Accounting

Creative disruption in accounting | Accounting Today

The days when accountants only had to worry about competition from other accountants are long over, with forces outside the profession increasingly mobilizing to sap market share from traditional firms in a bid to disrupt the industry.

As time has gone on, the areas where accountants remain unquestioned masters of their domain are fewer and fewer, as those from other sectors, like tech and consulting, move to challenge the profession’s dominance in both traditional bread-and-butter areas and novel service lines.

While many areas are at risk, there is a strong consensus that the ones most vulnerable today are the low-level compliance-based services comprised of easily repeatable tasks. Such tasks are increasingly done not by humans but by software, which is capable of performing these repetitive processes much more efficiently.

“There’s market forces today focused on innovating and offering services that go to the heart of the compliance and mandatory services,” said Matt Armanino, CEO of Top 25 Firm Armanino. “I think in those areas you’re seeing the biggest impact for sure: Some of the more simple services that can be fully automated, the ones that are repetitive in nature that don’t change often.”

Jim Bourke, managing director of advisory services at Top 25 Firm Withum, named simple individual tax returns as an area that is already being disrupted, calling it the “lowest-hanging fruit” of all. With the technology advancing as fast as it has been, he added that this disruption will continue into the future and get even more intense.

“Yes, [accountants] look to make sure it’s accurate, but today the way the return is done is pretty black and white. There’s a lot of technology used that automates a lot of these processes, like scanning and populating … With artificial intelligence, with robotic process automation, with machine learning ­­— man, it’s ripe for disruption and it is going to be disrupted,” he said, adding that many individuals with simple returns skip the accountant entirely and just use an online platform like TurboTax.

Similarly, Kalil Merhib, executive vice president of growth and professional services at CPA.com, the technology arm of the American Institute of CPAs, said that payroll services are another area where there has already been heavy disruption.

He noted that, more than a decade ago, after-the-fact payroll services were a big element in many firms. With automation now taking over many of the more routine functions, it’s a very different landscape today. “Most firms strategically focused on payroll aren’t looking to incorporate a payroll business without doing human capital management advisory or other types of services that wrap around it because [outside players] are so much more efficient at being able to do that and having their technology keep up with all the challenges that can make it complex to manage at scale,” he said.

Another vulnerable area is audit and attest. This might seem counterintuitive, considering that CPAs are the only ones by law who can sign off on a public company audit, but Jenni Huotari, business outsourcing practice leader with Top 25 firm Eide Bailey, noted that audit, as a field, is bigger than that.

While CPAs certainly dominate audits of Securities and Exchange Commission clients, there’s a whole world of other attest engagements for needs like satisfying lending requirements. Huotari noted that technology is allowing for greater degrees of data connectivity, meaning less need for audits. Even when one becomes necessary, she noted that certain technology solutions can generally perform at least some of the more simple tasks more efficiently than a human accountant, allowing people to skip the CPA firm entirely.

“A lot of the work we do is not necessarily required by regulation … Those that are regulated will be impacted last, but the ones that [do audits] driven by a lender, I think, are at risk first,” she said.

Donny Shimamoto, managing director at Intraprise TechKnowlogies, agreed that these kinds of basic compliance services, once the bedrock for any CPA firm, will be less and less connected to accounting firms. But at the same time, he wondered whether this was necessarily a bad thing. Accountants have never liked doing these kinds of tasks, so he questioned whether it ‘s worth preserving them in the first place.

“Whether CPA or EA or bookkeeper, if you’re actually competing with those products, you’re going to lose. They’re much more efficient. But the question is, should you be going after clients who only need those services? You shouldn’t, because those are not differentiated. They are not providing that additional layer of expertise of understanding of a business. That should be what you provide,” he said.

(For more on what’s helping shield accountants from disruption, see “Disruption protection.”)

ESG: The latest battleground

Outside the bedrock compliance function, one of the most at-risk areas for disruption is in assurance of environmental, social and governance information. AICPA president and CEO Barry Melancon noted that, of all the ESG assurance engagements worldwide for 2021 (the most recent data available) only 57% were conducted by accounting firms, with the rest done by consultants — and that is down from 63% in 2019. The statistics show that, overall, accountants seem to be losing market share in this area.

