Accountancy classed as an ‘essential service’ in Canada

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anada's accountancy firms found 2021 was very much 'business as usual', thanks to being classed as an essential service. Firms have experienced modest growth, new areas of business are emerging, and some have found themselves in the position to ask 'bad' clients to leave. However, recruitment, the bug bear that is dogging the industry world-wide, is putting a squeeze on firms ability to expand and take on new clients, while the economy as a whole is facing rising inflation.

Frank Fazzari, managing partner of Fazzari and Partners, an MGI member firm, says the problem is the salaries typically on offer in accountancy.

"We are doing what other firms around the world are doing. When I talk to some friends in the Big 4 they are doing the same thing," he says, "Charge out rates are increasing, and 'bad clients' are being asked to 'leave'. The structural problem the accounting industry faces globally is affecting us in Canada – wages in the profession are much too low when compared to the industries where students and younger staff are going – IT developers, vendors and all those connected to that business and finance. They pay much more, so that is where the talent is going. This problem was created years ago and will not change for at least two years as we try to catch up with salaries. "

As in the US, recruitment is driving M&A activity. According to Fazzari, M&A activity is continuous and more will happen because of the talent pool shrinking. Large firms are acquiring talent by acquiring smaller firms, while smaller firms are trying to do the same thing at their level. Fazzari believes that many firms will just be concentrating on surviving 2022 with partners doing more work than ever. "With a shortage of staff, partners and managers are forced to do work they have not done for years," he says.

Nexia Canada is seeing virtually all firms face serious resource limitations at a time when demand for accountancy services is growing. "There is increased demand for accounting and assurance services as a result of a very active stock market, especially in the emerging industry space," says Laurence Zeifman, chair of Nexia Canada. "Staff recruitment and retention has been a serious challenge after two years of Covid and reduced immigration. These factors have led to virtually all firms facing serious resource limitations. As a result, fee pressure has been sharply reduced. These resource challenges are the common issue facing all of our Canadian members. Firms are sometimes even forced to turn down potential good new clients. Nevertheless, we expect continued growth in Canada."

Growth areas included new departments established to service clients applying for the myriad of grants, subsidies and supports offered by the Federal and Provincial Governments to offset the economic downturn caused by the Covid pandemic, according to Jeremy Jarrell, senior manager of professional and technical services at BKR International. Firms with M&A departments also saw growth as did those with cross-border and international tax groups.

Brian Kreisman, managing partner at Crowe BGK, confirms that the industry is being stretched to its limit. "Demand for accounting firm services is at an all-time high due to an amazing growth in transactional services and other special services," he says. "More companies are requiring audited financial statements.” Kreisman acknowledges that this, coupled with an unprecedented talent shortage is creating a massive problem in the industry. " Firms are starting to see reverse fee pressure and must utilise their precious resources in a more targeted manner," he says. "Low profit clients are being addressed either with large fee increases or are being told to find new auditors. Salaries are skyrocketing and firms continue to get more creative in the treatment of their employees to primarily retain their existing team, but also to assist in recruitment attractiveness."

The lack of staff in all areas of Canadian business is becoming a vicious circle for accountancy firms, as their clients are increasingly looking to outsource business management functionality as a way of addressing their own skills shortage. According to Maj-Lis Vettoretti, managing partner at Shimmerman Penn, a Prime Global firm, this is going to force the management teams of accountancy firms to rethink how they recruit and work.

"Staff recruitment and retention has always been a challenging area for firms to manage, however this has really become the forefront of issues that firms are facing over the past 12 months," she says. " Firms who were hesitant to embrace offshore staffing solutions are now finding it a necessary add-on to their staffing complement. In addition, part-time and contract work arrangements are becoming the norm in order to address capacity needs and the lack of available full-time candidates. At the same time, firms need to be creative and stretch themselves to find ways to keep long-term employees engaged and motivated. The capacity issues are impacting some firms’ decisions to finally let go of D-list clients and request fee increases or flexibility in deliverable timelines.

