Seismic Shifts in the Profession

Today, our guest is Dan Hood. I probably don’t need to introduce Dan, but I’m going to—so Dan is the editor-in-chief of Accounting Today. He’s been in that role since 2011. He joined Accounting Today as the managing editor in 1998, so he’s been the voice of our profession for quite a long time now. He hosts The Accounting Today Podcast, which I was very fortunate and honored to be a guest on recently. Dan, welcome to The Unique CPA.

Thank you for having me. I’m excited. This is great, going back and forth between the podcasts, we could just be each other’s guests for years and years—we never need to talk to anybody else.

Alright, done deal. I’m signing the contract. There we go. But like I said, I honestly, I really was honored, for me to be on that. You and I recorded last week—it’ll be coming out, I think shortly before this comes out I would assume, or about the same time probably. 

Yep.

But like I said, I really do feel that you’ve been the voice of our profession for a long time. I’ve been in this profession a long time—and I predate you. But I remember, at least, Accounting Today going way back with me in the profession.

Well I would say, maybe Accounting Today might have been the voice of the profession, but if I’m the voice of the profession, the profession has bigger problems than I think it does. But no, it is a fascinating profession, there’s a lot going on, and it’s an exciting area to cover.

I should say, I mean, this is one thing I never talk enough about, but I’m not an accountant. I have no background in accounting. I have a background in journalism, and came into it to cover the space, and it is genuinely fascinating—it’s been the last 25 years, as you reminded me—and it’s been exciting and fun and it’s a neat profession with a lot of exciting aspects to it, and covering it has been great.

Yeah, and there’s a lot of change—accelerated change probably recently as well. But it’s probably always been changing. But there’s a few topics we’ll probably talk about today regarding that—what’s going on in the profession. But before, I really want to talk about this for a few minutes—or as long as you want—you do have a conference coming up in May. I think, is the… May 8th, is that the day?

Yep, May 8th to 10th in San Diego.

And so give us the theme of this, and how this came about, to do this.

Absolutely. It’s called the Firm Growth Forum, and one of the things we’re thinking about is that, you know, accounting firms are so busy helping their clients grow, and helping their clients succeed in their businesses, that sort of you know, it’s a shoemaker’s children kind of a thing—they often don’t have time to focus on their own growth. And with, as you mentioned, there’s so much change going on. I think there’s more change going on now than at any point in the 25 years I’ve been paying attention to accounting, and it’s difficult to keep up with it. It’s difficult to keep up with all the different changes internally, externally, with clients, with staff, with the structure of the firm, with all the different technologies coming out. There’s so many options, you know. Forget about the challenges, there’s just a ton of options to pay attention to. 

And so one of the focuses of this event is to bring accounts together, particularly leaders of accounting firms together, to figure out how to make their firms better. So we’re focusing on the structure of the firm, the services firms are offering, how they’re handling staff, right? The war for talent is an enormous issue. How they’re how they’re figuring out succession planning, what they’re going to do about PE—private equity coming into the space, that’s a big topic, right, these days? New service offerings around ESG, CAS, cannabis, cybersecurity, all the different new service offerings that firms are paying attention to. That’s our focus, is that sort of aspect of the sort of working, you know, working on your business as opposed to working in your business. And we’re excited to bring, we’re bringing a lot of—you’re joining us—we’re bringing a lot of experts from all around the space to talk about what it means to run a modern firm and what it takes to be successful at that. We’re psyched about it. We think it’s going to be very exciting. 

We haven’t done a conference in a decade or so—we’ve been in this space for a bit. It’s, there are a lot of shows out there. We think this one’s different because of that specifically, that focus. There won’t be a lot of technical education, it won’t be a lot of tax law or standards, that sort of thing. It’s really more about working on your business and working in your business.

Which I think is hugely important. That topic comes up a lot at least with me personally, because I think a lot of times and you’ve mentioned it: CPAs are so—I say CPAs generically, EAs, CPAs, tax preparers, bookkeepers, accountants—are so focused on helping the client, is what you said, helping the client, being the resource for the client, coming up with the solutions for the client, helping them grow, that they forget that they have a business that needs all the same things. And they often I’ve heard people like, “Oh, yeah, I do own a business, don’t I?”

“I’m a small business owner too! Hey, wait a minute.”

Yeah. And I think that’s important, especially when, like you and I talked last week about mental health and just, you know, not putting your nose to the grindstone and working 80 hours a week. I think working on your business, I think is important. So I’m really looking forward to this. And thank you for choosing me to be one of the presenters. I’m really looking forward to that.

We’re excited about it.

Alright. So then you just said a bunch of things that we could expand on.

I’m gonna save some of it for the show—for the event—

—No, we’re going to record for 24 hours straight right now. We started a marathon.

Yeah, this is going to run through May 8th, and then you can join us live.

So one of the things that I was really intrigued by, and it’s going to be addressed somewhat at the conference it sounds like too, but I was intrigued: You put this question out, I think it was last August, and then probably going to get it wrong, you can correct me, but what I think it was, “Do we still need accounting firms?”

Yeah.

And I was like, when I saw that, like, “Wow, that is awesome. I know everybody’s going to answer this, it’s great information that’ll be out there,” and you wrote this up in an article, you know, in August, and then the responses in October. But let’s talk about that. Do we need accounting firms? Or is it just more, we just need to change the way accounting firms are structured? What was the whole point of the question?

