MEDIUM-SIZED ACCOUNTING FIRMS – CHALLENGES AND OPPORTUNITIES
Written by Yehuda ZAMIR, Managing Partner at Shimony Certified Public Accountant (Israel)
March 2015
Medium-sized accounting firms (MSF), those with 10-50 employees, face a number of challenges that are unique to
their size.
On the one hand, an MSF cannot be run like a small firm. The MSF must carry the fixed costs of professional
administrative services and various forms of professional insurance. The firm has to create opportunities for career
paths for its employees in order to retain talented workers, maintain their interest in the job and expose them to a
spectrum of areas in the field of accountancy. The firm must also accumulate sufficient financial reserves to allow it to
take on larger clients with regard to learning, implementation, handover, etc.
On the other hand, the firm is not big enough to maintain designated departments for auditing services, such as a tax
department or a professional department, and cannot take upon itself the high overheads for marketing, professional
seminars or the distribution of professional material on a regular basis.
Clients, for their part, know that a small firm is no longer enough for them, and a big firm is still too expensive and
cumbersome but nevertheless they expect the MSF to provide all the necessary services.
The employees of the MSF are also a factor in this complex situation. They look at their colleagues in the big firms and
know that they will probably never be able to work with substantial clients, such as banks, insurance companies, big
hi-tech companies, international chains, etc. They pressure the partners to provide them with work that is professional
and challenging in order to maintain their professional standards and their interest. The employees also know that
should they wish to leave, the partners will be less able to assist them in finding other opportunities than the partners
of a big firm.
The MSF must compensate for all these shortcomings in order to maintain a professional skilled team that is able to
deal with potential challenges.
In Israel, the market for the auditing of public companies is dominated almost entirely by five big international firms:
EY, KPMG, PWC, Deloitte and BDO. In order for the MSF to become an auditor for a public company, it must
demonstrate long-term, up-to-date, professional abilities, in addition to offering competitive prices and bearing the
high insurance costs. The entry bar into this "club" is so high that most MFSs simply concede this slice of the market to
the big firms.
Israel is now known as the "Start-Up Nation" and therefore one might expect that many of the hundreds of Israeli
start-up companies would be serviced by MFSs. In actual fact, in this area too there is a decisive presence of the big
firms and the majority of the investors (especially the big international funds that finance these start-ups) insist that
an accountant from one of the big firms sign off as the auditor of the financial statements. They believe that the
signature of one of the big firms ensures that the financial statements are correct and professional and that the future
entry of additional investors, an IPO or an exit will proceed more "smoothly" if such a signature appears on the
financial statements.
The small firms who are not always obliged to adhere to the stringent standards of auditing and documentation, and
who apply their own judgment as to the scope of the audit (without dependence on long and complicated check lists)
– these firms too, try to "eat away" at the business of the MSF, with their main advantage being their lower fee for
accounting services.
So how, nevertheless, does a medium-sized office manage to maintain its status and existence?
1. The most important thing is the spread and variety of its professional services. There are certain services that
the small firms consider "too big", whilst the big firms do not make these services the focus of their work. The
entry of the MSF into these areas is a natural progression and allows for specialization and professionalization
over time. These areas include:
(a) Payroll processing for senior employees in big companies. This niche demands a certain amount of
professionalism and discretion whilst giving personal attention to all the senior employees being taken
care of by the firm. Big companies are willing to generously compensate those who deal with this
sensitive area which requires a high degree of personal trust. The gain that comes from working so closely
with such senior employees comes into play when these people resign to establish their own company or
join another big company. Generally they are not familiar with any other accountant apart from the one
who has worked with them on their personal compensation and they hire him to work with them in their
new position.
Another advantage is to be able to boast that such an important client appears on the firm's client list,
even though the service provided to such a client may have been quite modest.
(b) Preparation of financial statements for public companies. An auditor is forbidden to be involved in the
preparation of the financial statements. He is only permitted to audit them. However, a considerable
number of public companies do not have the ability to prepare their financial statements independently
according to the IFRS and the SEC regulations.
It is exactly into this niche that the MSF can fit, as it is big enough to offer professional services but small
enough to compete with the big firms in the provision of auditing services.
The preparation of financial statements for a public company has an additional added value and that is the
good relations fostered between the MSF and the various departments of the big firm which is carrying
out the audit for that same public company.
(c) CFO/Bookkeeping/Accounting services for foreign investors. These services, when provided to local
companies, constitute a basic and important part of the MSF's income (as does the classic audit), but
competition with other firms does not allow for a high profit margin. Providing these same services to an
international company, one that is used to more stringent standards of reporting and scheduling creates
higher remuneration for the firm and more interesting work for its staff.
2. Another important matter is the cultivation of good relations with the big firms. This is a good example of the
well-known expression: "if you can't beat them, join them". It is very important to maintain congenial working
and personal relations with the key people in the big firms so that they will be happy to refer work to the MFS
that they are unable to perform themselves, either due to reasons of independence or to internal
organizational constraints. This is true for the preparation of financial statements and the provision of
accounting services such as CFO/bookkeeping for international companies.
Israel is a country that attracts foreign investment and therefore international companies that come here are
in need of, excellent professional service for their monthly financial reporting. They are not familiar with any
local firms and therefore they turn to the big, international accounting firm with whom they work for a
referral. The Israeli branch of the international accounting firm will refer their client to an MSF whom they
know will be able to provide high-quality accounting/CFO/bookkeeping services. This way the client will be
satisfied and the big firm will be able to reduce its auditing hours. It is important to be “on the radar” of the
key people in the big firms so that when such an opportunity arises, the MSF won't miss out. Of course, the
MSF must be prepared professionally and administratively for such an opportunity so that it will be able to
provide these services quickly and without wasting time on reorganization.
3. Relations with government institutions – government bodies, municipalities, institutions, courts, etc. All these
bodies are in need of accounting services from time to time and the fostering of good relations with them will
most likely lead to other connections. It is enough for a certain judge to be impressed with the professional
and independent work of an accountant in one case, to prefer to engage this same firm as an "expert opinion"
in future cases. This is also true for bodies such as the National Insurance Institute, municipalities and
government offices.
4. Cultivation of "team spirit" in the office. Big accounting firms employ hundreds of workers but most of them
do not stay for a long time. Small accounting firms employ a minimal number of staff who is well aware of
their limited opportunities for professional advancement. It is an ongoing challenge for an MSF to maintain a
large number of employees at a high level of professionalism and -satisfaction. The firm's managers must
develop a feeling of "team spirit" amongst employees that is accompanied by ongoing traditions such as
annual bonuses, annual trips for employees and their families, birthday celebrations, etc. All this, of course, is
in addition to providing a varied workload and worker mobility in the different professional tasks: due
diligence, taxation, classic auditing, internal auditing, CFO/bookkeeping work, economic checks, etc.
Employees need to feel that they have job security (something not always attained at big or small firms),
professional satisfaction and a feeling of belonging to the firm.
To conclude, despite the huge challenges faced by the medium-sized firm in the face of growing competition from
both big and small firms, professional and meticulous management, alongside the realization of the full potential
inherent in a medium-sized firm can create a positive and rewarding work experience for the firm's partners as well as
for the employees.