CPA firms for decades saw little upside to providing basic accounting services to business clients. Bookkeeping and other “write-up” activities required extensive data entry and document transfer that chewed up man-hours but did not require much specialized knowledge. Client accounting services (CAS) were seen as commodities that brought with them depressed hourly rates and a risk of costly errors. It simply made more sense, not to mention money, for CPA firms to focus on higher-margin tax and audit work.
It is a testament then to the transformative power of technological and market forces that CAS is now being touted in some circles as the future of public accounting. The digitization of financial data and the evolution of cloud computing, broadband connectivity, and mobile devices have made it possible for accounting firms and their clients to access critical information and applications from virtually anywhere at any time. This has set the stage for the development of cloud-based software packages that allow CPAs and clients to work from a shared database of the client’s essential financial data. Cloud-based software automates or otherwise greatly reduces the manual labor associated with transactional accounting functions, opening the door for CPA firms to offer outsourced CAS in a scalable model capable of serving many clients and generating a steady stream of revenue and profits (see Exhibit 1 for a list of services commonly included in CAS offerings).
“CAS clients are like an annuity for a firm,” said Michael Smith, CPA/CITP, a McGladrey partner who helped build an outsourced accounting business for the firm.
The business potential of CAS is bolstered by increased demand from small companies and nonprofits for outside help with accounting functions. In addition, management teams are seeking higher levels of industry-specific knowledge to navigate increasingly complex competitive and regulatory environments.
These factors have sown the seeds for a fertile CAS market that some CPA firms already are harvesting. Steve Chaney, CPA, has leveraged cloud computing and market specialization to build a California-based accounting firm that serves 300 churches and faith-based nonprofits. Chaney & Associates enjoys what its founder calls an “endless” supply of work and high profit margins thanks to monthly fees that range from $1,000 to $8,000.
Other practitioners, including several who participated in panel discussions at CPA2Biz’s inaugural Digital CPA Conference in December, report monthly fees as high as $15,000 per client and hourly rates of as much as $800 for advisory and project work.
How can CPA firms launch a cloud-based outsourced accounting practice and develop it into a profitable line of business, either as the main focus of a firm or as a complement to tax or other services? This article provides direction drawn from a road map developed by technology author and business consultant Geoffrey Moore and also offers insights from practitioners who have blazed the trail in this area.
THE FOUNDATION FOR CAS
A trio of mega-trends has laid the groundwork for the growth of CAS, said Moore, who interviewed dozens of CPAs while researching Accounting Services: Harness the Power of Cloud Computing, a white paper he developed for CPA2Biz, the AICPA’s technology and marketing services subsidiary. Moore describes the three forces as follows:
Digitization. For accounting firms, this refers to the move from paper to paperless. The availability of financial information in digital form makes it possible to run cloud-based applications that swiftly process business data and identify, analyze, and report key process indicators for management. In this and other ways, the cloud breaks down barriers to productivity and reduces the limitations of size, granting small companies and firms access to computing power previously reserved only for large enterprises.
Virtualization. The connectivity enabled by cloud computing and mobile devices has removed geographic barriers, meaning that CPAs no longer have to be physically present to connect with clients. Technologies that allow for real-time communication and collaboration over the internet have made it possible for accountants to work with people they have never met in person. Along the same lines, technologies such as Skype, WebEx, smartphones, instant messaging, email, and a host of internet-based applications make it possible to have virtual workforces who can work from virtually anywhere provided they have an internet connection.
Transformation. This refers to a shift from generalization to specialization that has been taking place among small businesses for the past two decades, Moore said. Business has become so complex and specialized that business owners and management need advisers who understand the unique characteristics of their industry. Cloud and business intelligence applications make it possible for CPAs to provide advice based on real-time information streams. “The ability to provide business intelligence from a quick analysis of data is a miracle,” Moore said.
NOT RIGHT FOR EVERY FIRM
Not every accounting firm is suited to offer cloud-powered CAS. Firms that audit publicly traded companies can run into problems with SEC and PCAOB regulations related to the offering of consulting services. Firms that perform audits only on private organizations must be careful to offer CAS only to non-attest-level clients or risk impairing their independence. For more information, see the AICPA Code of Professional Conduct, Section 100, Independence, Integrity, and Objectivity, and Interpretation No. 101-3, Nonattest Services.