Well, yeah, it’s worth, before people mobs with pitchforks show up outside my window, it’s worth explaining. The framing of the question is, “Do we need—is it the structure of accounting firms  that we need?” Well, obviously, everybody knows we need accountants, everybody knows we need accounting services, both on compliance and advisory folks—either way, we need those, everybody needs those. There has never been more demand for accounting services. So that’s not really the question. 

The question is, “Do those services need to be delivered in the traditional accounting firm structure?” Right? Where lots and lots of raw talent comes out of schools, goes into public accounting firms, gets winnowed down to a sort of pyramid of partners—the traditional, some will call it the pyramid shape. Do we need that? Is that functioning properly? Is it doing the things we need, and is it sustainable? 

So that was really the question was, you know, are there other ways to deliver these services? Are there other ways that accountants could be, might be, happier to operate? You know, would they be less stressed or less, or feel freer, be able to offer the services the way they want to offer them, in a way that’s maybe better for their clients? Are there ways that are more capital-efficient, or that better meet the demands for capital that a modern accounting firm is running up against? Obviously, there’s all kinds of talent issues that goes into this. We don’t have the mass number of young accountants coming into the profession that we used to have, which supported that model of, like I said, that pyramid, that broad base of thousands and thousands and thousands of fresh out of college students coming into the profession, I don’t want to say getting chewed up, but you know, being put to a ton of grunt work, and then getting sort of winnowed down to a small group of partners, they hive off, some of them would go off into industry, someone who would go off to entirely other professions, someone would go off to nonprofits, etc, or start their own small firms, but really ended up with this small number of partners. 

So that was the question—are there other ways to organize the delivery of accounting services in ways that don’t require the firm? Because there are many problems with the firm. And you know, the responses were a mix of… personal threats? No, there were no personal threats. But I mean, there were some people who were very upset about who were like, “Of course we do! Of course we do!” Some of it was conflating, like I said—I wasn’t saying we don’t need accountants, I was saying, “Do we need to be organized in firms,” was really the question. 

But, but there was a lot of thoughtful responses about—on all sorts—some disagreed with me, but were thoughtful about it. And some people were whole hog on it and wanted to try things that I wasn’t even prepared to imagine. And so it was neat. It was fun to throw a question like that, because accountants think very deeply about their profession and think about what they’re doing, and get very passionate about it. So like I said, death threats aside. It was a great experiment. 

And I think—there was no consensus. That’s, you know, you wouldn’t expect there to be, but there was certainly a recognition that there are problems with the model. You know, some people said, “It’s the worst possible model except for all the others,” and some people were like, “No, it’s perfect.” And some people said, “Yeah, you know, we’re gonna have to do something about the talent issues and the paying out retirements to a large overhang of partners when there aren’t enough partners coming up.” 

And there’s so much, so many possible answers to it, and different possible structures. You know, sort of my take on I don’t know, I’m sure you have thoughts on this, and I’d like to hear them. But my sort of saying is, we’re probably gonna have all these models, you know? Some firms will keep the old firm model, some firms will try whole new collective hive mind things that we’ve never imagined, and others will try entirely, you know, others will be competitors coming in from outside the space. What are your—you were thinking about this, we’ve been talking about it, but—

—Yeah, so I’m the same, I’m the same way as you. So what I’ve seen is the, you know, traditionally, my—I don’t know what the right term is—audience, or my interaction with firms for up until the last three years has been top 400 CPA firms. And that structure has  been in place for most of those for a long time. There’s a modern—I call them modern firms—firms that haven’t been around 50 years. It just means that they may be doing things a little different than that top 400. But traditionally, they’ve been around a long time, they’re under the structure, and I don’t see it changing that much, although with private equity, they’re restructuring, and there’s obviously going to be change. And we could probably talk about that. 

But what I’ve seen is the “modern,” what I’ll call it—I used to call it “millennial” firm, whatever, startup firm, 30, 40 year olds starting up their firm, they’ve been around ten  years or something—I’ve seen a completely different mindset on structure there. And I honestly like, there’s not one set stone, “this is what we’re gonna do.” But there is the from, you know, Josh Lance, who started a firm in Chicago, who was remote from day one, doesn’t have the partnership structure, but he allows employees that meet certain requirements, you know, so many years there, to buy into the firm as well. So they can be a partner. It’s not just you’re named a partner, you choose if you want to come in or not in the ownership structure. 

You have firms where the owners are out doing—modern firms again—a lot doing a lot of things like you and I do, out promoting the profession. “I’ll talk on a podcast, out at webinars, conferences,” talking. And they’ve built their firms, that are which I think’s extremely important—and I’m supposed to be interviewing you, but we’re gonna keep going,  I like the back and forth. This is awesome. 

Yeah!

So they’ve done these things like where they’ve created a sustainable firm in a short amount of time where this firm can run without them. And so I think that really should be the goal that the firm can run without the person that started it, and they’re still the figurehead, but they’re out doing all these other things, which I find so cool and interesting. 

There’s firms like Acuity that I didn’t even know existed. They’re 150, or whatever, $12, $15 million firm that I didn’t even know existed until a year or two ago, and they built their firm, based on pretty much what they’ve seen in tech startups. You know, they take that same mindset, and they’ve put it into the firm. 

So I think there’s a lot of opportunity for change. I think change is probably needed. And especially when you said, when we talk about the employee attraction and retention, apparently, there’s something out there that people don’t like, and if we could do things better, hopefully, that helps with that.

