Accounting
Can PE buy transformation? | Accounting Today
For all the investments private equity is making into accounting, many of the firms receiving the infusion say the money is just a larger piece of the puzzle all forward-thinking firms are trying to solve — of much-needed transformation.
The money is a pivotal step toward becoming that future-focused firm, and the process of obtaining it kicked off a discussion about structuring private equity deals at Accounting Today’s PE Summit last week in Chicago, featuring panelists Jeremy Dubow, CEO of Chicago-based Prosperity Partners, and Richard Kopelman, CEO of Atlanta-headquartered Aprio Advisory Group.
Aprio, which
“We looked at everything,” said Kopelman, including merging up and a debt recapitalization, before the firm’s investigation of the market and internal finances led to PE as the best option.
Meanwhile, Prosperity Partner’s due diligence included cold calls, according to Dubrow, who heads the firm formerly known as NDH before it
“We were looking at the future trying to decide which direction we should go,” he explained. “We were a strong, profitable firm with success in our ranks, but realized we were at a crossroads in terms of people, the labor-constrained environment, and where we wanted to be.”
Alan Klehr
Talent was a ubiquitous topic throughout the two-day summit, as many firms described courting or accepting PE investments due to today’s sparser pipeline, and PE firms spoke about the value of accounting firms with their business being low-risk, with a positive cash flow, recurring revenue, and led by trusted accountants.
For Prosperity, a firm of about 120 people, picking up the phone was the best way to discover what PE could unlock.
“As a small firm, we started with a bunch of cold calls and emails,” Dubow recounted. “The process initially started through cold calls. We didn’t know the tidal wave of change on the horizon. We would take a few phone calls, understand how this is working and how to value your accounting firm.”
For Aprio, value had to be calculated very specifically, as Kopelman explains “we wanted to do away with the mindset to sell assets and monetize it. We see firms that robbed younger partners of the ability to serve younger partners in the right way.”
That meant moving away from the deferred comp model, he continued. “We wanted to move to a model of creating value for the business, for owners, for growing entrepreneurs.”
Dubow and his team had the same concerns for their people.
“Private equity allows us to issue equity to all employees, from top to bottom, where everyone shares in the upside of the firm,” he said. “Everyone participates and is growing in the same direction. Everyone is going to celebrate at the same time.”
The firm of the future
While ownership — or potential ownership — in the business can incentivize younger people to join a firm, there are other elements to a next-generation practice, and PE may help in attaining them.
“We have to create the firm of the future today, in key areas,” said Koltin Consulting Group CEO Allan Koltin, also co-chair of the PE Summit, during his keynote address. “It’s going to cost real money to do it. Nothing in business is forever. Not all private equity deals will be successful. Some are, and some don’t meet the goals of both parties.”
He also stressed that PE is
Dubow would agree. “Don’t just jump into private equity and say this is the only thing I’m considering,” he advised. “We spent time looking into alternatives.”
Once deciding on PE and specifically Unity Partners, Dubow found it accelerated change within the firm.
“As a small firm that changes with a 10% improvement every year, how do we increase that to 100%?” he said, explaining that PE “allowed us to think about people differently and be transformative with technology. We have a different business as a result. It allows us to be a firm of the future. We take that type of risk, and it allows us to move to the next level.”
Alan Klehr
Avani Desai, CEO at Schellman, explained during another PE Summit panel that the firm’s
“It helped me put together a true executive leadership team,” she said. “We now have a CRO, chief growth officer, someone leading digital transformation.”
According to Desai, an employee during a recent firm town hall expressed: “We have changed more in the last three years than the 18 years prior.”
Desai and her fellow practitioner panelists all agreed that PE had eased the administrative burdens and tactical headaches that often fall on partners, and allowed for more long-term strategizing.
This was new for New York City-based Regional Leader LMC Advisors, which joined
“Before Ascend we had no strategic planning, no strategy for top-line growth… no plan of action,” he said. “Through budgeting, and a three-year strategic plan, we really looked at our practice.”
