Viewpoints

The Rise of the Mega Regional Accounting Firm

Tom Bonadio

Originally Published In:
THE ROCHESTER BUSINESS
JOURNAL
October 2006
Author: Thomas F. Bonadio, CPA

During my thirty-five years in public accounting, I have both witnessed and been a part of a number of radical changes in the accounting industry, particularly over the last ten years or so. Many of these changes have been positive for both CPA firms and their clients.

The Age of Tradition

I can identify three discernable eras of public accounting, starting with the "Age of Tradition". During my formative years in the profession, accountants were expected to stay within narrow boundaries of what was considered to be their roles and responsibility – audit, tax and bookkeeping – and any step outside of those boundaries was not tolerated.

Conservatism was the watchword, and brown wingedtipped shoes the standard. Even the mildest of entrepreneurial thinking was discouraged, and any type of marketing or promotion was considered unethical. For young professionals like me, the roadmap to partnership was prescribed by a well-worn path that had existed since the time Arthur Anderson entered his first debit.

The Age of Entrepreneurship

In the early 1990's major shifts in attitude, spurred mostly by accountants in their late thirties and early forties seeking to create more value for clients and increase firm revenue, pushed for expanding services beyond traditional accounting.

CPAs started to flex entrepreneurial muscles, tenuously dipping their toe into the waters of financial services, payroll services, consulting, and more. Firms established new lines of business and started niche-marketing. Today, on average, CPA firms earn about 30% of their total revenue from non-traditional practice areas – a number that I expect will grow even more over the next ten years.

Enron et al.

Then, in 2002/2003, the accounting industry became unglued, thanks in large measure to a deadly combination of corporate greed, lack of financial controls, and a very small group of accountants who looked the other way in order to protect hefty fee arrangements.

You might think that all of the bad press heaped upon the accounting industry just a few short years ago would be devastating. In fact, just the opposite occurred – the industry has never been in better shape due in large measure to the Sarbanes Oxley Act of 2002. In 2003, the top ten CPA firms in the country realized total net revenues of $22 billion. Three years later, total net revenues were $28.5 billion!

Of this, the Big 4 accounting firms represent $24.5 billion. So, instead of taking a hit, the remaining Big 4 firms in the country grew even bigger and more profitable.

The Sarbanes-Oxley Cascade Effect

Sarbanes Oxley did more that just enrich the largest CPA firms, it created a "cascade effect" along a number of dimensions:

• Many governmental entities and not for profit organizations are implementing SOX-like systems and processes.
  
• Sarbanes-Oxley created significant consulting opportunities for CPA firms of all sizes.
  
• Arthur Anderson clients and partners needed to find new homes and to a large degree, bigger local firms became the beneficiary of this shift.
  
• An unprecedented migration of clients occurred as Big 4 firms raised their audit fees, jettisoned "undesirable clients", and terminated portions of engagements that had even the slightest hint of conflict of interest.
  
• Clients and projects shed by the Big 4 were picked up by the next tier-size of CPA firms, who in turn shed clients that were picked up by the next tier, and so on.

The Rise of the Mega-Regional Accounting Firm

The cascade effect is the prime catalyst for what I call the "The Rise of the Mega-Regional CPA Firm" – the current era of the ever-changing accounting industry.

A mega-regional CPA firm is one with net revenues between $20 million and $250 million, and a presence in numerous local markets.

Across the country, mega-regionals came into existence as larger local firms grew in terms of staff, expertise, and capabilities. They moved to establish market dominance, either geographically by adding new offices in new locations, or by developing and staking out numerous niche practices. To a large degree, mega-regionals realized growth through merger and acquisition.

The transition included adding new capabilities and repositioning existing services. Big 4 and national firms concentrated on providing auditing services, opening the door for large local firms to deliver SOX compliance, internal auditing and tax compliance work.

Firms developed strong marketing departments and a commitment to branding that served to raise awareness, establish positioning, and create goodwill for attracting new talent and merger and acquisition candidates.

The Benefits of Mega-regionals

The mega-regional CPA firm phenomenon has produced a wealth of benefits for clients.

At a fundamental level, mega-regionals provide more resources, more capabilities, greater levels of expertise and a deeper bench than their local competitors. They have individuals who become regional gurus in specialized, specific industry service niches. They have the resources to invest in new services and attract better personnel. And since a mega-regional is essentially a local firm, their ability to leverage their size for purposes of helping clients with banking and legal matters is unmatched.

In an era where stretching pennies is increasing important, mega-regionals deliver outstanding value to clients. Their fee structures are significantly less than Big 4 or national firms, and competitive with the rates of local firms.

Last but not least, mega-regionals have been able to retain their small firm personality yet deliver big firm capabilities. For many clients, this balance in conjunction with the mega-regional's fee structure represents just the right proportion of technical competence and fiscal conservatism.

In Our Market

Although there are exceptions, mega-regionals tend to root in areas of high growth. For example, in downstate New York there are about a dozen firms that fit the megaregional firm profile.

However, at this point in time there are no mega-regionals in the Finger Lakes/Western New York market, although there are a few firms like ours that are poised to move in this direction. We continue to add new services and are involved in active merger discussions that by next year, will result in TBG becoming the first regional CPA firm in upstate New York to reach the $25 million net revenue mark.

Like other Managing Partners across the country who grew their firms into mega-regional status, it's my belief that a CPA firm's ability to keep their clients in compliance, and grow and protect assets, can be done more effectively with broader and deeper capabilities and resources.

I've been privileged to be a participant in the changes that have swept the accounting industry and expect that the face of public accounting over the next ten years market will be different from that of today.

I'm looking forward to what the future holds.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.