Jennifer Katrulya, CPA/CITP, CGMA, provides CPAs with training on how to develop a cloud-enabled CAS business line, both through her firm, the Connecticut-based Business Management Resource Group (BMRG), and through her role as the founding writer and lead facilitator of CPA2Biz’s two-day CAS training workshop. Katrulya recommends to her students that they assess the profitability of their audit and attest engagements and consider whether it would make their firms more money to drop audit and convert their attest clients to CAS clients. For firms with small to midsize clients, CAS can be “a lot more profitable” than audit engagements, Katrulya said, though that’s not the case for firms with large audit engagements.
CPA firms considering a foray into CAS also need to consider whether such a move makes sense for their clients and for their firm’s culture. Some firms are better off sticking with core tax and audit offerings or operating in a niche that caters to clients who don’t want to deal with the hassles of converting to a paperless tax system. “There will be some small set of firms that will succeed by saying, ‘We’re never going to use digital, ever,’ ” Moore said. “But the growth of the market will be in the digital domain.”
SELLING CAS TO STAFF AND CLIENTS: CHALLENGES AND BENEFITS
Firms that want to launch a cloud-based CAS business must obtain staff and client buy-in. With staff, firms may emphasize the work/life benefits that can come when a firm moves to an all-digital, cloud-based platform, Smith said.
“Some of our staff have family responsibilities that interfere with work hours,” he said. With cloud-based applications and data, “it’s much easier to work remotely,” he said.
With clients, firms can speak to the increased efficiencies and reduced errors associated with the automated financial reporting and data transfer possible in a paperless, cloud-connected setup. Other benefits to the client include:
Lower costs. Small companies can outsource their accounting functions for less money than it would cost to staff a full-time accounting department.
More time to focus on running their core business. With the CPA firm handling the accounting recordkeeping, business owners can devote their attention to improving operations and pursuing new market opportunities.
Instant access to key performance indicators. Many firms provide KPI dashboards giving management a real-time view of the company’s essential financial metrics.
Access to expert advice. Outsourced accounting departments often provide experienced CPAs, many with industry-specific expertise and management-accounting knowledge, to supply financial and strategic advice in a consulting role. Many firms term these types of services as virtual or outsourced CFO, but those names can be misleading because the “virtual CFO” provided by the accounting firm usually does not work full-time hours with the client or perform all of the duties associated with the CFO position (for more, see the sidebar, “The Reality of Virtual CFO”).
THE ROAD MAP TO CAS
In his white paper, Moore lays out a four-stage process to developing a high-value CAS business. Following is a tour of the plan’s key parts.
Stage One: A Necessary Evil
Even with technological advances, there’s only so much efficiency CPA firms can provide in write-up, an area Moore terms “a necessary evil.” To maximize the value they can offer clients, CPAs should specialize in an industry or business segment, as Chaney has with faith-based nonprofits and Katrulya has with venture capital firms.
Firm leaders should pick a business segment they and their staff are passionate about, but they also must be careful to pick a niche that can provide enough business for the firm to survive. The target segment, or industry vertical, Moore writes in his white paper, should be “big enough to matter” but “small enough to lead” and also should fit well with the firm’s reservoir of skills and expertise. Firms can add other niches at a later date. Katrulya’s BMRG serves medical, legal, and nonprofit clients in addition to venture capital firms, but the firm limits its CAS offerings to those four “verticals.”
“Industry-based expertise is critical,” Katrulya said. “Expertise is what we sell.”
Along with selecting a niche, firms must have some baseline technology in place before venturing into CAS. Most important is having an online system of record that is available 24 hours a day, seven days a week to both clients and CPAs working from any location. “There are two reasons to want to have a common system of record,” Moore said in an interview. “One is to have the bookkeeping happen in a single place so that you never have to copy an entry from one system to another system, particularly a manual copy. That’s kind of the kiss of death in this system.”