The transition from independence to private equity-backed was not without surprises, according to PE Summit speakers.
This included a larger stress on the financials. “It was a whole new level of reporting, which was the hardest thing for me at the beginning — how much data they wanted,” shared Desai.
“The amount of reporting was a shock to us,” she continued, “but we learned. You can’t live your life in a spreadsheet, I tell my 28-year-old boss. But getting data from there, I’ve come to the realization that it really helps to be able to see that.”
Her co-panelist, Utah-based WSRP Advisory CEO and managing partner Dan Rinehart, agreed that the influx of numbers was helpful, especially for firms considering entering the PE space.
“As a bunch of accountants, we’re supposed to be the experts on accounting, financial reporting,” he said. “We didn’t know we had to really dive into the details of realization, utilization. We understood it, were tracking it, from a strategic planning perspective, but we had to dive into the details…. The extra reporting had actually been really good, to help us make decisions more in real time.”
Rinehart was also pleasantly surprised by the freedom afforded under the firm’s PE structure.
“For us, we haven’t noticed any control change; we look at the private equity partner as a partner,” he said. “Not someone that’s a boss to us, but a partner. I’m trying to think of one decision where I felt like I couldn’t make it. Sometimes I call the private equity partner [and ask] ‘What do you think of this?’ They say, ‘You’re in charge, you run the firm.’ I was scared about taking on private equity — is someone going to be walking the halls of the office, reading all the workpapers, seeing when I take lunch? That’s not going to happen.”
“It’s a partner, they’re not breathing down our backs,” Cohen agreed about LMC’s operations under Ascend. “The executive leadership team is making those decisions. The Ascend board is there to be a thought partner.”
Alan Klehr
Of the many detailed considerations to be made in a CPA-PE firm partnership, the appeal of the accounting profession was a central theme throughout the PE Summit.
Stuart Ferguson shared his perspective, as managing partner of strategic advisory firm Pointe Advisory, during another summit panel.
“One thing I’m fascinated by is that private equity investment in the space has brought swagger to the CPA industry,” he said. “Ten years ago, if a CPA firm was in the news it was usually for a bad reason, not a good reason. Now, the majority is related to the attractiveness and growth potential, the opportunity of the great businesses built by CPA firms. There’s a swagger, a reason to be proud of the business you built. Private equity, as its prone to do, is a disruptor and accelerates disruption. Firms are forced to think differently about talent [and more].”
“It’s a proud chapter in public accounting,” co-panelist Koltin chimed in. “You sacrificed your life, donated your brain and body to the cause, and never thought the business could be worth this on day one. The bar got raised, and internal valuations — maybe we need to change our valuation.”
The Treasury Department is warning Congress that it needs lawmakers to unlock $20 billion in funding for the Internal Revenue Service that could be rescinded due to duplicative legislative language.
The $20 billion is targeted at IRS enforcement and is separate from the more than $20 billion that has already been clawed back from the Inflation Reduction Act’s extra $80 billion in funding for the IRS over a decade. If Congress doesn’t act during the appropriations process before the end of President Biden’s term, the $20 billion may be rescinded, putting at risk the IRS’s ability to hire more employees and carry out its duties next tax season.
“The IRS is going to potentially have to make dramatic decisions about stopping hiring and starting to budget for a world [in] which they don’t have $20 billion, which will stop a lot of their progress,” Treasury Deputy Secretary Wally Adeyemo said during a call with reporters Tuesday, according to the
The IRS received an extra $80 billion in funding over 10 years for enforcement, taxpayer service and technology upgrades as part of the Inflation Reduction Act of 2022. But as part of a deal to raise the debt ceiling in 2023, the funding was reduced by $1.4 billion, and later as part of another agreement last year an additional $20 billion of the tax enforcement money was distributed to other federal agencies for nondefense spending. That $20 billion cut was mistakenly duplicated in the legislative language, so the IRS faces another steep budget cut unless Congress acts to amend the language during its year-end appropriations process.
The budget cuts could also exacerbate the deficit as the extra money for tax enforcement was expected to generate tax revenue. The Treasury estimated the national debt could grow by $140 billion without the extra funding for tax enforcement.
