant proportion of the services (either the largest or second-largest category) until the firm size exceeded 35 FTEs.

Review engagements accounted for a larger percentage of gross fees in Atlantic Canada and Quebec than the norm (which is 18% of gross fees).

Compilations accounted for a larger percentage of gross fees in Western Canada (BC and Alberta) than the norm (28%) and accounted for a smaller percentage of fees in Quebec.

Personal income tax services accounted for a lower percentage of gross fees in Manitoba than other provinces.
Ian McConnan, partner in Harris McConnan LLP in Edmonton, says his firm mainly handles notice to readers/compilation reviews and tax returns but also does a lot of work in the not-for-profit sector. “Just about every not-for-profit is a loss situation for us,” he says. “But that’s public service work and part of our philosophy is that somebody’s got to do it.”

John Tabone, CICA’s manager of inovation, says he was surprised to see that services other than auditing, accounting and tax continue to represent a relatively small share of firm revenues. The survey found that assurance and related services comprise almost three-fifths of billings. “I suspect this might decline as some firms drop assurance altogether to focus on other services.”

Financial planning is one example. The survey found that, on average, less than 1% of fees came from this kind of work. But Brian Purdy, CFP, partner in PMT Chartered Accountants and Business Advisors in Williams Lake, BC, says demand for this kind of service has been mounting in recent years as the number of retirees in this town of 20,000 has shot up. “Financial planning is a growing area for us, but it’s still part of the general practice.”

In Purdy’s case, that means 1,600 tax returns each year. Tabone points out the survey clearly indicates just how important private owner-managed businesses are for small accounting firms. “Accounting for 67% of revenues, they are the lifeblood of many CA firms.” As Yaremchuk says, his firm thrives on owner-operated companies in the $1-million to $2-million revenue range. “They are easy to deal with and they’re there for a long time.”

Tabone points out even among firms with more than 35 FTEs, listed companies represent only a 7% share of revenues (see “Fees earned by sector” on page 35). While the lion’s share of publicly traded corporations use the Big Four, smaller but well-established CA firms in Vancouver, Montreal and Kitchener-Waterloo, Ont., have been able to sign up public company clients, in some cases because there’s such a mismatch between supply and demand. Yaremchuk notes that about a quarter of his firm’s billings come from the construction industry.

That kind of specialization turns out to be relatively rare, even though some practice management experts advise accounting firms to be much more selective and strategic about their mix of clients. The survey concluded that for only 11% of the respondents, more than half their revenues come from one industry, and most focus on several sectors. Quebec had the highest proportion of respondents — 33% — that specialized so heavily in one industry.

While putting all your eggs in one sectoral basket may be too risky for many firms, Steve McIntyre-Smith tells his clients to focus on a handful of industries as a means of building a practice that distinguishes itself from the pack.

McIntyre-Smith is president of Oakville, Ont.-based MFA Group Inc., which specializes in accounting practices. “A lot of small firms take any business on and they grow the practice by default instead of by design.” He advises CAs to ask themselves what industry they would have gone into had they not become accountants, as a way of focusing on a sector that excites them. Then it is a matter of linking up with industry associations, attending conferences and reading the trade press.

This is the strategy McIsaac took when she took over a national firm’s local office in 1999. She decided to stay away from municipalities — “the learning curve was too great” — and has a large agricultural client base. People in her office grew up in farming communities and McIsaac has a post-secondary degree from an agricultural college. The result: her staff has grown to 14 from 5 and in the past year,she opened a second office and added an-other partner.

One of the most interesting measures in the survey had to do with partner in-come. “Sole practitioners are not necessarily in practice to be rich,” says Ingrid Enhagen, associate director in member services for the Institute of Chartered Accountants of Ontario and one of the authors of the MAPP survey. According to the data collected, a sole practitioner’s average net in-come was about $71,000, less than half the average for partners across all the sizes of firms responding. In firms with more than 35 FTEs, the average net income rose to $305,000. Other key findings:

The largest net income amounts were in Alberta, British Columbia and Ontario (ranging between $181,000 and $189,000).

Firms anticipated an 8% increase in the firm’s annual net income before partner compensation over the next 12 months, with the biggest increases anticipated in Alberta (12%). As for overall operating expenses, the survey found that the average profit mar-gin before partner distributions was about 44%. Firms are able to recover 93¢ of each billed dollar, and most tend not to ask their clients for deposits and retainers. Stella Leung, a professional standards adviser for the Institute of Chartered Accountants of British Columbia, and a CA who participated in the development and reporting of the survey, also points out that many of the firms surveyed were not spending as much time as expected promoting themselves.

Not surprisingly, salaries represented the largest expense item, accounting for about 28% of gross billings. And, for a small firm in a rural area, staff cannot have the same expectations as those in firms in the cities. “If I had to pay the average wage in the survey,” McIsaac says, “I couldn’t recover it.” In Edmonton, meanwhile, McConnan has the opposite problem: these days, he is having to boost salaries by 25% to 30% a year just to keep up with Alberta’s red hot job market. “It’s nuts. I’m updating my salaries every three to six months just to keep up.” It is a classic seller’s market: employers outnumber commerce students by two to one at university job fairs. “Everybody’s short of staff.”