The second reason to have a common system of record is that it provides a place where the CPA firm can use online business intelligence tools to analyze company data and provide actionable intelligence to the client. This can lead to more strategic discussions between the firm and the client. “That’s a very high return on having a common system of record,” Moore said.
The other baseline technology to have in place is a single,
cloud-based point of exchange for all documents between the CPA firm
and the client, Moore said.
Stage Two: Establishing the Practice
Establishing a CAS practice requires the development of a client roster. Many practitioners presenting at the Digital CPA Conference emphasized the importance of standardization in client development. CPA firms that standardize software and processes can build or use templates to set up clients in a fast, repeatable process. Blue Bell, Pa.-based Fesnak and Associates requires all of its new clients to use the Intacct web-based accounting and financial platform, said Nicole Ksiazek, CPA, a senior manager and cloud accounting practice leader at Fesnak. ( Editor’s note: Intacct is one of a handful of cloud-based applications offered through the CPA2Biz Trusted Business Advisor program, and Chaney and Ksiazek have served as facilitators for CPA2Biz’s two-day CAS training workshop.)
A CAS client roster is composed of two types of clients, existing and new. With existing clients, it’s essential to select the right ones to transition. Not all clients are suited for a digital, CAS setup. In those cases, firms can either transition the client to another CPA firm or maintain the current relationship parameters with the client—a viable option at firms that offer other services in addition to CAS.
As for the clients that firms decide to move to the cloud, there are a number of approaches practitioners can take. Some at Digital CPA recommended starting with a larger client, which is less likely to push back on pricing issues. Others suggested that there are fewer headaches when transitioning smaller clients.
Chaney recommends starting with the clients with whom you have the best relationship. He employed that approach and didn’t lose any clients. “I launched our digital journey with 75 clients,” Chaney said. “The goal was to have 200 clients in five years. We hit it in one year.”
For new clients, practitioners at Digital CPA recommended a three-phase process.
First phase. Conduct a client needs assessment. Firms charge between $2,000 and $5,000 for this. Christine Triantos, CFO and virtual business solution consultant with Colorado-based accounting firm Anton Collins Mitchell, said she uses her first meeting with clients to ask them about the pain points in their companies. This information is essential in determining whether and how to proceed with a client.
Second phase. This consists of client on-boarding and migration. Firms generally charge double the first-phase costs for this part of the process.
Third phase. Once clients are set up and running, firms generally charge $1,000 to $5,000 per month for CAS, though advisory and project work can push the fee significantly higher.
Upfront costs with new clients can vary based on firm philosophy and individual situations. McGladrey’s Smith advises firms to use judgment on upfront costs. “We want clients to have skin in the game, but don’t charge too much,” he said. Fesnak and Associates has gone back and forth on what to charge, according to Ksiazek, who said firms can absorb costs upfront and make up the difference later. Other options include spreading upfront costs over the course of the first year and offering credit.
Stage Three: Expanding the Practice
Accounting firms must leverage the power of virtualization to grow their client and talent base. CPAs need to use cloud-based business intelligence and data analytics to detect patterns in their clients’ companies that the clients have not yet discovered. For instance, a CPA might develop a continually updating chart visualizing the change in certain business metrics over a period of time. When updated in real time, the chart might identify an investment opportunity or illuminate a cash flow problem that requires quick action. In either case, the CPA should bring the information to the client’s attention.
“As a trusted adviser, you need to provoke the conversation,” Moore said.
In addition, firms can turn CAS into a growth business by using virtualization to be digitally present in other cities and interact with clients without having to actually be there. “That turns out to work very well in vertical markets,” Moore said.
Moore lists four key principles for Stage Three:
- Streamline your work flow processes to be location independent.
- Re-engineer your internal communications and collaboration processes to support a virtual organization.
- Engage your clients through digital channels and migrate your interactions online. This involves the use of mobile devices, social media sites such as Twitter and YouTube, video services such as FaceTime and Skype, and instant messaging services including texting.
- Extend your target market’s geographical boundaries while maintaining your focus on target industry and core differentiation. This is where industry expertise becomes more important than location. As Moore writes in his white paper: “A faith-based institution in Birmingham has more in common with a sister organization in Boston than with a restaurant franchisee just down the street.”
