Consolidation Ahead for Accounting Firms

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Stricter regulations and slower economic growth continue to impact America's accounting industry, causing many firms, especially mid-sized firms, to see mergers and acquisitions in the future, according to a new survey from IBISWorld, leading publishers of business research and analysis.


“I do believe we will continue to see consolidation in mid-sized accounting firms for a number of reasons,” W.M. “Mack” Lawhon, Managing Partner and CEO of Weaver and Tidwell LLP in Ft. Worth, Texas, told AccountingWEB. “One is the desire to have geographic coverage in other strategic markets for regional firms. Another issue that will drive accounting firm mergers is talent acquisition in order to broaden the Firm's competitive advantage, either by service line or industry. Many mid-sized firms are facing succession issues and a merger up may be the best way of dealing with the issues. [I]ncreased size can bring [additional resources] in Information systems infrastructure, more sophisticated practice growth techniques and moving the firm to a new corporate culture of discipline and accountability.”

Consolidation isn't all the future holds, according to IBISWorld. Demand for advisory work connected to corporate mergers and acquisitions is declining, along with decreased demand for tax advice, as a result of the economic slowdown occurring throughout the U.S. this year. Slower growth, paired with efforts by Congress and government regulators to separate accounting firms and their consulting businesses, is causing many mid-sized firms to consider mergers in order to compete with larger firms for a share of the public company audit market. Larger firms are likely to seek more international growth opportunities in order to increase revenue and profit growth potential. Despite some firms expansion further into the international market, the ongoing transborder outsourcing of basic accounting functions will also continue to impact the industry, IBISWorld says.

“Over the period of 2010, it is expected that the average annual rate of growth in industry value added will be around 3.1 percent, which is slightly above the forecast for real GDP of 2.9 percent over the same period, with subdued growth in both revenues and profits likely to occur,” IBISWorld reports.

The news isn't all bad. Audit-related work and revenues tied to Sarbanes-Oxley legislation are expected to continue to escalate, especially among U.S. clients, and client investment in China is also expected to grow strongly, providing two bright spots in an otherwise less than rosy outlook for the future. Growth for 2006 is expected to be only 1.6 percent or $106.0 billion, however, growth is projected to increase to 4.7 percent or $111.0 in 2007, giving firms a reason for confidence.

“As the market economy slows down, professional service firms will slow incrementally as well,” Lawhon adds. “This speaks to new business for CPA [certified public accounting] firms, but what we do not believe will slow down is the shift of larger private clients away from the national firms and on to the larger regional and local firms. Due to the scarcity of resources, larger regional and local firms may have clients who migrate to smaller local firms and so on and so on.”

IBISWorld estimates that in 2005 the “Accounting, Tax Preparation, Bookkeeping and Payroll Services” industry had revenues of $104.8 billion, generated by an estimated total of 454,631 establishments. The sector was estimated to have employed 1,848,251 Americans last year, paying wages totaling approximately $49 billion. The industry value added for 2005 was estimated to be $69.9 billion.

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