The related issue is recruiting young CAs to join small practices, especially those away from urban centers. McIntyre-Smith lays out the recruiting squeeze in demographic terms: the baby boomers are beginning to retire, while their children, now entering the workforce, are not clamouring to join the accounting profession. Enhagen says that firms need to plan for the future more actively. “Less than 30% of the firms responding (including sole practitioners) have a succession plan or practice continuation plan in place.” And, she adds, “There are still a significant number of partnerships [25%] that do not have a partnership agreement in place.”

The advice McIntyre-Smith gives his accounting firm clients is that they need to differentiate themselves — perhaps by specializing in certain sectors or service areas, or offering work/life balance policies, such as allowing accountants to work from home. That observation meshes with one of the most telling findings of the MAPP survey — an overview of the top issues facing firms. Topping the list: keeping current with the rapidly changing technical environment; retaining high-quality clients; balancing work and personal life priorities, and recruiting talented staff (see “Top issues facing firms” on page 36).

The part on “Computerization” found respondents spent an average of $40,000, or 4% of revenues, on technology purchases, with smaller firms replacing computers on an as-needed basis and larger practices (i.e., with more than 35 FTEs) updating their computers on a regular two- to five-year cycle. CA firms clearly favoured desktop models over laptops, with 63% using desktops exclusively. Among larger firms, however,the proportion of CAs using laptops is exactly the same as those using desktops.

One of the reasons is computer theft. This kind of crime “may be more prevalent than practitioners are aware of,” says Enhagen. She points out that 18% of respondents had experienced computer theft, and it seems to be more prevalent in larger practices. What’s more, the technology investments often do not include security systems. “The lack of security in the CA firms surveyed is rather disconcerting,” adds Tabone. “Few firms use any kind of security when exchanging confidential information over the Internet and those that do are not using the best security practice — they use passwords without encryption.”

Many small firms have also been slow to establish an online presence. About 70%of surveyed firms with fewer than 10 FTEs did not maintain a website (and only 60%of those that did reported being satisfied or very satisfied with their site). Tabone calls the low level of interest in websites surprising. But in some firms, partners prefer not to have an Internet presence for fear it will attract the wrong sort of clients. “You end up with the clients you don’t want,” says McConnan, referring to clients who do not pay promptly or think accountants exist to help them defraud the government.

McIntyre-Smith asserts that no one should expect websites to generate new business. But, he adds, when articling students are vetting potential employers, they will often follow up an initial contact with some Internet research. If they cannot find any online information, “the firm is showing it is behind the times.” Prospective clients may do online research on a firm as well. McIntyre-Smith also says it’s worth the effort to spend a bit of money to create a distinctive online profile rather than rely on the widely available boilerplate website templates.

Though many small firms do not have their own website, the survey found that Internet use is ubiquitous in the industry, especially for research. Two-thirds of respondents visited the Canada Revenue Agency website at least once a week(please see table below).

Keeping current with office technology can be a bit trickier, especially in very small firms where the chief technology officer is also the managing partner. “If the top people running the firm aren’t willing to spend the time thinking about technology, it’s just not going to happen,” says Ken Gelhorn, who runs Gelhorn Information Systems, a Richmond, BC- based IT consulting outfit specializing in accounting firms.

Office technology can soak up a lot of attention. The survey found that more than half the respondents had endured viruses, and almost one in five has experienced computer theft.

McIsaac’s story is not atypical. After reviewing the technology survey results, she concluded that her firm is in the middle of the technology road. She has been moving toward creating a paperless office by adopting software systems that can scan and copy documents, allow users to update pdf files and so on. But she ran into problems trying to create an internal network between her firm’s two offices and hadn’t found enough of a clearing in her schedule to solve the problem. “Time was the biggest constraint,” she says. But she has made some progress, saying the problem “is getting resolved.”

The results suggest small firms remain skeptical about the move to paperless office systems. “We get a little bit concerned” about not having the paper back-up files, says McConnan, who arrived at work one Monday to discover that a weekend computer meltdown had obliterated several files. “We keep paper files forever.”

Gelhorn adds that many smaller ac-counting firms could afford to be much more strategic in their technology practices. He recommends that a basic complement of equipment include 300 gigabyte back-up hard drives that can be stored off site as a means of providing the back-up copies of all client files. Scanners, too, are essential equipment because they allow staff an easy means of accessing documents. The adoption rate is going up: in 2005, he says, about a quarter of his clients had one in their office; last year, it was up to 50%. (This year the number will probably exceed 50%.)Yet in his view, the single most important technology outlay is dual monitors, a configuration he recommends for every firm. Two monitors, Gelhorn says, allow accountants to multitask — simultaneously running working-paper files and e-mail or tax software. The presence of two monitors on a desk prevents a great deal of printing and also allows practitioners to work with clients when they come into the office. “The payback is so significant it’s almost a no-brainer.”

Leung notes, “The survey shows that some members do well with technology, but others could take the information in the survey and take it to the next step.”

The MAPP surveys will undoubtedly help small and mid-sized firms hone their operations to better focus on these key priorities. According to Tabone, national surveys will now be part of the profession’s landscape, with the next round expected to commence this fall. The CICA and the provincial institutes will be encouraging more firms to take the time to fill out the questionnaire. (The full report, available only to participating firms, includes more detailed results broken down by city/region and firm size. The surveys are conducted every two years and firms are encouraged to participate so they can access the detailed reports. Watch CICA’s website for updates or contact MAPPSurvey@icao.on.ca.) As Tabone says, “We expect participation in the next round to jump as more firms recognize the importance of having this information.”