The incoming Trump administration is already expected to slash IRS enforcement funding once President-elect Trump takes office. Republican lawmakers have been calling for cuts in the IRS budget, including the
Despite opposition among many Republicans in Congress to the Direct File program, Direct File may have the support of Tesla CEO Elon Musk, who has been assigned by President Trump to head a new Department of Government Efficiency with former GOP presidential candidate Vivek Ramaswamy with the goal of cutting waste and inefficiency in the federal government. On the recently created X account for DOGE, they
“In 1955, there were less than 1.5 million words in the U.S. Tax Code,” said the DOGE account. “Today, there are more than 16 million words. Because of this complexity, Americans collectively spend 6.5 billion hours preparing and filing their taxes each year. This must be simplified.”
However, that doesn’t necessarily mean the Trump administration will preserve the IRS Direct File program after next tax season.
“I would anticipate that it goes forward this coming year, in other words, for the 2024 filing season,” said former Intuit CEO Bill Harris, who developed TurboTax when he was president of ChipSoft, which Intuit acquired in 1993. “I’m sure it’s already all baked. The following year, it could just go away. I would bet more that it just withers on the vine. But I think that’s too bad too because one of the things that the IRS really needs to do is take a customer-focused view.”
He acknowledged, however, that Intuit and other tax software companies have been fighting to end the Direct File program.
“Some people, for instance, at the tax preparation software companies, are against it because they perceive it to be competition,” said Harris, who is now founding CEO of Evergreen Money, a development-stage financial services company. “I really don’t think that that’s the proper view. I think the proper view is that for the kinds of simple returns that they’re capable of handling, I think that’s great, and people should have a free mechanism to do that. And it’s also clear that the government will never be in a position to build something that’s terribly sophisticated. And so even for people with moderately complex taxes, they’re going to need something like professionally and privately built tax software. I see this as an opportunity for an excellent private-public partnership, so I hope the IRS continues with it, and I hope that the private companies embrace it.”
After leaving Intuit in 1999, Harris was co-founding CEO of PayPal, which merged Elon Musk’s X.com with Peter Thiel’s Confinity. Accounting Today asked Harris what he thought of the prospects for Musk’s DOGE to find enough savings from cutting government waste to make up for the lost tax revenue from the extension of the Tax Cuts and Jobs Act and the various tax exemptions proposed by Trump on tip income, overtime pay, Social Security benefits and more.
“Nothing to do with Elon Musk, although I know he’s obviously going to be a part of this, but absent any personalities, it’s remarkably hard even for a Republican administration to rein in costs,” Harris replied. “Certainly the initial Trump administration did not do that. They expanded expenditures. There was a big runup in the debt, particularly as the party has moved from traditional Republican notions of fiscal conservatism to essentially populism.”
Cutting the IRS enforcement budget could contribute to the national debt, as the Treasury Department warned, and could have a spillover effect leading to slowdowns in taxpayer service and technology improvements as well.
“You could see monies being taken away from enforcement, but probably continuing the customer service modernization portion of the IRS,” said Tax Guard CEO Hansen Rada. “The IRS requires a lot of people because the Tax Code is so complicated, and that’s really Congress’s fault. It’s not the IRS’s fault. It’s almost like yelling at the policeman when he pulls you over for speeding. If you want the speed limit raised, you go to your local representatives, you don’t yell at the policemen, and the IRS is just the enforcement arm. Barring any sort of drastic change to simplification of the Code, it’s going to require people, because of deductions and all the other considerations in order to execute that. The vast majority of returns are simple returns, W-2’s, and so this Direct File, or this app that Elon hinted at would be a modernization effort to help the majority of returns, but not the complicated ones, and that still would require people.”