Shimamoto said that part of this is because ESG is a nonfinancial subject matter and so it does not always occur to people to turn to CPAs for these types of engagements. But he also said that lack of regulatory force as to what ESG assurance should look like also contributes to this, as nothing explicitly says that someone has to be a CPA to do it and, further, nothing says the attestation needs to be performed in the way a CPA might.

“That is where you see a non-CPA provider coming in, saying they’re doing assurance but also not being forced to follow assurance standards, whether U.S. or international. The non-CPA firm provider is not having to do the same level of work that a CPA firm would do, and they also aren’t having to pass peer review, depending on the state they’re in,” he said.

Geni Whitehouse, president of the Information Technology Alliance, noted that in addition to the higher amount of regulatory rules, especially around independence, another issue is just limited capacity. It can require a major amount of time and effort for practitioners to get the training and education they need to perform such engagements well. So while there are many firms that are interested in this area, such as those that work with the organic farming industry, not all of them are capable right now of shifting from their current focus into this new area — they’re too busy.

“It takes some investment and commitment and time to get up to speed. Finding that time when I’ve got work coming in, it’s a classic ‘I’m too busy doing this stuff to stop doing this stuff,'” she said.

Armanino added that many companies view ESG assurance as one more compliance function that serves as more of a necessary obligation versus anything with intrinsic value.

“So this is something they would not choose to do unless they had to do it,” he said.

Advisory not safe either

In general, accounting firms have lately been encouraged to move away from basic compliance services and into advisory for many of the same reasons articulated here. But Whitehouse warned that the longer it takes for the profession to fully transition into this mode, the more likely it will be that the kinds of clients firms would want to have will be scooped up by nonaccounting competitors.

“I think as accountants fail to provide real insights to their clients, our clients are going to other people for that kind of help. They’re getting training online. They’re not looking to CPAs because of our focus on compliance, and our business times from January to April and times like [October] where they’re not available,” she said.

Who is stepping in to fill the void? Whitehouse said it has been bookkeepers and outsourced financial services providers. She has seen a lot of talk at conferences about how they are the ones with the financial data to be able to ask trenchant questions like why someone is spending so much on one thing or so little on another. They are eager to provide advisory services and seem to be making the transition faster than traditional accounting firms.

“They’re looking to bookkeepers for more advisory services and the bookkeepers are stepping up because they want to do more valuable service work for their clients,” she said. “I think that level of service is where the transition has been happening more rapidly. And I think there is some fear that the CPA profession, because we wait until the end of the year to get involved, is missing out on the opportunity,” she said.

Disrupt back

Despite the scale of these challenges, the accounting profession is not taking them lying down. Jody Grunden — co-founder of Summit CPA Group, which merged into Top 100 Firm Anders last year — extolled the virtues of thinking a little differently from the typical accountant as a way to not just resist disruption but even do a little of your own.

He was one of the first to move into outsourced CFO services, which now make up a significant portion of his clients. He took the firm fully remote years before the pandemic, which has allowed it to take on clients or hire professionals anywhere in the country. He was also an early adopter of a value-based versus hours-based fee structure. As opposed to sending an invoice, simply “zapping their account” was a big hit with clients, he said.

Part of how he came to those decisions was by changing his mindset as an accountant. Instead of looking at what other accounting firms were doing, he looked at what companies in other industries like manufacturing were doing instead. This was because he felt a different mindset was needed to successfully adapt, and he didn’t think he’d find what he’d need by looking at other CPA firms.

“One hundred percent we’re an accounting firm because we started that way, and we merged into an accounting firm,” said Grunden. “But we act more like an advisory firm 100%; had we never been an accounting firm to begin with, we probably wouldn’t have merged with them because they would have looked at us differently. But our growth was high, our profits were high. We just don’t do anything that necessarily warrants a CPA license for the most part.”

Armanino emphasized shifting business models as key to adaptation, especially billing structure. The firm has shifted client engagements to a more value-based model where the firm’s fee is a portion of the value it creates for the client. He said the firm has implemented more fixed pricing for certain services, increased its managed service offerings, and taken on more recurring engagements where it takes over certain work for clients on a regular basis. He said these changes are necessary to transition from the billable-hours model because technology has made many routine processes so efficient that a firm might inadvertently disrupt itself.

