Rankings Report: US

US market continues to churn 

Inflation is having a drag effect on US businesses in general, but 2023 will still see a lot of excitement in the US market. M&A activity will continue as firms fight for market share, technology innovation and skills but the recent division of EY could start a shock wave that ripples down every tier of the industry. Che Golden reports.

The US market has not been immune to the geopolitical and financial storms sweeping the globe, nor has it been able to outpace the skills shortage, even though it has had the luxury of throwing money at the problem. Private equity investment has fuelled mergers and acquisitions as firms chase the technology and the skills sets needed to stay competitive, while inflation has driven up wages and fees. Consolidation in the market has led to a boom in business for smaller firms if they can make sure they stay competitive. The skills shortage has now become so critical that some firms find themselves downsizing or turning away clients because of it.  

While demand for services is still high, energy and inflation rises have had a big impact on US accountancy firms and their clients, according to Gary Klintworth, senior managing director of CBIZ, a Kreston member firm. He noted that although inflation has slowed slightly in 2023 and energy prices have appeared to stabilise, the peak in June of 2022 created uncertainty and resulted in individual consumers having less money available for discretionary spending.   

“During 2022, these increases, coupled with an already tight labour market, have led some organisations to institute off-cycle and higher than normal salary adjustments in order to retain top talent,” he said. “However, with all of the uncertainty in the market, businesses are also in cash conservation mode as valuations have been slashed and raising equity capital has become less attractive due to ongoing inflationary pressures, geopolitical instability and unique monetary policies.”

Gary Klintworth, senior managing director, CBIZ, a Kreston Global member firm

Private Equity firms had been investing in many US accounting firms last year and there was a hope that the increased liquidity would free up cash for wages and make recruiting and retention easier. However, the ongoing recruitment crisis is proving that it takes more than just money to get staff these days.  

“Private equity’s push into the accounting industry is providing liquidity that appears to initially support infrastructure investments such as upgrading software, both to serve clients and to run the firm more efficiently,” said Dan Johnson, managing director of CBIZ, Kreston member firm. “It remains to be seen if the additional liquidity will assist with retention and recruitment of talent. The hope is that new software will allow professionals to avoid mundane tasks while focusing on creative solutions for clients, something most accountants have said is more enjoyable work.  It will be interesting to see whether individuals migrate toward firms with private equity backing during the remainder of 2023.” 

Dan Johnson, managing director, CBIZ, a Kreston Global member firm

The real problem for US firms is that even if they can up wages significantly, there simply are not enough people to fill the vacancies. Mike Nichols, vice president of human resources at CBIZ, a Kreston member firm, pointed out that the number of students entering the industry through university has been decreasing steadily for a number of years. Out of those graduates, the number of individuals completing the rigorous CPA exam protocol is on the decline. 

According to Jeremy Vokt, from BKR Americas board of directors and managing partner of Bland and Associates, firms of all sizes are actually downsizing or cutting clients due to the shortage of talent. “The demand for services is definitely there but we are seeing a shortage of talent in our industry,” he said. “Some of that is due to fewer students going to school for accounting, some of that is due to the 150 credit hour requirement that other majors do not have to adhere to and some of it is just people leaving the profession since COVID.” 

One of the ways US firms have been trying to get ahead of the skills shortage is through mergers and acquisitions and there has been quite a bit of churn in the market. This is leading to over consolidation, which has been benefiting the smaller accountancy firms. Vokt claims over consolidation had a direct impact on his business in 2022. “Yes, we are definitely seeing growth as a result of consolidation. As a local CPA firm located in Omaha we are seeing growth of 15-20% the last couple of years. Some of that is coming from large national firms not being able to serve certain clients due to staff shortages and some of that is coming from smaller firms that don’t have the staff to serve certain clients.” 

Amongst the mid-tier and larger firms, there seems to be no sign that the M&A churn is going to slow, and private equity investment is predicted to become even more common in 2023.  Many of the top public accounting firms have aggressive growth plans, and need funding to attract top professionals, especially in niche advisory areas that command higher fees and improve gross margins. “There are also fee pressures on traditional assurance and tax services. Firms need to make investments in infrastructure and technology to help them create operational efficiencies that can help offset these fee pressures. An infusion of capital from private equity is now being seen as a way growth-focused firms can achieve their goals, states David Kessler, CEO, CohnReznick, a Nexia International member. 