Yep. Yep. No question. I mean, yeah, there’s so many options, right? And certainly, you talked about alternative ways to become a partner, you know, you’d have we have there has always been one or two firms that were ESOPs for the last 25 years. But I keep hearing a lot more talk about ESOPs, and it creates, you know, it’s not quite a partnership, it’s not really the same thing as partnership, but it does give everybody a stake—or almost everybody—who wants to have a stake in the firm. That’s a new model, right? And that’s in many ways a, you know, possibly a longer lived model than the current accounting firm. Are there ways we could change current from model to allow that to have a long lifespan? Sure, private equity is helping with that, right? It’s pulling forward some of the partner reward to a more—to a younger level, let’s put it that way. 

So yeah, it’s going to be interesting. And I think the most interesting thing about as I said, is that there’s going to be a lot of different kinds. There’s going to be, you know, the rise of gig work, and then that kind of that economy, I think we’re gonna see a lot more firms—well, firms that aren’t firms. We’re gonna see a lot more firms that are sort of collectives that come together to do individual projects, like “Okay, I got my tax guy, and I got my, you know, my accounting guy, and I got the accounting and tax guy working together all the time, but then they bring in their payroll guy, or somebody if they’ve got a CAS practice, or they bring in their, like an exchange,” what’s the one I’m thinking of? “The cost segregation study guy,” or whatever the case may be, you know, we already have models for that right of partnering between firms for specific engagements. And I think we’re gonna see a lot more of that. I think we’re gonna see firms get smaller, but with longer reach, because they work with a lot of other people.

Yeah, I agree with that. And I think becoming that niche—so a smaller firm, but you have a niche. And again, I mentioned Josh Lance. Josh Lance’s niche is the craft brewing industry. He is known as that. And so he has this niche, but then there’s things within that niche—you know, like you said, cost seg, or R&D, or, you know, just payroll in general, that then that they, I don’t know how they do it this way—I think they do—but then they team up with someone else to bring in the experts. So you could still be that point of contact for your clients as the expert, but man, you just can’t know everything in this profession. It’s impossible. And so I think that’s a model I think we will see more.

And that’s kind of what Tri-Merit has done for the last 16 years. We’ve been an outsourced partner for tax preparers on specialty tax. And I think I can see that accelerating. 

So let’s talk about that though, in general, a little bit. There’s a couple things that came off of that, in my mind. You know, we talked about employee retention. Is there a model that we think is going to be better, or remote work? Is that somehow going to change the business model as well? Any thoughts on how we get people into the profession?

If I had thoughts, I wouldn’t be the voice of the profession, they’d crown me king if I could solve that problem. 

Yes!

But yeah, I think, you know, there’s a lot of things that the profession can do, and has been doing—to give it full credit. I mean, you know, the profession hasn’t been standing still. I think we may be making it seem like, “Oh, they’re mired,” they’re not. They’ve been making lots of changes. 

Yes. 

I’ll give you an example. I love this, because we’ve been doing our “Best Firms to Work For” list for, I think it’s now in the 16th year, this will be the 16th year, I think. And when we first started it, you know, the difference between the number one firm and the number 100 firm was enormous It’s actually 1 to 60, but that doesn’t matter. The point is, between the top firm in the bottom firm was enormous. The bottom firm was, you know—it was fine, it was acceptable. We didn’t put any firms on lists that weren’t good, but it was nowhere near the number one firm. You know, the gap between them was enormous.

The gap has narrowed entirely. The difference between the number one firm or the number 100 firm, it’s actually we do it by size, so it’s a little less than that. But I mean, basically, the top firm and the bottom firms in that list are—the worst of the best—it’s tiny. It’s, you know, I think of it as an Olympic timing, right? You know, where it’s like, a tenth of a second is what separates the number one from the number two? They’re all really performing well, on all the things that it takes to retain talent. They’re giving flexibility and mentorship and development and compensation and compensation and compensation, and benefits and bonuses, and opportunities to be a leader at a younger age—all the different things that firms need to do. 

So we’re seeing that, you know—they’re doing the best they can to make themselves attractive. It’s the—so I don’t think the burden really has to be on the firms per se. It’s the profession as a whole, needs to figure out, what are the causes? Why aren’t people coming in, and there’ll be a lot of argument about the 150 hour rule if that’s the thing. I think that’s a part of it. But there are a lot of other parts to it too, which is one, it is very difficult to compete with technology, and finance, both of which took off exponentially during the 90s. 

And that’s when this shift really took place. The decline of accounting students went from, you know, sort of 2% of all accounting of all students were taking the accounting degree down to 1%. It got cut in half. 

Wow. 

And that took place in the 90s. And it’s not, you know, 150 hour rule is, you say, maybe keeping people away. But I think it’s that suddenly you had technology saying, “Hey, we like people who think well in systems, we like people who are good with numbers, we like people who are comfortable with taking a framework and applying it to other things.” A lot of the analytical skills that go into making a great CPA or a great accountant or a great EA or a great anybody in this profession, are talents that are equally exciting to technology, which pays a lot more. And similarly for finance, people don’t talk about this as much, but the finance industry exploded over the course of the 90s—it started in the 80s, but exploded really over the course the 90s. It became huge and started paying enormous sums of money, and again, it was a little sexier to say “I’m working for, or I worked for a commercial bank or an investment bank”—sounds a little sexier than “I worked for a CPA firm,” and they’re paying you a ton more money. 

