|RAYMOND A. ZIMMERMANN, JD, PhD,
is assistant professor of accounting at the University of Texas
at El Paso. |
MARY ANN MURRAY, PhD, is assistant professor of quantitative management at St. Marys University, San Antonio, Texas.
DANIEL J. FLAHERTY, CPA, PhD, CMA, CIA, CCE/A, CFA, is chairman and professor of accounting at Southwest Texas State University, San Marcos, Texas.
Every year the Texas Society of CPAs performs a nationwide management of an accounting practice survey of local and regional (nonnational) firms. Its main purposes are to help small firms compare themselves with other small firms and to identify the attributes—such as firm size, sources of income, salary expenses, overhead expenses, employee benefits and administrative procedures—that affect a firms operations. For the first time this year, the survey asked respondents to comment on how they addressed international issues for their clients. While the survey covered even more areas, this article focuses on these main topics.
Every firm participant is in one of six groups based on firm size and net fees generated. For example, there are three categories of solely owned practitioner firms—those that generate less than $100,000 in net fees per year, those with net annual fees of between $100,000 and $200,000 and those generating more than $200,000 annually in net fees. For multiowner firms the fee categories were less than $400,000, between $400,000 and $1 million and over $1 million. Each peer group lists performance measures according to financial characteristics, sources of fees, marketing activities, administrative policies and fringe benefits. For example, multiowner small firms with annual fees between $400,000 and $1 million can compare their individual firm performance with others in their peer groups.
Participation in the survey was voluntary and anonymous. A total of 1,428 firms, categorized as either sole practitioners or multiowner firms, took part. Categorizing a firm as a "sole practitioner" firm means the firm is owned by a single CPA; other CPAs may be employed by that individual. A subsequent reclassification further divided the respondents into groups based on annual fees generated (see exhibit 1).
The following sections provide a sampling of the survey results. All averages reported are weighted according to the response rates for each category.
Accountants did well this past year, but they worked hard for their money. There were some interesting differences between sole practitioners and multiowner firms—as well as some similarities.
Income . The average net income reported by sole practitioners was $79,400, an increase of 9% over the 1995 survey. Multiowner firms reported an average of $121,800, a 6.36% increase over the previous year.
Respondents put in a lot of hours for that income. Sole practitioners reported 6,464 total number of hours worked per firm, with 3,696 billed hours, a billing rate of 57.2%. This figure is a weighted average figure based on the number of respondents in each firm size category. It includes time worked/billed by professionals, paraprofessionals, clerical assistants and computer professionals. The weighted average of the number of such personnel in the firm is 2.7 personnel members. Multiowner firms, on the other hand, reported an average of 34,782 hours worked, with 20,163 actually charged. Interestingly, this came out to a virtually identical billing rate of 58%. The net fees realized per charged hour ranged from a low of $45 to a high of $72. The average was $51 per hour for sole practitioner firms and $60 per hour in the multiowner firms.
Compensation for professional staff . Starting salaries for new professional personnel averaged $21,700, ranging from an average of $16,100 paid by sole practitioners in the lowest category of net fees to an average of $25,002 by multiowner firms with fees exceeding $1 million. The average paid by sole practitioners was $20,125 and that paid by the multiowner firms was $23,219. Of all firms responding, 43.8% paid overtime to professional personnel, and 20.9% of them paid it at premium rates, such as time-and-a-half. The majority of the firms (57%) offered compensatory time off in lieu of overtime. (However, recent legislation may inhibit this practice in the future.) Of all firms, 41.4% reported using incentive bonuses as a method of compensation, and 12.7% based employees compensation on profits.
Total annual compensation for salaried professional personnel varied greatly, as shown in exhibit 2.
Fringe benefits . Most firms offer some type of fringe benefits. The typical paid staff benefits found in an accounting practice are listed in exhibit 3.
The 1996 survey, when compared with those in the 1995 survey, revealed few changes from the previous year. In 1996, medical insurance was provided by 67.5% of the firms—a slight decrease from the 68.0% in 1995. Group life insurance increased to 52.8% in 1996 vs. 51.9% in 1995. Disability income insurance was available in 26.8% of all firms, up from 23% in 1995. (Questions on maternity leave were cut because the Family and Medical Leave Act imposed legal obligations. Therefore, many firms have to provide certain benefits that previously were optional, making these questions redundant.) In contrast to the relatively stable benefit provisions described above, retirement plan availability at firms increased to 51% from 46.1% in 1995.
Professional license fees, generally the annual CPA licensing fees imposed by the states, were paid by 68% of the firms. Some 76.2% of them reimbursed employees for continuing education expenses. CPA examination review fees were paid by 20.4% and examination fees were paid by 21.8%.