ConvergenceCoaching, Bellevue, announced the 2023-24 graduates of the 2024 Fall Transformational Leadership Program: Alyssa Aviles, CAAS manager, Boos and Associates; Anita Ison, audit senior manager, Kruggel Lawton CPA; Anita Unger, senior tax manager, Beers, Hamerman, Cohen & Burger; Cara Gray, manager, WilkinGuttenplan; Caroline Ready, marketing and sales coordinator, ConvergenceCoaching; Carson Messenger, tax senior manager, MHCS; Chris Saray, audit manager, WilkinGuttenplan; Cristine Torrefranca, senior manager, Saltmarsh Cleaveland & Gund; Dahlia Garcia, partner, Beasley, Mitchell & Co.; Hans Nielsen, senior manager, Smith + Howard; Holly Connolly, CFO, outsourced accounting, Copeland Buhl; Jon Priebe, tax senior manager, Beers, Hamerman, Cohen & Burger; Karen Lewis, director, KSM CPAs & Advisors; Lisa Walther, tax manager, Weinstein Spira; Megan Stambaugh, audit manager, Grimbleby Coleman; Phil Giguere, partner, MP P.C.; Robert Dowdle, A&A senior manager, VSH CPAs; Slayton Gilmore, tax senior manager, Smith + Howard; Stacey Craig, director, tax services, Saltmarsh, Cleaveland & Gund; Stephen Wray, audit manager, Grimbleby Coleman; and Tim Provost, partner, MP P.C.
The accounting profession faces a dual challenge: a persistent talent shortage and an urgent need to adapt to a rapidly changing business world.
As businesses struggle to fill critical roles, automation and artificial intelligence are increasingly viewed as answers to these challenges. These technologies have immense promise, particularly for automating repetitive and time-consuming operations, but they also raise serious concerns about their impact on the profession.
Automation is ideal for handling many tedious activities that have historically defined accounting work. Technology can greatly minimize the manual burden in areas such as invoice processing and account reconciliation. Robotic process automation, for example, can handle routine bookkeeping duties, freeing up accountants’ time to focus on higher-value activities such as strategic planning and advisory services.
Similarly, advanced AI systems can examine huge data sets, detecting abnormalities or patterns that would typically require hours of human work. In sectors such as fraud prevention, AI’s capacity to detect anomalous transactions in real time can help accountants examine concerns more effectively. These efficiencies are game changers for businesses dealing with talent shortages, allowing smaller teams to accomplish more with less.
However, over-reliance on automation carries concerns that cannot be overlooked. One major concern is the possible lack of human oversight. While machines are great at processing and analyzing data, they lack the contextual understanding and ethical judgment human accountants bring to their jobs. Recent occurrences, such as the
The key to fully realizing the benefits of automation while maintaining the integrity of the accounting industry is to strike a cautious balance. Automation should be considered as a tool that complements, not replaces, human skill. By automating mundane and repetitive processes, technology allows accountants to focus on areas where their judgment, creativity and strategic insight are required, such as complicated problem-solving and ethical decision-making. Instead of removing entry-level positions, businesses could rethink them with automated operations and opportunities for hands-on learning. This guarantees that emerging professionals continue to develop critical skills while taking advantage of automation’s benefits.
At the same time, businesses must prioritize continual skill development to keep accountants at the forefront of technology innovations. This includes providing them with skills in areas like business/accounting analytics and AI tools, ensuring they can not only utilize these technologies effectively but also analyze and act on the insights they provide. By empowering accountants in this way, automation complements rather than replaces humans.
Instead of perceiving automation as a threat, the accounting profession should see it as an opportunity to rethink its value proposition. Accounting may be elevated from a numbers-driven discipline to one that provides strategic insights and demonstrable business effects through thoughtful integration of technology. Educational institutions play an important part in this process. By educating students on navigating and leveraging technology while encouraging critical thinking, they may prepare the next generation of accountants for a world in which technology and human expertise coexist.
Automation and AI have the ability to address the accounting profession’s skills shortages, but their greatest value resides in allowing accountants to focus on the creative and strategic aspects of their work. By investing in a balanced approach, the profession may ensure that technology improves its skills while not eroding its core strengths. The future of accounting does not involve machines replacing humans but rather humans and machines collaborating to achieve more.
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