So I think those are all the broad structural issues of the workforce, and of competition for accounting firms, that maybe the profession needs to deal with. Because I think firms in general, are doing their part, or at least they’re working very hard. One area I will say, though, you mentioned remote work. I think remote work is one area where the profession probably could do a little bit more work on.

We do some surveys—the company that owns us owns six or seven other B2B publications, and will occasionally do surveys across all them on broad topics—remote work was one of them, and how you’re going to handle sort of the “return to work” post-Covid. You know, we did a survey as to how they were going to handle that, you know, at the end of the pandemic, how do you expect your people to come back to work? 

And accounting was a far outlier in terms of expecting people to come back to work much sooner, and much more completely, than any other industry. I mean, like 10 to 12 percentage points out from the others. So you know, all the banking industry, in the insurance industry, in the financial planning industry, in the bond market, in the bond industry, and two or three others that we cover, were all saying, “Well, yeah, we want people to come back to the office, you know, but we’re not going to expect them to,” but accountants, “Nope, go get back in the office now.” Obviously, there are plenty of firms that are not being that way—they’re embracing remote work. But overall, our respondents were were way out of line with the sort of general workforce in the general market, and at the same time complaining about not being able to find staff.

And it’s like, well, maybe if you listen to them when they say “I don’t want to come back to the office,” or “I want to only want to come back to the office to three days a week” or something like that, that sounds one area in general, as I said, I think firms are doing well in terms of addressing the desires and needs of potential staff accepting that.

Yeah, and I think that’s a big deal because I’ve seen that when I was, again, going with my definition—legacy firm and modern firm—I see a big disconnect there on the remote work. This is just me anecdotally. I don’t have numbers or anything. But that’s what I’ve seen. And I think that modern firm is not having the same problem getting employees as that legacy firm, especially a legacy firm that is going to say, “Yes, you need to be back in the office.” So that’s just something we need to address. 

A couple things then, based on that—again, you get me so excited. Some things that you said here that these—I don’t know if I should use the term “sexier looking industries,” but the, you know, the banking and the finance, technology, they pay more. We have students that have to go an extra year, and we’re not paying them as much as somebody that’s maybe not even getting a college degree? And if they are, they’re going only four years. 

Right.

It sounds like we have a pricing problem as much as anything. I don’t know if you have any thoughts on that? 

Well, yeah, I mean, yeah, and every time we talk, I have a different study, because we do a lot of research. But you know, we do our top 100 firm list. And last year, effectively every firm on the top 100 list said at some point, “We reviewed our compensation this year and gave raises,” and many of them said “We reviewed our compensation twice and gave raises,” because this was the middle of the great resignation, and everyone was concerned. And it’s like, if you have to look across your workforce and review your compensation twice in a year, that’s gonna tell you something’s wrong with your compensation to start with. 

Right. 

And it’s not like accountants are poor. I mean, they get pretty good salaries coming out of college. But too compare with where they can go, it’s just not enough. And there’s this sense of, “Well, you will when you become a partner, it’ll kick in, then you’ll get paid off then.” And it’s like, first off, we know that you don’t expect everybody to become a partner, right? We know that you’re thinking it’s a pyramid, and a bunch of people are going to fall away. And it’s just going to be the top performers become partners. So there’s a little bit of disingenuousness there. 

But then there’s also just the fact that “I don’t want to wait, you know, 30 years. I don’t want to get it when I retire. I can go to tech and get paid an enormous sum of money and buy a house on the beach now.” You know? “Why wouldn’t I do that?” And then, you know, we talked about the extra year of college and the cost of that. I’m going to an extra year of college and maybe getting an MBA. And that credential—and don’t get me wrong, I have enormous respect for the CPA credential. But on the other hand, if I can get a credential that is, let’s face it, pretty well respected—almost as well respected, MBAs, when you go into corporate, right? If they see an MBA or a CPA, they go, “Wow, those are both great credentials,” not “Obviously, CPA is better.” And the difference there is, I don’t have to take a big fat test to get the MBA, right? I can go the extra year of school, and I pay the money, but I get the credential right away. And I think that’s something to bear in mind. Again, I’m talking about sort of the broad profession has to think about how it’s being compared to other credentials, and how hard. 

Now, you would never want to see it dumbed down, or made easier, but at the same time, you need to make sure that that that value is paying off for for people who want to take or want to become a CPA. And we’ve got to do there’s some a lot of marketing work to be done. And some compensation work to be done on the salary level to start.

Oh, for sure. Alright, so I think one important thing, based on what we were just saying there, is we’ve mentioned the 150 hours a couple times. And this is an issue that seems to be coming up more, I think partly because we are having this 2% of college graduates—and now 1%. We are having people not staying around. And so there’s been discussions, and I’ve seen states start talking about this, too. “Do we want to reduce this down to a four year degree now?” I think Minnesota is the first one to at least talk about this. Is there a proposal out there? Whether they—and I think you wrote something on this recently?

Yeah, this just—we just covered this, and it’s fascinating. You know, it’s obvious people are naturally going to look to the 150 Hour Rule. It’s the big change, right, that we can point to. We still have an exam, that’s been the same. The 150 Hour Rule is the big thing that’s changed in the last 25 years, internally to accounting, right? And so it’s natural to look there and say that’s the culprit.