Many individuals who were practicing under the supervision of a CPA had only a bachelors degree. Under the new 150-hour education rules adopted in many states, those candidates will have to return to school to obtain the necessary hours to qualify to sit for the exam. To avoid this problem, many without certifications who are not interested in obtaining the CPA certificate may choose to switch from public accounting to industry or government positions where the certificate may not be required. Additionally, many will choose to "qualify" themselves via alternative certifications such as the certified management accountant (CMA) or the certified internal auditor (CIA). Students currently enrolled in various accounting programs have expressed this somewhat narrow-minded approach. Perhaps it is a way to reduce their ever-growing education debt.
SOURCES OF FEES
Fees derived from the different service areas in many instances reflected firm size, as shown in exhibit 4.
Audit fees, as a percentage of net fees earned, increased as firm size increased. In total, audit fees represented only 12.5% of all fees collected. This low figure could be the result of peer review requirements, increased manpower needs, required knowledge of the clients business, the additional expense burden associated with audits as well as other factors. Audit fees constituted 7.3% of the fees generated by sole practitioners and 17.5% of the fees at multiowner firms.
As expected, tax services provided the "bread-and-butter" for most firms. Overall, tax services or tax engagements accounted for approximately 45.7% of the fees collected. Contrary to the trend found in auditing, exhibit 4 reveals that as firm size increased, tax services decreased as a source of fee collections. This trend could be attributed to the large pools of small clients requiring tax services but not audit assistance and to the greater ability of many individual practitioners to handle tax issues as opposed to audit engagements.
Review services accounted for 3.4% of the fees generated, increasing as a fee generator only for multiowner firms with revenues greater than $400,000. As expected, for sole practitioners it represented only a very small percentage of their revenues. Similarly, management consulting services were relatively uniform across firms of all sizes, generating 6.8% of all fees. A "blip" in the data for multiowner firms with revenues greater than $1 million revealed that those firms tended to be more involved in providing this service. Such firms were likely to have more—and bigger—clients and clients with more specialized needs than smaller firms. They also are better able to hire the necessary expertise to deal with such clients.
Write-up and data processing fees constituted approximately 14.5% of all fees generated. Sole practitioners tended to generate a larger percentage of their income from write-ups than multiowner firms (16.4% vs. 12.6%). In addition, the largest of the multiowner firms reported write-up fees substantially lower, as a percentage of the total fees generated, than those reported for write-up fees in the other firm size categories. These firms reported only 9.9% of all fees coming from write-up services. This reflects that as firm size increases, write-up and data processing fees become less important as a source of revenues.
Other services made up only a small percentage of the revenues produced. Services that fell in the "other" category include litigation services, computer hardware sales, software selection, business valuations, mergers and acquisitions, payroll processing, securities sales and advice, economic feasibility studies and executive searches.
As the economy and the marketplace become more international, more firms than ever before are actively engaged in international activities with their clients. The North American Free Trade Agreement (NAFTA) has created a growing need for international assistance and firms can use this need to expand their client base. Of all respondents, 22.3% reported clients owning material interests in an active business in a foreign country. Almost half (49.2%) had clients that buy and sell goods or services outside the United States, and one-third of the clients have passive investments in foreign countries.
However, maintaining the expertise for such clients can be difficult and time-consuming. Therefore, most firms charged some type of premium for these services, typically from 11% to 20% above domestic accounting service fees. Almost a quarter of the reporting firms said those activities constituted a substantial source of income.
Tax service was the most common activity for the firms involved in international activities, with the bulk of the business occurring in North America and European markets. Even companies not located in states bordering Canada or Mexico are beginning to expand into international operations. This trend is due largely to the elimination of many tariffs, with more cuts to come, and to the low salaries in the Mexican manufacturing sector. Small firms should prepare themselves to handle the expanding client requirements that should accompany the gradual phasing in of NAFTA.
The other Western Hemisphere countries represented only a small portion of the fees generated by international activities, but it should be kept in mind that the United States, Canada and Mexico are currently considering the possibility of admitting countries from Central and South America into the trade arrangement.
MORE INFORMATION AVAILABLE
These are only a few of the results reported in the survey, which contains more information on international activities, seasonal staffing and office technology, along with key balance sheet ratios and summary balance sheet information.
The complete survey is divided into two sections. One section presents the survey results from all respondents and divides the results into two groups: the averages of the top 25% most profitable firms and the averages of all respondents. The second section divides all the respondents into two different groups: those that practice in cities with populations above 250,000 and those in smaller cities. This additional information can help firms select the responses that more closely fit their situations. Anyone interested in obtaining the complete survey for a $50 fee should contact Dianne Jones, staff liaison for the Texas Society MAP survey committee, at (972) 687-8500.
Small firms may lack the resources to perform large surveys the way national firms can, but with this survey, they can at least know how they stand compared with similar colleagues around the country.