David Kessler, CEO, CohnReznick

The accounting industry is also simply becoming more attractive to private equity firms. Kessler pointed out that the accounting industry has demonstrated , continued growth, and resiliency in periods of economic downturn, like the pandemic. In turn, PE funding has provided capital to offset the higher salaries being demanded by recruiting candidates in the industry while retaining top employees through compensation increases. With more capital, accounting firms can also recruit and pay the salaries of the key executives they need to run specialised advisory practices. These executives are entering public accounting from top positions in niche consulting firms, specialty tech companies, and cybersecurity firms. 

SMEs across the board did get some help in 2022 from the American Rescue Plan Act. “The Act has not only provided stimulus payments to individuals but has provided small businesses with forgivable loans to help cover payroll, operational expenses and other incentives to retain employees during the pandemic,” said Klintworth. “This has allowed many small businesses to continue to operate during these uncertain economic times. This is only a short-term solution and the long-term impact on individuals and small businesses remains to be experienced.” 

According to Jay Weinstein, vice chair, Eisner Advisory Group LLC, an Allinial Global member firm, the plan has had a bigger impact on some industries than others, such as construction. That positive ripple as cascaded down to everyone who services those clients, resulting in a strong year in 2022. 

2023 should be an interesting year for US firms. According to Weinstein, there is going to be continued consolidation amongst firms – his own shows no sign of slowing down an M&A strategy aimed at adding industry specialisation and geographic coverage. However, Johnson believes the break-up of EY into separate auditing and advisory businesses is going to send shockwaves throughout the entire industry.  

“The other Big Four firms have stated they don’t plan to follow the EY model, but a successful decoupling may force them into rethinking,” he said. “The follow-on consideration is the impact the transaction will have on retention and recruitment of staff. 

Jay Weinstein, vice chair, Eisner Advisory Group LLC, an Allinial Global member firm

Clients may also find that it is not easy to sign up with accounting firms in 2023. Johnson pointed out that many firms are implementing internal analytics to allow for better understanding of profitability by client and engagement. This will put pressure on firms to raise prices on clients with poor metrics or to consider cutting ties with the client. 

There will also be new growth areas for firms to stake territory in, according to Shahab Moreh, chief growth officer for Mazars US. “The Inflation Reduction Act was passed in August 2022, with legislation addressing healthcare, climate change and renewable energy incentives as well as inflation,” he said. “The Act includes important tax incentives and credits for investment in renewable energy. Separately, regulators are focused on topics related to data risk management 

Together with the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA) is expected to pump nearly $2 trillion into the economy. Kessler sees these two federal programs as major opportunities for many of its clients including investors, private companies, and state and local government agencies. “Both programs are priorities for our firm,” Kessler said. “In fact, we had been preparing for IIJA months before the bill was passed and are currently engaging with state and local government agencies to help them distribute funds and maintain requisite compliance and reporting. 

Shahab Moreh, chief growth officer, Mazars US

Overall, the health of the accounting industry in the US in terms of customer demand, fee pressure, and staff recruitment and retention is very good, according Moreh. “There is strong customer demand for services, in particular for accounting advisory, tax advisory, management technology and risk consulting services. Professionals providing business advisory, tax advisory and specialty consulting services are benefiting from fee increases. 

Mazars has seen strong demand in risk consulting, cybersecurity, ESG, tax advisory and accounting outsourcing services, as well as audit services. Bland and Associate’s largest growth area is its outsourced or client accounting services (CAS). Its clients are also seeing their internal accountants retiring which allows the firm to go in and do all their outsourced accounting. “I think we will continue to see consolidation at all sizes of CPA firms in the US,” said Vokt. “In addition, we will see more and more firms embrace offshoring work to other countries like India.” 

Outsourcing, which was beginning to feature more and more in accountancy firm’s portfolios in 2022, is going to gain more traction in 2023 thanks to the skills shortage, according to Weinstein. “Demand for our services is still solid, people need accountants in good times or bad,” he said. “I think outsourcing has grown a lot more, whether it be for IT services or fund administration. It is more cost-effective, and clients get access to a wider range of resources. It helps, when there is so much pressure to find talent, that you can hire percentages of people’s time.” 

It will be interesting to see the effect private equity investment and the EY break up will have on the UK market over the coming year. With no relief in the skills shortage on the horizon, firms will have to become even more inventive to stay competitive as M&As hot house growth.