INSIDE Public Accounting ran a little pulse survey last month and asked 84 managing partners at accounting firms with revenue of $15 million or more for their views on the private equity trend sweeping the profession. Despite huge deals making headlines recently — Grant Thornton selling a majority stake to New Mountain Capital, Baker Tilly’s $1 billion deal, and the Aprio private equity deal announced today) — most of the MPs surveyed are skeptical at best, pessimistic at worst. We expect at least some firms to warm up to the idea over time as they watch their competitors flash all that cash around.
See: Concerns Abound Over PE Impact, But Firm Leaders Believe They Can Compete
For this article, we were initially going to focus on the 19 percent of MPs who think PE is a good thing for the profession, the 35 percent who feel its impact will be negative, and the 40 percent who are, at this point, unsure. That’s interesting, right? But then you scroll down and see this:
Firm leaders without an interest in PE were asked their opinions on the best way to compete. Their responses:
- 0% said raising compensation;
- 3% said using outsourcing and technology to reduce the workload on entry-level staff;
- 21% said promoting culture;
- 67% said “all of the above,” and
- 7% cited “other.” One “other” respondent commented, “I do not believe anyone truly knows at this point. Promoting culture and taking care of your employees will always be a key to success.”
Normally we would chortle loudly — LOUDLY — at these managing partners thinking culture will trump compensation when it comes to competing for talent in this rapidly changing landscape but in this case, they might actually be onto something. Plus 67 percent of them did say “all of the above” so it’s not like 0% of them identified raising compensation as an important factor in securing talent. It’s just that none of them identified raising compensation as the only factor.
I don’t know if you’ve been on Reddit lately but r/accounting has been on fire with discussions about private equity these past few months. The common sentiment in a lot of these posts is fear and uncertainty. Well, excluding the many discussions about boomers selling out and pulling up the ladder behind them. What’s going to happen in the long term? That’s the fun part, no one knows! It’s only been three years since EisnerAmper became the first Top 20 firm to cut a deal with outside capital.
Exhibit A:
Ah yes. I’m sure private equity will magically work out for public accounting when it has brought every other industry it touches to ruin. Good luck with that.
byu/Jumpy_Parsnip3954 inAccounting
You know who this might work out well for? The firms that remain independent. They can pitch stability to both clients and talent, assuming they are well-managed and not outsourcing 70% of the work to offshore randos.
In the Institute of Chartered Accountants in England and Wales (ICAEW) “Evolution of mid-tier accountancy firms” report released in May, the ICAEW explained how managing partners at mid-tier firms across the pond see an opportunity to market themselves as “100% PE-free” to clients who are looking for a more personal touch.
Said the ICAEW in that report:
Conversely, maintaining independence may support firms in upholding their unique identity, values and client approach, which some firms believe could be jeopardised under external ownership. More than one-fifth of respondents (21%) described the culture of their firm as ‘family-like’, and a further 17% as ‘traditional’, which may not be seen as a natural fit for PE investment. One respondent suggested that there were already “disgruntled clients” unhappy with accountancy firms taking on PE investment, and that remaining independent was an opportunity for their firm.
Again, we’ve got to hold back a hearty laugh at “family-like.” OK.
In the IPA survey, 85 percent of the MPs surveyed “frequently” (IPA’s word) have private equity firms sliding into their DMs; 66 percent of them have no interest in these advances. With the ICAEW report we see somewhat similar numbers from their mid-tiers:
When we wrote about that ICAEW report the first time we said “Brace yourselves for a bunch of corny ‘wE’rE a FaMiLy’ marketing from firms that are morally opposed to private equity investment” but maybe unironically this?
We’ll wrap this up with the negative quotes from the IPA survey because negativity feeds our rotten souls over here.
“I have not enjoyed the vulture-esque approach of many of the PE firms – total turnoff – and I’m afraid it is indicative of what they will do to the industry.”
“PE investment has been a financial windfall, and it will likely be on a PE firm’s exit, but at the expense of future firm culture and legacy. All about the money. Just waiting for the cuts in headcount that PE will implement.”
“PE in the profession will ultimately be a net negative, as PE focuses on short-term financial goals rather than long-term success. It will be a financial boon to retiring partners, but I expect that 15 years from now PE will regret their decision.”
Concerns Abound Over PE Impact, But Firm Leaders Believe They Can Compete [INSIDE Public Accounting]
Luckily I’m at a top 15 firm that doesn’t have a terrible balance sheet requiring a PE bailout. I feel bad for those who wake up one day realizing the contrary and that the retiring owners didn’t care. If people thought the profession paid poorly now, wait until they go through the PE cycles.
Top 15 Firm? Get ready for a PE deal. You just do not know that it is in the works behind your back. The money is too much to ignore for anyone in the top 30.
none of the firms have a terrible balance sheet. It is just greed in that people are trying to “get theirs”. The firms have limits on retirement payouts already. The executive committees running firms are getting disproportionate payouts to the other partners. You are fooling yourself otherwise. All the firms have closed partner compensation so no one will really know who will get what. Alan Koltin has been the single most devastating person unleased on the accounting profession. His name is only associated with trying to get commissions on the transaction. I feel sorry for young partners they will not have opportunities to be paid what they are worth in the future.
Greed is certainly a factor but so is fear. If there aren’t enough smart and motivated accountants who want to become partner and have the aptitude for it, aging partners will naturally worry “If I have to hand the firm over to less capable people who don’t want to work, where does that leave me in 5 years? Am I better off saying the hell with it and cashing out now?” They shouldn’t be blamed for thinking that way. The only thing cheaper than talk is a promise that you’ll be rewarded in the future for your all efforts today.
If the pipeline for staff accountants is at a trickle, the pipeline for staff accountants who have the willingness and ability to progress to partner is a very slow drip. The profession has been deteriorating for 15 years. I think PE is just getting started.
good point
What is your definition of being paid poorly? average partner compensation in small accounting firms is 450k. Mid tier firms it is 700K. That puts the partners in the top 1/2% to 1% wage earners. There is one individual, Alan Koltin, telling firm management they have to get bigger. He is just a used car salesman. Smart people in positions of responsibility actually believe him like he is a wizard. I forgot, what firm did he ever manage? His 1040 income tax preparation firm? This is greed pure and simple.
We, as CPAs, are always under pressure to boost our rate per hour and our margins but we as CPAs adhered to the rules of our profession or at least did out best to adhere to those rules even if it meant less profitability. The rules are likely out the door in few years and our profession is going to blow up if regulators continue to allow PE acquisitions to occur. What’s in it for the PEs other than net income! They don’t give a poo about the rules! This is ridiculous, what have become of our profession!