Stage Four: Deepening the Practice
As accounting firms spend more time working in client businesses and in specific industry verticals, their CPAs will gain crucial experience and expertise in the issues of most importance to their clients. In addition, firms should enable CPAs to attend industry conferences and access other learning opportunities to become experts in their field, Katrulya said. Once they achieve expert status, CPAs can take on a trusted adviser role, one in which the CPA becomes more of a strategic partner than a technician, Moore writes in the white paper.
As a strategic partner, the CPA becomes an essential resource to the business owner, acting as a consultant and taking on special projects that address client-specific issues and command high margins because of the expertise required. One such project could involve a CPA helping to develop a five-year financial model that forecasts the cash flow and tax implications of an acquisition a client is considering, said Smith, the McGladrey partner.
Other examples of project work CPAs can take on include:
- Analyzing critical processes in the client’s business and potentially re-engineering them to make them more efficient or produce more timely and accurate financial information.
- Assisting a client with an international expansion. This could involve helping the client understand international tax matters and develop policies and procedures to deal with tax compliance issues. Part of this process could include developing new accounting processes to support currency conversion and value-added-tax (VAT) reporting.
Doing projects for individual clients is “very valuable” work with strong margins, Smith said, but it’s difficult to scale up because it is so customized. Thus, Smith said, firms cannot expect these types of advisory and project services to make up more than a third of a CAS business.
“There needs to be a mix,” he said.
From Katrulya’s perspective, the greatest long-term value of cloud-enabled CAS comes from the development of turnkey accounting services that leverage the firm’s industry-specific expertise but are standardized so that the process of delivering them is repeatable across many clients.
“The key is the growth of the scalable portion,” she said. “What we are being paid for is being a firm with a plan.”
Barry Melancon, CPA, CGMA, president and CEO of the AICPA, points to swiftly increasing complexity as “the No. 1 opportunity and No. 1 threat” for accounting firms. In the small business sector, radical and rapid change in the business and regulatory landscape has spawned increased demand for outsourced accounting departments and advisory services. This, in turn, has created a significant opportunity for CPAs willing to become experts in client industries and to invest in technologies that facilitate cloud-based communication and collaboration with clients.
Long-term, profitable relationships beckon for CPAs who can leverage digitization and virtualization to provide timely, transformative business intelligence to small business owners. Does this mean that CAS is the real deal for the future of public accounting? No one can say for sure, but for several firms already operating in the CAS space, their leaders already are seeing the upside.
To view Geoffrey Moore talking about his road map to CAS, click here.
Exhibit 1: CAS: An Overview
A multitude of services can fall under the client accounting services (CAS) umbrella. Here is a quick look at some of the major types of services.
- General accounting. This includes the monthly close process and general ledger maintenance.
- Budgeting and forecasting. This can be customized as needed to specific departments or projects.
- Reporting and analytics. This often calls for the development of dashboards displaying key performance metrics that the client’s management team can see.
- Tax administration. Planning and return preparation.
- Technology services. Helping clients choose the right software and tweaking the applications so that they integrate well with one another. Training clients and staff on how to use the applications.
- Payroll. This process makes sure the client pays its employees.
- Accounts payable. This function ensures the client is paying its bills.
- Accounts receivable. This covers everything related to the client getting paid by its customers.
Source: Michael Smith, McGladrey.
The Reality of Virtual CFO
Many accounting firms offer virtual CFO and virtual controllership services, but those names often don’t reflect the true nature of the CFO and controller positions.
For instance, some firms use the terms virtual CFO and virtual controllership interchangeably despite the fact that the two roles are “very different,” points out Jennifer Katrulya, CPA/CITP, CGMA, the CEO of Connecticut-based Business Management Resource Group (BMRG) and the developer of training programs for CPAs interested in adding cloud-based client accounting services (CAS) to their firms’ product menus.
Controllership services, by Katrulya’s definition, include most of the client accounting services mentioned in the main article “From ‘Write-Up’ to Right Profitable.” At the higher end, these services include preparing and sending out reports that provide clients with the essential financial metrics of their companies, as well as the development of key performance indicator dashboards.
