7 June 2016

INSIGHTS FROM THE IFAC SURVEY: SIZE MATTERS

The International Federation of Accountants® (IFAC®) has once again released the results of its global annual survey of accountants from small- and medium-sized practices (SMPs), only this time around, there were even more respondents. Over 6,700 from some 169 countries responded, 32% more than last year, making this perhaps the largest such survey of accountants working in practice. The number of respondents to the survey is a clear signal that SMPs are acutely aware of the significant role they play in business and society; and the results signal that the profession needs to be alert to the many opportunities and threats they face right now and in the future.

Relentless, and ever faster, changes in technology, globalization, competition, and regulation are together making business more and more complex. This significantly impacts the nature of clients' needs and what they expect of their accountants and how accountants deliver services, as well as the environment in which professional engagements—from assurance through advisory and everything in between—are conducted. While SMPs are pervasively affected by these changes, not all SMPs are affected equally. Differences in size have a major bearing on how SMPs can address challenges and take advantage of new opportunities.

Because SMPs are very diverse in size—from sole practitioners to medium-sized practices with many offices—how they respond to the changing demands of their clients, in terms of what services they provide and how their practice is organized, will vary widely, as well.

Compared with their larger counterparts, SMPs are distinct in certain ways. They are usually intimately involved in their clients' matters, generally owner-managed small- and medium-sized entities (SMEs), who engage SMPs as the main source of technical and managerial advice. SMPs are also typically characterized by team stability, flexibility, tailored solutions, and specialized knowledge.

There are many challenges facing SMPs. Below I analyze how practice size affects the perception of, and response to, these many challenges.

Significant Challenges

According to the survey, SMPs face many and varied challenges, but the intensity of the challenge is broadly the same across all practice sizes. More than 70% of respondents rate six challenges as having a moderate, high, or very high impact. One can group them in three different categories: 1) Market position—attracting new clients (78%) and differentiating from competition (74%); 2) Profit instability—experiencing pressure to lower fees (71%) and rising costs (76%); and 3) Keeping up to date—keeping up with technology (72%) and keeping up with new regulation and standards (74%).

The most pressing challenge SMPs face is that of attracting new clients (47% of respondents said this was a high or very high challenge). While less of a challenge than the prior year, probably due to the improved performance of the economy, it still ranks as a major challenge for almost half of all SMPs, regardless of size.

The survey reveals that only 13% of SMPs' clients have no international activities. As many as 74% are involved in import or export of goods or services, and 33% or them have foreign owners or investors. These results are not surprising given the rapidly increasing extent and depth of globalization of business. As expected, larger practices among the SMP spectrum report having a higher percentage of clients with multiple types of international activities, especially the more sophisticated activities. For example, 45% of the largest SMPs (21 or more partners and staff) report having clients with part of their business infrastructure or operations in one or more foreign countries. In comparison, only 15% of sole practitioners say their clients are part of international structures.

Impact on Performance

The survey offers good insights into the outlook for practice performance, as measured by fee revenue, across the different size categories. There is a correlation between size and growth in fee revenue; the larger SMPs are more likely to predict an increase in fee revenue. Across the four practice areas, 44-55% of the largest category of SMPs (21 or more partners and staff) forecast an increase in fee revenues. By comparison, 30-39% of sole practitioners foresee fee revenue increases.

By service, the biggest practices are much more likely to forecast growth in advisory and assurance than smaller practices. This is significant since many commentators see this practice area as offering higher added value and faster growth prospects. Perhaps this reflects smaller practices being slower to realize the potential fee growth to be had from advisory and consulting, or being too small to have the capability to respond to the increasingly sophisticated demands of their clients.

Joining a Network, Association or Alliance—Possible Solution?

Surely, in a world where globalization is intensifying, it will be very difficult for SMPs to maintain existing clients, let alone attract new ones, if they are unable to help their clients with international issues. Globalization, technology, and intense competition are leading to new and higher client demands and the need for talented professionals to meet these demands. It is not easy to give the right answers to increasingly complex questions alone or with a very limited team. Of the participants in the survey, 39% are sole practitioners and another 32% are in practices with 2-5 partners and staff. Those very small practices will experience big difficulties coping successfully with the many challenges mentioned above. IFAC's resources for Practice Management signposted on the Global Knowledge Gateway are available to help SMPs address these challenges.

The right practice size for the right service is also very important. And our complex world probably requires some form of collaboration between professional SMPs to serve certain clients, and so, to keep the significant role and trust that clients and our society demands, as well as their unique advantages, including close dialogue and the involvement of partners and key staff.

Membership in a network, association, or alliance might help SMPs serve clients with their international activities, and network and leverage resources to gain solutions to their other challenges, but 64% of sole practitioners and 45% of the next smallest practices (up to 5 partners and staff), are not members and are not considering joining one of these groups. Maybe they should be? Log in and share your views below.

Antoni Gómez, international chair of Auren

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