We are seeing, you know, Minnesota introduced a law, and it’s important to to understand the law they’ve introduced, because it’s not just “Let’s get rid of the 150 Hour Rule.” What it is, it’s created two alternative pathways to becoming a CPA—or three, if you want to put it that way. Three is the traditional one—if you can go and get 150 hours, and then pass the CPA exam and get the work experience, you can become a CPA. 

But they’ve added two alternatives that don’t require 150 hours of college education. You get four years, and then I think it’s two years of work experience. So instead of an extra year of college, and then some work experience, you get double the work experience. So the notion is, that live experience out in the market, out working with accounting firms, they’re treating that as the equivalent of the fifth year of school.

And then there’s a second one that involves, I want to say it’s one year of work experience, and then something like 120 CPE credit hours in a short period of time, relatively short period of time. So essentially, you’re taking that CPE credit—again, as a replacement or as a placeholder proxy for the 30 extra hours of education. So it’s not really getting rid of 150 hours. It’s finding alternative ways to get experience and  education and so on. 

And there’s, I thought that was a really interesting approach to it. So it wasn’t—we’re not getting rid of it, you can still do it that way if you want. Because getting work experience or taking a lot of CPE, these are not, you know, it’s not easy. So I thought it was an interesting approach to it. There are some reasonable questions with it. Does it create problems with mobility, is one. Those could go away, if the AICPA decided they should go away. That’s a little, I mean, they could, you know. But there’s a good question of saying, “Do we want to make, you know, do we want to lower the bar for entry? Do you want to say, “Well, you’ve used to have five years of school, now you only have to have four”—there’s some legitimate marketing and reputational concerns there. 

Yes. 

You know, it’s just like saying, you know, you wouldn’t want doctors or lawyers to say, “Eh, we’ve cut out a year of schooling for them. They’re fine. They don’t need that.” You don’t want that perception. And another thing I thought was interesting, just that people are experimenting, and I think that’s a level of seriousness of approach to the problem that needs to be taken, right? You need to say, “We really need to shake things up, seriously, up to and including really looking at the core requirements for the profession, to make sure that it can live on.” So that’s the one thing about that, that I would say, you know. I’m not sure that 150 hours is the culprit, but I think that being willing to look at everything and say, “What really do we need to do, or what can we do that will seriously tackle this problem,” because it’s so huge.

Yep. And I think—I like what you said, that people are looking at it. It’s kind of going back to what we said at the very beginning. There were a lot of changes, there are a lot of good changes have happened, people are looking at changes. So we’re being innovative—at least somebody’s coming up with ideas. And honestly, if you go back to your medical profession analogy a little bit. I mean, part of the medical profession is, and I’m not a doctor, but I think they’re out actually kind of working before they actually finish their degree. They’re out hands-on doing stuff, which is kind of equating to this. I learned more in my first year in public accounting than I did in my four years or whatever. Well, mine was probably about six years, but…

You could have gotten your 150 hour credits. 180! 

Yeah, well, so I actually probably did do about 150, because I got an undergrad degree in computer science, decided a couple of years later I should’ve been a CPA, went back to grad school—probably have 150. So, but I actually don’t have a degree, I don’t have an accounting degree. I just had enough hours to take the exam and so did that. But yeah, I learned on the job.

We hear that a lot, right? You hear that most of what people learn in college isn’t that useful. And then in a lot of states, those extra 30 hours don’t have to have anything to do with accounting. 

Exactly.

And certainly, if they had something to do with accounting, then they might be—I might consider them more valuable and be less—but you know, let’s hope the clients don’t understand that, that isn’t so valuable, that makes the reputation that they don’t realize that it’s not—there’s nothing to do with accounting. It’s, you know, it was basket weaving or French.

Right. It was the universities, the colleges, they didn’t buy in on this 150, so they didn’t put a curriculum in place for the 150 is what I understand. And because of that, it’s just, you gotta get your 150 hours, and there is probably some additional emphasis on accounting and law and everything else. But yeah, it’s out there. 

Alright. So let’s, there was one other thing, or at least one other thing—like I said, I can keep doing this for—we got 23 more hours to go, so, on the marathon podcast interview here. 

You mentioned, Dan, about, you know, nobody wants to wait till 30 years in before they get their money from becoming a partner and everything. Well, private equity, part of probably what they recognize is, “Yeah, we can come in, and we can give this money out faster, and now we can also capitalize these firms, and they can get more involved in technology, and find out better ways to be efficient.” Do you have an opinion, or a pro or con, or just what’s your observation of what private equity is doing in the profession?

Yeah, I mean, it’s solving some problems, right? Some obvious problems, which are lack of capital for a bunch of different things—one of which, for M&A, for technology investments, for service line investments, and here particularly, and for people investments—and that’s the thing as you say. You’re able to pull some of those incentives forward, because being a partner is an incentive if you plan to stay at a firm for your career. 

Right.

And a lot of people these days, that is not as attractive an idea for them. Particularly when they look at what partners do—most of what partners do is talk about how much work they do. I’m kidding. I’m kidding. 

No, it’s not uncommon!

But it’s true. There’s a lot of complaining that makes it less attractive. Also, this never fails to terrify me. As Mark Rosenberg talks about, he talks to young accountants on a regular basis, and he’ll routinely say to them, you know, “How much do your partners make?” and they routinely underestimate by hundreds of thousands of dollars.

Yes. Yes.