“If the core of your business model is a cost-based model of selling time — well, take the 1040 tax process. We’ve used technology to automate half the process but if all we have to sell is time, that is probably not a good impact on our business model; we just lost half our revenue stream. So we have to look at business models,” he said.

Shimamoto noted that there is a similar business-model-based change in how cybersecurity advisory developed. He said there are many IT consulting or cybersecurity specialist firms that came forward around the mid-2000s that partnered with certain CPA firms in order to functionally take on cybersecurity audit engagements that should have been done by an accountant. The firm partner would sign off on it, but for the most part it was the IT or cybersecurity consulting company that was doing the real work.

“[This goes] all the way back to SAS 70, when we saw the IT consulting companies come in and effectively we’d see them ‘partner’ with a CPA firm but really the security consulting company is doing all the work, and if it is really done like that, that is a violation of our standards. That goes back to the mid-2000s, and even earlier, where we start to see those kinds of things occur,” he said.

As time went on, though, more firms began to develop their cybersecurity advisory practices in addition to their cybersecurity audit arm, which he said represented a maturation of the service area that has been effective in letting firms “get their stake in and ‘defend’ that area.” This is due to a shift from offering a singular service to offering an ongoing relationship. So while the consulting firms might still be competitive, it’s mostly on one-off jobs versus long-term contracts.

“I see it as, if you compete on [one-off engagements], you’re not framing your services correctly. It’s not about performing a function, but the advice and expertise and dealing with complexity,” he said.

Deepening the relationship

Firms have also held their ground by focusing on the client experience, leveraging the relational aspect of the profession. Sharon Berman, finance and accounting solutions principal at Top 50 Firm Rehman, said one thing that’s helped a lot in this regard has been hiring what she called a “client concierge” who acts as a touch point with clients for further services.

The client concierge position, which was established a year and a half ago, is responsible for things like welcoming new clients and introducing them to the services the firm provides. It’s worth noting that when the firm was looking for someone to fill this position, they turned not to the accounting industry but to hospitality, as it is more about making the firm more hospitable for clients.

“I can’t tell you how many times in my profession I’ve heard, ‘Boy, I didn’t know you did that.’ So [the client concierge] has done a phenomenal job educating our clients in what we can do for them. Providing exceptional service is always what we did, and now she is there for other advisors and for me to educate and work with these clients and bring them along to other areas of interest,” Berman said.

This has helped the firm offer clients things like wealth management, retirement planning, fiduciary services, accounting outsourcing, real estate advisory and more, on top of what it was already offering. With this has come a realization that they’re really selling a relationship versus any particular service.

“We would sell the engagement — and this is across all our departments in our firm — and then we could go dark. Our advisors are busy doing what they do every day. So we added this new business to the firm and they were getting the time and attention they needed from an onboarding perspective. This is another set of hands, another touch,” she said.

Eide Bailly’s Huotari has taken a similar tack, moving away from thinking in terms of the engagement and more in terms of the overall relationship. She noted that one thing that her firm has that other competitors do not is their deep knowledge and experience with particular clients, giving them better insights into their particular contexts. Being able to automate routine compliance tasks has helped a lot in this regard, as it frees up firm staff to focus more on the human connection.

“What we sell is a relationship-based service,” she explained. “There’s a lot of value in the relationship and connection to communicate with our clients. We’re helping them interpret the information. We have a deep understanding of them and their business and their goals, and we’re able to really pull it all together and help them get there. It’s shifted from what was more compliance-based things you have to do, and shifted to the relationship part of it because we’re not in the weeds with things that have to get done.”

In this respect, given that the disruption is driving the profession to transform itself, it may not necessarily be a bad thing all around. Withum’s Bourke said accountants should embrace the fact that they’re not doing as much of these simple compliance-based jobs anymore. No one liked doing them anyway.

“Today, advisory services drive the profession. Like anyone else, we have to pivot as professionals as technologies get more powerful and [perform] so many of the manual tasks we used to do in our profession,” he said, comparing today to when he was a newer CPA doing tax work. “From February to April, that was all I did. And we made a great living in it. But technology is changing it. It is very, very quickly changing the whole process and we need to pivot and change as well. Let’s not be the next Kodak. Let’s not resist. Let’s embrace it.”