Virtual CFO services can refer to controllership services in addition to advisory or project work for individual clients. Accounting firms sometimes allocate top-level CPAs, usually partners or others with management experience, to serve as a part-time CFO for a client. These CPAs can offer clients value by doing budgets, reviewing insurance policies, interfacing with bankers, and managing and predicting cash flow, but part-time CFOs lack the bandwidth to perform the full range of CFO duties, including treasury, strategic, and day-to-day management; staff evaluation; investor relations; oversight of information technology initiatives; and deep collaboration with, or direct oversight of, the human resources department.
“I believe a CPA firm's risk exposure will grow by holding out these advisers to be CFOs, controllers, etc., or de facto client management or executives when in fact they are not performing the full range of functions for such an executive position,” said Ed Schultz, CPA, MBA, a partner at executive services firm Tatum LLC who also serves as a JofA editorial adviser. In his role at Tatum, which provides executives who work on a contract basis with clients, Schultz has held interim CFO and other senior management positions for more than a dozen companies.
“There is a big difference between a real CFO and other senior financial managers and one who kind of ‘gets it,’ and not every firm has the resources to have practicing CFOs do this work,” he said.
Part-time CFOs also aren’t as available as full-time CFOs to address day-to-day executive leadership and big-picture questions brought up in real time by senior management, such as major expenditures and merger-and-acquisition opportunities.
“There definitely comes a point where we recommend a full-time CFO for our clients,” Katrulya said. “If a client needs 20 to 25 hours or more per week from us … the needs become such that it can’t be standardized.”
In those situations, firms providing standardized CAS can partner with other firms that specialize in supplying contract CFOs who have management accounting experience and can focus on meeting the client’s needs. BMRG has entered into such arrangements, which Katrulya recommends as a good option for firms just getting started with CAS.
Technological advances, most notably cloud computing, have made it possible for accounting firms to profitably provide outsourced accounting services. Cloud-based software applications and shared databases have automated most of the manual data entry and transfer that made “write-up” a low-margin business.
Rapid change and increasing complexity in the marketplace are driving up demand for outsourced accounting services. Upper management teams at small and medium-size companies want to devote more resources to improving business and less to handling bookkeeping.
A white paper written by technology guru Geoffrey Moore for AICPA subsidiary CPA2Biz lays out a road map for CPA firms to launch and grow a cloud-based outsourced accounting practice. Moore credits three mega-trends—digitization, virtualization, and transformation—for fertilizing the field for client accounting services (CAS), a field that has proved lucrative for a number of accounting firms.
Cloud-based CAS is not right for every firm or every client. Firms that perform audits could run into regulatory and independence concerns. Firms considering a foray into CAS may continue to offer other services, such as tax, but they should specialize their CAS practice in an industry vertical.
Firms that embrace cloud-based CAS must obtain staff and client buy-in and make the necessary technology investments. At a minimum, firms need a shared online system of record that is available to clients and CPAs at any time from any location with an internet connection.
Moore’s road map consists of four stages. The journey starts with recognizing that client accounting services are necessary. The next stages cover how to establish, expand, and deepen the practice.
CPAs who develop deep expertise in their industry vertical should look for opportunities to provide strategic advice and business intelligence to their clients. The goal is to move from a compliance adviser to a strategic adviser trusted to execute high-margin, customized projects for clients.
While consulting services are valuable with a lot of margin, they are not easily scalable. As a result, firms in the CAS space should aim for a mix of consulting and turnkey CAS engagements.
Jeff Drew is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at firstname.lastname@example.org or 919-402-4056.
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Private Companies Practice Section and Succession Planning Resource Center
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Information Management and Technology Assurance (IMTA) Section and CITP credential
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members’ professional duties and responsibilities, the AICPA has
changed the name of the Information Technology Section to the
Information Management and Technology Assurance (IMTA) Section. The
IMTA division serves members of the IMTA Membership Section, CPAs who
hold the Certified Information Technology Professional (CITP)
credential, other AICPA members, and accounting professionals who want
to maximize information technology to provide information management
and/or technology assurance services to meet their clients’ or
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about the IMTA division, visit aicpa.org/IMTA.