So they don’t realize how attractive it is. I mean, forget the fact that it’s 40 years away, they have no idea how attractive the money is. So you got a couple of problems there. One that it’s too far away, and two, that they have no idea how big it is. And so, you know, private equity solves some of that by being able to, you know, to give share stakes, or bonuses or payoffs to younger hot talent that you want to keep. So that in that sense, it solves a bunch of problems. 

On another sense, I think it brings a whole lot of questions and unknowns. Basically, “What do these PE people want? Who knows what they want? I have no idea.” You know, they want to sell in five years, or five to seven years, or whatever their time horizon is—it varies from firm to firm, obviously, or depending on how patient their capital is. But they, you know, what do they want? What do they see in accounting? Are they seeing a tremendous opportunity to, you know, turbocharge firms and boost their growth enormously and then reap the rewards of that? Are they looking at like a steady—because accounting firms are pretty reliable earners, right?—even during the midst of the pandemic, they still grew 3 to 4%, and last year, they grew, we just got these numbers in, they were like 18%, so huge growth. So accounting firms are pretty reliable earners putting up a pretty reliable stream of cash. Is that what they see in it? Who knows? I don’t know.. Again, it probably varies from firm to firm, but you need to know that before you look to PE.

And then you also want to know, what’s their time horizon? And who are they going to sell to? Because once they own it, they could sell it to anybody. They can sell it to, you know, me, they could sell it to the mob—think about that. That’s the next John Grisham novel is a mob.

Uh oh!

You know, it’s, who knows what they’re doing? And I’m not suggesting there’s anything shady or nefarious, but it opens up this whole—I would like it to be exciting, and it would. But it opens up this whole can of worms, you know where you’re going to go? And how far away from being an accounting firm do you end up? And I think, you know, I can’t recommend it or not recommend it. 

I was on a call with a bunch of people talking about this recently. And one of the things we had to sort of keep reminding yourself was that PE firms vary as widely as accounting firms do. There are great accounting firms, there are terrible accounting firms, there’s run of the mill accounting firms. And the same thing for PE, right? There’s going to be very good private equity firms that are genuinely interested in creating value and adding value and building a better business than the one they saw before. And then there’s going to be asset strippers. I’m not sure how you asset stripping an accounting firm—well actually, I take that back, I could totally see how you would do that. You would break it up, and you would sell off the staff, you know, as much as you’re legally allowed to. 

But there’s going to be differences in all those. And so the question is, you know, it’s the individual PE firm that you’re dealing with will determine whether it makes sense, and what their plans are, and what your partner goals are.

Yeah, and one of the things I think that I see—and you and I were talking before we started recording—we both learned a lot of our private equity knowledge from Allan Koltin, and so based on what what Allan’s told us. But a couple things—one, at least, I want to assume that this is part of it, just allow them a bigger investment in technology, because technology is huge, technology can make you more efficient. I’m assuming PE wants to take advantage of those efficiencies. But then also, being able to increase your service offerings, too. You know, rather than just tax and accounting and auditing, now we’ve got HR departments, we have IT departments, we have, you know, investment groups that, you know, we’re offering investment services, you know. There’s probably a bunch of services that they never thought about before that they could probably bring in. 

Yep.

Does that now dilute? Or should we not be called an accounting firm anymore? Or is this now, we are a advisory? I guess a lot of firms are rebranding as advisory firms. So what do you think that premium is going to turn into from that standpoint?

Well, that’s right. I mean, this is—the fascinating part is—the whole fact that you’re seeing all these firms go into PE that have to split themselves up into two different organizations. So it’s all about the LLC and the LLP. But really, it’s right, it’s the advisory firm, and it’s the old attest firm, whatever. 

Now, they still operate effectively—it’s not like they leave the, you know, build a wall down the middle of the office kind of thing. But I think that more and more, that will become a very different—right now, it’s all the same term, and they kind of operate, it’s all on the back end where they, you know, one firm leases employees from the others and stuff like that,, and you don’t really see it. And that may well be true. But I wouldn’t be surprised if as we go forward, that becomes more true, that you do see it, that you see differences, and they go back to this. 

I keep going back to Anderson Consulting. And you know, Anderson Consulting, long before the collapse of Anderson leaving Anderson because there was the big gap between attest and the highly turbocharged consulting firm. And you don’t need to go back that far—I always do, because that’s the you know, because that was one of the big things. 

Accenture, right?

Yeah. They left and became Accenture. And they’d left, and we all get confused, we think they left after Sarbanes Oxley, or something like that. No, it was five, six years before. But you don’t even need to go that far back. You can go to three months ago when Ernst and Young said it’s doing the same thing, it’s splitting up its a test function from pretty much everything else, because pretty much everything else is making a lot more money—it’s a lot higher path of growth, and those partners don’t want to be tied down to an attest. I put words in their mouth they may disagree with. They would certainly say “That is not what is happening at all. It’s a carefully thought through strategy to deal with the modern environment.” 

And I’m wildly over exaggerating, but I usually would suspect that will play out much more over the course of—and again, it will depend on the PE firm. If the PE firm is there to turbocharge growth, as you say, take advantage of a bunch of efficiencies with technology, and then turbocharge the advisory services, because there is a tremendous potential for growth there—if they’re looking to do that, you will eventually find that there’s going to be a growing gap between the LLP and the LLC, between the attest function, which is not stuck, but remains doing this critical work of the CPA profession, and then the other part which can grow as much as it can, right? It has no conflicts of interest, it has far fewer conflicts of interest. 

