Canadian firms stretched thin by old problems

It is pretty much business as usual for Canada, with a stable economy and low unemployment. The country is struggling to get its inflation rates down and the economy is showing signs of slowing but the business community is optimistic. A steady rate of mergers and acquisitions across all sectors and a stream of start-ups is increasing demand for specialist skills from accounting firms. Established firms are growing and increasing their demands for tax and financial planning. The only problem is, Canadian firms are still grappling with a skills shortage. Wages have shot up and firms find themselves being stretched ever thinner. The problems of 2022 have become the problems of 2023. 

Kelly Lohn, director of BKR Canada, has seen a substantial rise in wages with the costs being passed along to clients in increased fees. “Many Canadian firms are struggling with servicing their existing clients,” he said. “Clients are growing and the demands being placed upon the firms are increasing, while recruiting new staff is challenging. Firms have no choice but to let clients go in some circumstances, as they just cannot keep up with the demand. Many are implementing programmes to cull clients or putting in place minimum client fee thresholds.” 

While Lohn expects wage inflation to cool in 2023, he does not see an end to stricter vetting of new clients. 

The key growth areas that Canadian firms are seeing are an increase in tax services and USA cross border services together with financial planning. A recent change in regulation has also added to the accounting burden. For the first time in over 30 years, the Auditing and Assurance Standards Board has issued a new standard on compilation engagements.  The CSRS 4200 Programme imposed on Canadian accounting professionals is now standard requirements on all compilation engagements requiring acknowledgement by all clients of various undertakings. The standard is effective for periods ending on or after December 14, 2021, and will impact all users of compiled financial information, including third-party users such as lenders, suppliers and purchasers of a business.  

Under the existing compilation standard, there was often a misunderstanding by users of compiled financial information as to the extent of work performed by the practitioner in compilation engagements, and the compiled financial information provided no information as to the basis of accounting applied in its preparation. Key changes under the new standard include a new compilation engagement report that describes the responsibilities of management and the practitioner and the nature and scope of the engagement; and a requirement to include a note that describes the basis of accounting applied in the preparation of the financial information. 

Canadian accounting firms may need to review their practices after Paul Munter, the chief accountant of the US Securities and Exchange Commission (SEC), issued a public reminder about involving other auditors in multinational audits. In October 2022, KPMG Canada was one of three national affiliates of KPMG International  sanctioned by the Public Company Accounting Oversight Board (PCAOB) for failing to disclose unregistered firm participation in public company audits.  

PCAOB Rule 2100 requires that any accounting firm playing a substantial role in the audit of an issuer be registered with the US audit watchdog. This includes the audits of companies that have operations in jurisdictions other than their headquarters or primary markets. PCAOB staff claim to have observed technical but critical issues in engagements involving the use of other auditors. The PCAOB wants firms to be more attentive when identifying other auditors and their audit hours rather than confuse or even mislead audit committees. The PCAOB published 14 inspection reports of Canadian public accounting firms in 2022, the most in one year since 2016, when it published 16 reports. 

In 2022, the PCAOB also imposed four enforcement actions against Canadian accountants and accounting firms. The Canadian Public Accountability Board (CPAB), the Canadian equivalent of the PCAOB, announced in 2022 that it is planning changes to its disclosure practices in the face of media scrutiny and changing best practices. The outcome of its consultation and its disclosure recommendations, are expected later this year. 

Unemployment remains low in Canada across all sectors, and accountancy firms, like many of their peers worldwide, looked to mergers and acquisitions in 2022 to obtain the skill sets their clients want. Brian Kreisman, managing partner at Crowe BGK, expects the trend to continue in 2023. “It is becoming increasingly challenging to operate as an independent firm given today’s resource shortage,” he said. “We see three trends occurring at independent firms to address this: outsourcing, automation, and consolidation. Despite these challenges, there will always be a place in the market for independent firms with a strong team of partners and a well thought out strategy.” 

