The Profession Disrupted: Compliance Commoditized

By Rob Nixon, CPA Trendlines

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The accounting profession globally is being disrupted right now and most accountants don’t even know it is happening.

There are three main areas that are being disrupted in the profession:

  1. Compliance is being commoditized by technology,
  2. Labor is being sourced from less expensive countries and
  3. Clients are using the Internet for your advice.

These three market forces will only escalate, and if you do nothing about it revenue, profit and business value will erode.
Let’s start with how compliance is being commoditized by technology. The adoption of Internet- (commonly called cloud-) based technology is growing at a rapid rate. You can’t stop it. There is social behavior change in action (people want to access their information on their handheld device) and there are massive technology companies investing huge sums of money to drive the change – if they don’t, they won’t be in business.

The applications that are used over the Internet are very sophisticated, very accurate and can connect to other Internet systems. For example, the accounting system can connect to the client management system, which can connect to the stock control system and the distribution system. At the client end, inexpensive applications can talk to each other and give real-time information to the business leader.

Here’s an example in action: A customer buys a product or service by whatever means. It is scanned using the bar code and automatically registers the sale into the online accounting system. Bank accounts, income statements and balance sheet data are automatically updated. The action also updates the inventory management system that there is one less product. The client management system (assuming the customer used a login, user name or loyalty card to identify the customer) and the buying habits of that customer are updated and now can be tracked. A real-time report appearing on a dashboard is automatically updated, and the leadership of the business can see the trends or reports immediately on their smartphone or tablet. They might be on a private island at the time sunning themselves and the report comes through or they can check when they choose.
This level of automation (all driven through the internet) enables the business leader to make instant management decisions and run a better business. It’s happening right now. No spreadsheets manually updated. No paper filing and updating. No need for a meeting to tell me the numbers. No waiting. No people. All real time. All automated.

It’s exciting and it is happening right now. In my business I have had this level of automation for years.

Now, let’s look at the accounting process. Previously it used to be on a spreadsheet, server or hard drive and kept at the client’s premises. A bookkeeper (or spouse of the owner) did the data entry using manual key strokes. At the end of the year a file was saved and sent to the accountant with supporting information. There would be questions and queries back and forth and the accountant would then prepare a set of accounts and present back to the client some two to nine months after the initial data was received. The preparation of the historical data was a necessary evil as it had to be done to comply with the government authorities.

However, the data was old data. It was redundant. What help is it when you tell me “I should have done this and that” nine months after the fact? No help whatsoever!

Enter Internet-based accounting systems. The products available offer real-time information that does not need people to do the data entry. With these systems the data is more accurate (supercomputers are doing the processing, not people) and there are fewer mistakes. As well as that, the accounting systems are offering excellent reporting and data analytics that were only previously offered by accountants as a management accounting package. The revenue I used to spend with the accountant is now delivered by technology.

Also because the information is more accurate and the systems only have one version, the time spent at your end to prepare annual accounts is far less. In fact, we are seeing anything from 30 percent to a 60 percent time reduction at the accountants’ end for accounts preparation work. What do you do with that time saving? Do you reduce your price? Unfortunately for you, the technology companies are directly promoting that “You will be more efficient working with your accountant when you buy our product.” You have been selling “hours” for all these years and more efficiency means fewer hours and fewer hours should mean a lower price. That’s what the business community is thinking.

We see more price pressure on compliance than ever before and it will only escalate.

As an example, the New Zealand accounting profession is one of the world leaders in the adoption of cloud accounting technology. They have been active in the space since 2010 and approximately (at the time of writing) 25 percent of New Zealand small businesses use a cloud accounting product. As a result of technology and market forces, the New Zealand accounting profession has been negatively affected. In short, it’s going backward.

All you have to do is take a look at my profit per partner analysis below of the last 11 years. In 2004 the actual median profit per partner was NZ$176,163. In 2014 the actual median profit per partner was NZ$190,409. Not only has the actual profit per partner declined in the past eight years (from a high of NZ$229,646 in 2007) but when you apply “CPI plus a bit” of just 5 percent to each year since 2004 then the 2014 comparison results are staggering.

The other numbers of work in progress, receivables, writeoffs / realization, average hourly rate and productivity / utilization have gone up, down and sideways. At the end of the day, it’s the profit per partner that matters.

Every expense in a firm is increasing. Salaries and overheads are increasing and you should be running a better firm each year so applying 5 percent per year profit growth is a very conservative growth target. Based on 5 percent, the median profit per partner in 2014 should be NZ$286,951. Alas, this year it’s only NZ$190,409. That’s almost a NZ$100,000 difference per partner!

How can the average partner in New Zealand afford private school education, decent cars and reasonable vacations and still give back to the community? Most can’t. And to make matters worse, isn’t the accounting profession supposed to be “The Trusted Advisor” – the “Primary Business Advisor?” Most partners are making less than their clients, yet they are advising them about business success! Hmmm.

So why is this happening? I think there are three primary reasons:

  1. Cloud accounting technology is driving efficiencies in the firm, and the profession has been forced to reduce prices.
  2. Savvy clients have more information than ever before, and they are asking more price- and value-related questions.
  3. Nimble accounting firms are promoting bundled and lower prices than ever before and thus commoditizing compliance.

There is more of this to come. To counteract these market forces, the profession has not acted fast enough in marketing, value pricing and delivering business advisory services.

As the old saying goes, “If nothing changes, nothing changes.” What that means is if you do nothing (strategy, process, tools, etc.) then nothing changes. In this case doing nothing means everything changes. And a sharp decline in profit should be enough to motivate the industry to change.

Let me add one more to the mix before we get onto solutions: one-click tax payments. With all the Internet data (which is much more accurate) already in the Internet accounting system, how long will it be before the government authorities get their systems ready and allow direct payment? The government authorities do not care about the intermediary called an accountant. All they want is their tax money! The reason the majority of the accounting profession exists is to make sure that the government gets the correct amount of tax money that it is owed.

One-click tax payments are not far away, and they will bypass accountants and eliminate a big chunk of their revenue. Technology is disrupting the industry, and there is more to come. Is your firm ready?