Bookkeeping, payroll and other accounting services continue to be a growing area. According to Vettoretti, analytics and benchmarking are also offerings that clients are interested in and willing to seek external advice. " All types of business management/advisory services continue to be sought out by clients as they need to focus on their own core business activities due to staffing and capacity issues that are affecting all industries," she says. "The accountancy industry needs to re-think and re-organise practice management and how we execute and deliver client service. Technologies continue to advance which can significantly change how we do our work. The new tools that are available, coupled with changing staffing complements requires a re-design of processes and encouraging new thinking. This change leadership will be an area that firms need to face – a necessity that will surely feel chaotic at times but reap rewards in the end."

However, Heather MacDonald-Santiago, director of marketing and communications at Crowe Soberman says that despite the problems, the overall health of the Canadian accountancy industry is good and it is set for moderate growth in 2022.

According to IBISWORLD, the market size, measured by revenue, of the Accounting Services industry in Canada is $15.0bn in 2022. It is expected to increase 4% in 2022," she says. "This increase is faster compared to other industries in the country. According to Statistics Canada, the top 10 accounting companies in Canada comprise 46% of all the industry's operating revenue in Canada. Overall, the provincial distribution of operating revenue for accounting, tax preparation, bookkeeping and payroll services has remained largely the same as in previous years, with Ontario (43.5%) accounting for the largest share of revenue in 2018, followed by Quebec (19.4%), British Columbia (14.7%) and Alberta (13.0%)."

Soberman has still seen demand for taxation consulting and compliance services, as well and auditing and other assurance services, although demand has not been as high as previous years. But in line with the trend of clients outsourcing to their accountant, MacDonald-Santiago has seen more demand from the firm's clients for general business consulting demand, for cloud accounting service and global mobility work – a lot more assurance work is coming in through initial tax compliance work. According to Kreisman, transactional work has increased significantly, with no end in sight. "The globalisation of business has made most companies in any part of the world targets to companies worldwide. This is likely here to stay. We see companies from Asia, Europe and Australia targeting and acquiring companies here in Quebec at an unprecedented rate."

MacDonald-Santiago predicts that Canadian economic growth is likely to remain solid but modest for the remainder of 2022, with the service sector expected to see greater growth over the next few months. "There are unknown factors that could disrupt forecasts for the Canadian economy," she warned. "These include, the pandemic and any new variants that cause further restrictions (although 75 per cent of Canada’s adult population is vaccinated), possible supply chain issues and rising rates of inflation."

According to the OECD, supply-chain disruptions have slowed but not arrested Canada’s economic recovery. With a fourth wave of infections receding, output is projected to surpass pre-pandemic levels by the end of 2021 and grow faster than trend at 3.9% in 2022 and 2.8% in 2023. Inflation is projected to moderate as production bottlenecks clear, before strengthening again as unemployment falls. More persistent supply constraints could, however, mean that inflation stays higher for longer and delay a projected acceleration in trade and consumer spending.

The Canadian government has also been adjusting regulation to improve the quality of the accountancy industry. Randy Greenstone, partner at Crowe BGK, says that in the last 12 months, there are two significant developments in the CPA Canadian standards worth noting. The first being the changes to compilation engagement standards; updating and strengthening the requirements and guidance for accepting, conducting and reporting on compilation engagements. Second, standards for accounting for the treatment of retractable or mandatorily redeemable shares issued in a tax planning arrangement came into effect, making it more restrictive to treat these shares as equity as opposed to debt. While according to Suzanne Grant, partner at Crowe BGK, another significant change will be the replacement of the Canadian Standard on Quality Control (CSQC) with the Canadian Standard on Quality Management (CSQM). This means that for the first time CPA firms in Canada that only perform related services, such as compilation engagements, will have to implement a system of quality management that would be documented in a manual.