Now, the balancing part of this—and this is where things get complicated, and this is one of the reasons why it’s fascinating to cover accounting—this is, one of the balancing things there is I think that the ESG opportunity is going to turn the turbocharged part of accounting to attest. I think you’re gonna find that over the next, you know, three to five to ten years, the opportunity for offering attest services on ESG is going to make attest the hotbed of activity. There’s just going to be enormous opportunity, and there’s not going to be enough people—well, there’s already not enough people to do it—but there’s going to, there’s going to academia firms offering that kind of stuff… It’s no longer going to be, I think it will be less the purview of just the big four and the large firms, because right now, how many firms really do audits, right? The vast majority of audits are done by the largest firms. 

Right.

I think we’re gonna find that there’s an enormous explosion of opportunity in audit, because of ESG. So that may balance that out. But even if it doesn’t, then as I said, you’re getting stuck with this profession getting further and further apart, you know, the two big elements of it. One is the sort of core thing of this, and as you mentioned, we’re not just talking about CPAs—in this case, we are. I’m talking specifically just about CPAs. Because the only thing they have a license to do, is the audit. 

Right.

So if they sort of get stuck there, and they’re gonna see all these other things get hived off and say, “Well, we could grow faster if we weren’t tied to you.” I think it’s gonna be fascinating. We’ll see how it plays out—it will play out differently at every firm. 

Yeah, that’s the one thing I say when again, going back to that modern firm. The modern firm doesn’t seem to be concentrated on the audits very much. It’s all the other services. And that might be the case. 

You know what, real quick, because I’m sure everybody’s familiar with ESG, and I know you did a whole series of articles on ESG, do you want to give us a quick definition of what that is, and why this is important to the accounting industry or profession?

Sure, sorry, I should have explained it as I was saying it. So it’s “Environmental, Social and Governance” reporting, and it’s people talking about reporting on climate change things. So companies reporting on their carbon footprint, or on the amount of pollution they put out, or on where they source freshwater for their products, if they use water in their products, or where they source the materials and metals that they use in their products. All that sort of stuff, that’s part of it. There will eventually be some social reporting around diversity, for instance, or your impact on the community around you, or your engagement with the community around you. And then the governance is sort of how you’re structured to operate responsibly in a modern environment. Those are all three different levels of reporting. 

But for instance, the big issue right now with the E part of ESG, is the SEC recently put out a bunch of proposals on reporting around climate change, and that’s still in the proposal stage—people still looking and commenting on it. They’re going to—undoubtedly they are going to require some reporting around climate impacts fairly soon. There already are some responsibilities for that, but there’s going to be a lot more and they’re going to be a lot more standardized. 

There’s also, I’m estimating, there’s somewhere between 700 and 800,000 different frameworks for reporting all kinds of environmental stuff, and those have all consolidated down to the point where there’s very few of them, which means that there’s some consistency around the world, right? There’s now the International Sustainability Standards Board, based in I think, Montreal, and somewhere in Europe, run by the IFRS Foundation. So there’s going to start to be standards put out that are reliable, that people can use, that have some comparability across the world, and governments more and more are going to be requiring this kind of reporting, stakeholders are going to be requiring this reporting, markets are going to require reporting, we’ve already seen that show “Investors” do it, when they want to do sort of socially responsible or environmentally responsible investing. 

But the point is that more and more companies are going to be required to report on this kind of information. And it’s going to look just like—you have to go back to the 30s to really get a sense of what this will look like. You have to go back to the 30s to say, “What would it look like when all these companies suddenly had to start reporting their financials to the SEC, or whatever markets they were involved in, and they didn’t have any of these structures in place, or they had structures but everyone’s structure was whatever they wanted to be or whatever their bank required it to be, or whatever Mr. Rockefeller required, or or Mr. Carnegie, or JP Morgan.” So think about that, what that would have looked like—helping all those companies get ready to put out a modern financial statement. Imagine what that’s gonna be like, and that’s what it’s gonna be like for ESG reporting, because there’s no models for this, or so many models that effectively there is because they’re all over the place.

They’re going to need help setting those systems up—every company in the world is going to need this. And then they’re also going to need at a station around, that every year, someone’s going to have to go and say, “Yes, this is your carbon footprint you are you are measuring your carbon footprint correctly by the right standards that everyone agrees on, and you’re gonna pay us for it,” just like you do for a financial statement audit. So that’s just gonna, be think about all the different things you can report under ESG. That’s, you know, every one of those is the equivalent of another financial statement audit. 

Now, they’ll be—and I’m exaggerating slightly for effect—because there will be a lot of overlap. Some of these things will be reported through the financial statements. And a lot of them will involve similar types of information. But it is a huge opportunity, and it doesn’t require—I know there’s a lot of people in accounting, because we hear from them, a lot of people in the country as a whole who say, who disagree with the premises behind requiring this reporting, and that’s fine—but the reporting is going to be required, whether people disagree with it or not. You know, there are states that are trying to ban it, for instance, or ban certain elements of it, or make it not a requirement, that kind of thing. And that’s, you know, that’s fine, the political aspect of it as a whole other question. But the fact is that this reporting is going to be required, firms are going to have to have it attested to—this is a tremendous opportunity for accountants, assuming it goes on, in the model, in the sort of, with the momentum it currently has. 

Right. 