Kreisman sees that firms in general are acquiring practices that allow them to focus on expanding or adding new specialties in the area of advisory and consulting. There is certainly a significant amount of churn - upward merging has become more of a trend as staffing and regulatory pressures strain the margins for SMEs, yet Kreisman is also seeing some of the larger firms looking to spin off parts of their practices that cater to SMEs. 

According to a wage survey conducted by Robert Half, 90% of Canadian hiring managers said it is challenging to hire skilled accounting and finance professionals. The increasing market for M&As across all sectors and a proliferation of start-ups is fuelling demand for M&A and capital-raising skills and experience. Tax and internal audit talent is in huge demand at the more junior to mid-levels (senior financial analyst-manager) given the niche skillset. 

2022 saw new recruits demanding higher wages, with desperate employers bumping salaries by as much as 20%. As Lohn has pointed out, these increases were passed onto clients in terms of fees, but with more candidates entering the market, the pressure to increase wages in 2023 will be significantly lower. A modest salary growth over the next 12 months of 3–5% has been predicted. 

The feedback from staff when hiring in just about every country in the last two years, is that they want a better work/life balance. With fewer students taking up accountancy courses at universities, many respondents to country reports in IAB have warned colleagues that the work culture of accounting firms has to change radically if they are to be attractive to graduates. Robert Half’s salary guide found that 90% of companies in Canada were adding new and improved perks and benefits to their offerings. The most common additions are mental health resources, wellness programmes and flexitime, with nearly nine in 10 accounting and finance managers reporting that offering remote work options has helped them attract strong candidates in the past year. 

“Retaining top employees will continue to be a focus ,” said Pejman Mahlooji, international liaison of Crowe MacKay LLP.   “We have been and will continue to focus on training, culture, mentoring. Our goal is to help our teams develop technical and soft skills and ew are focusing on making transactional tasks more automated by investing in technology.  We spend a lot of time thinking about how to maintain the culture we have, which is very strong and has contributed to our very low turnover rate.” 

Nevertheless, outsourcing is becoming more attractive to Canadian firms, and Crowe MacKay is exploring this.   It now has staff  operating out of Costa Rica and is diverting resources and training to ensure its success. 

The ongoing strength in the labour market is making many economists nervous. There is a concern that higher wages could lead to higher inflation and it could derail the Bank of Canada’s efforts to bring inflation down. The economy is showing signs of slowing down, posting 0% growth in the fourth quarter of 2022. The Bank of Canada, which is working to bring down the country’s high inflation rate, has raised concerns that sustained 4 to 5% wage growth will make it harder to return to its 2% inflation target. The effect of higher interest rates on the labour market is expected to play out in the coming months as the Bank of Canada held its key rate steady at 4.5%, the highest it has been since 2007. Though high interest rates have already had an impact, economists estimate it can take up to two years for rate hikes to be digested by the economy. 

The collapse of two US regional banks, the Silicon Valley Bank and Signature Bank, in March, and the Swiss government-brokered deal for UBS to buy Credit Suisse has raised concerns about the health of the global banking sector and there were fears that Canada would be adversely affected by it. Canadian banks emerged stronger from the 2008 global financial crisis due to prudent regulations and since built a reputation for financial stability. The six big banks - including Royal Bank of Canada, Toronto Dominion Bank, and Bank of Montreal, account for about 80% of Canada's banking assets and have avoided scandals or failures. 

They kept their focus on domestic lending and the majority of their earnings come from serving local clients. But in recent years, Royal Bank, BMO, TD Bank and CIBC have expanded into the US by buying regional lenders to benefit from strong growth in second-tier US cities. That strategy is now under scrutiny. However, analysts are confident that the Canadian institutions have ample liquidity and manageable credit risks which will help them to emerge largely unscathed. 

It will be interesting to see if a focus on mental well-being and flexible working will be enough to change the fortunes of Canada’s accountancy firms and bring the people it so desperately needs into the industry. At the moment, firms are walking a tightrope, growing to acquire skills and yet having to fire clients. If the economy holds steady, it might give the sector the breathing space it needs to get ahead of the skills shortage.