And my suspicion is that it will. And even if, again, even if you don’t like it, people are going to have to do it, they’re going to be turning to accountants for help with it. And it’s going to be a great opportunity.

So auditing is not dead, then auditing will survive.

Yeah, that’s my suspicion. And this, this may be its saviors, right? I mean, there’s always going to be auditing. The question is can you build a successful firm around it? And this goes back to our question about do we need accounting firms? You know, if accounting firms can’t make the revenues they need if they can’t pay the bills, with just audit work, but they’re getting split up because the PE ownership rules require them, right? Or the, I should say, the CPA firm ownership rules require the audit firm to be independent. You know, they’re going to need a savior, they’re going to need something to help them out. They’re going to need a different model, and if that model is, “We do 90% ESG, attests work. And then 10% financial statement work,” there you go.

Yeah. Alright. I think that was a perfect circle there. We just went right back to the beginning, wrapped it up, and so the answer is, “Yes, we do need accounting firms.”

Thank God. Phew. Otherwise, what would I cover?

So we did this full circle now. And there’s one last question and I didn’t warn you ahead of time—I probably should have warned you ahead of time. 

Alright.

But there’s one question that I ask everybody at the end of each podcast is, “Alright, so we just talked about the profession for 45 minutes. We determined whether you agree or not that you’re the voice of the profession—”

—God help the profession.

When you’re not out being the voice of—my words, not yours, you’re not calling yourself this—when you’re not out doing this work do you currently do, what’s your passions outside of work? What do you do for fun? What do you like doing when you’re not doing Accounting Today stuff?

Sure, sure. So probably my biggest thing is I’m on a trivia team in New York. I love trivia. So I’m out there on a regular basis. I spend a lot of time reading just because I like reading, but also a lot of time reading trying to learn stuff, so that I don’t lose at trivia next Wednesday, which really started as I should say, really, I’m passionate about drinking in the middle of the week, because it’s all at bars. But it turned into a love of trivia that you know, I’m on a team here in New York, we’ve come very close, we came close. We were second in the city once but then as I said, we drink too much in the middle of the week. But so, that’s a lot of fun. I enjoy doing that. And I would say that’s probably my big passion. 

Wow, that’s awesome. I like that. So what’s your drink of choice then?

At the bar—we go to the same bar every week, except this week, I should say, the week we’re recording we’re not gonna be there because they’re filming an episode of Bluebloods there, which gives you a sense of what kind of bar this is. It’s a beautiful old—it’s not an Irish bar, but it has a beautiful wooden bar and all the fittings and all that sort of stuff, and they’re filming an episode of the Tom Selleck cop show Bluebloods there, so we’re not going this week. 

But my choice there is Narragansett—Narragansett lager beer, which is a classic American lager out of Rhode Island, for anybody who’s listening from Rhode Island. It is also, and this is, see, this is the trivia angle. Let’s now bring in the trivia. Because it is the beer if you remember the scene in Jaws, Quint, the fisherman, Robert Shaw, Quint, drinks Narragansett throughout the movie. And it’s the beer when he crushes the beer cans, famously crushes the beer can, and then Richard Dreyfus crushes the styrofoam cup. The beer he’s crushing is a Narragansett  lager beer from Rhode Island.

Alright. I’ve heard of Narragansett—I don’t think I’ve ever had it. I’ve drank pretty much every beer around the country. That’s one, I’ve missed, so I’m gonna have to seek that out.

It is, well, it’s now getting available—now available across a lot of a big part of the country. I’m surprised at the places it shows up. It is not a craft beer. It’s a classic American, drinkable lager like a Schaefer or a Schlitz or stuff like that. But it’s pretty tasty. And it’s, I recommend it. It’s a good hot summer day beer.

I assume it’s an independent brewery at this point, but I don’t know. Maybe they were bought out?

My understanding is that they’re still independent, I should double check that, go check it, go to Switzerland and see where the the ownership is registered, probably to InBev or AmBev, or whatever the South African or Brazilian based company that owns every beer brewer in the world is now, but—

—Yeah, or Duvel, or Heineken, or whoever.

Ahhh, Duvel.

Yeah!

Now I’m thinking about Duvel. I lived in Brussels for a year and a half. And so I got used to a lot of delicious Belgian beers.

Yeah, there’s some good beers out there. 

Alright, so now I can talk beer for another hour. So we’re gonna stop there. I just again, want to thank you for being part of this. I appreciate the time. I just want to again, before we finish up here, promote the fact that—and this is not a commercial for this—but I’m just looking forward to this conference, you are going to have your conference in San Diego May 8th through the 10th. I got those dates right? 

That is correct. The Firm Growth Forum. 

And so how are you going, I assume there’s still room for registrations at this time,

There is still room—we still have some spaces, we hope to get a good crowd of folks. I should say, we’re not looking to make it a huge conference, we’re not looking to have thousands and thousands of people wandering by. Because one of the things we found is accountants learn best from each other. Right? So we want to give everybody a chance to—a small enough group can be a little intimate, people can talk amongst themselves, share their own stories, but also has the sort of the weight of expertise there, that they’re really gonna learn something useful. So yeah, we’re excited about it, looking forward to it.

Yeah, and that’s one thing I really love about conferences like this is that I think you learn as much after the presentation just talking with everybody else you’re there with, grabbing a Narragansett or some other beer—

—Exactly—

—and having a good time, and learning and just getting to meet other really fascinating people in the profession.

Yeah! Excellent.