Results of the 2019 ICAS Practice Survey revealed
Robert Outram analyses the results of the ICAS Practice Survey 2019
An exclusive survey of CA firms carried out for ICAS has revealed significant differences in the way practices are responding to the challenges of “technology, trust and talent”.
The three themes, highlighted in the CA Agenda initiative, are also apparent in the findings of the 2019 Practice Survey, carried out in association with software provider Practice Engine and based on detailed and confidential responses from 137 CA practices throughout the UK.
The survey covered financial performance, recruitment and human resources issues, the firms’ relationship with technology and the issue of trust and ethics.
One of the key questions concerned the firms’ most important challenges. Dealing with compliance and regulation came at the top of the list, followed by “balancing the volume of work throughout the year” and “keeping up to date with accounting and auditing standards”.
In contrast, the question of practice structure and ownership was at the bottom of the list of pressing concerns. Interestingly, while “attracting the type of clients you want” came fifth, “retaining quality clients” was only twelfth, implying that acquisition is seen as the big challenge.
Practices in the survey ranged from sole practitioners to firms with 16 principals or more, based throughout the UK.
Financial metrics show a wide variation. For example, hourly charge-out rates for a partner ranged from £35 to £400.
Average rates for partners and staff generally go up with the size of the firm, although it is interesting to note that the firms in this survey with more than six, but fewer than 16, principals charged higher rates than even larger firms.
There is significant variance in fee income per partner throughout the UK. The average is just over £191,000. Sole practitioners average just over £171,000 per head while firms with 16-plus partners bring in on average a little under £500,000 and four to six partner firms average £250,000 per partner.
Regionally, London leads the pack with an average of £640,000 per partner while Edinburgh performs worst at £103,000. Central Scotland and Glasgow and the West average around £135,000 per partner and the north and south of Scotland average about £180,000.
The average profit per partner was £74,000, which is much lower than previous ICAS Practice Surveys have shown.
Partners in two to three partner firms report an average profit per partner of £56,000, compared to sole practitioners on £66,000, and four to six partner firms on £81,000. Those in seven-plus partner firms fared best with average profits per partner in excess of £125,000.
Geographically, profits were lowest in Edinburgh (average £36,000 per partner) with the rest of Scotland earning around £57,000. Partners in London recorded an impressive £270,000 in profits, with those in the rest of England earning around the overall UK average of £72,000.
Historically, recovering fees in a timely way has been a challenge for professional services firms. Debtor control within practices appears to have improved considerably since the last Practice Survey in 2014.
At that time, the average across all practices was in the region of 70 debtor days while the current survey indicates almost 80% of respondents had an average of less than 60 days.
Typically, smaller practices are better at collecting debt, or at least not allowing debt to build. The trend within the profession to move to fixed-fee models, monthly billing and use of direct debit or standing orders appears to have contributed to the reduction.
More than six out of 10 firms in this survey report an average fee per client of £1,500 or less, and only one in 20 say their clients account for £20,000 or more in fees each, on average.
With the pace of change in information technology faster than it has ever been, firms cannot afford to ignore it, but some practices are a lot further along on their IT journey than others.
While 14% say their tech spend amounts to 10% or more of the firm’s turnover, slightly more (16%) are spending less than 2% of turnover on IT. Almost no respondents expect to spend less over the next two years on IT, however, and 18% expect to be spending “significantly more than now”.
The majority of firms have some way to progress to cloud-based software, with only 9% entirely on the cloud. Nearly half said they operated software that was entirely on-premises. Worryingly, 7% still consider that pen, paper and spreadsheets are appropriate tools in 2019.
Paul Chipperfield, Managing Director UK/EMEA with Practice Engine, argued that no firm can ignore the power of the cloud.
He added: “It requires a complete change in mindset and a readiness to accept higher revenue costs rather than more capital expenditure.
“Those who do so, however, will gain in terms of their ability to change and adapt, as well as in terms of the benefits of scale.”
David Menzies CA, Director of Practice, ICAS, said: “The profession appears to be split on the effect of technology in the future with around 40% anticipating it to change their way of working, almost 50% believing they have already made the changes required and 10% saying they will only change if they have to.
“With 60% of the profession believing change has already happened and will not continue or that they will be heavily resistant to change there is a significant risk of heads being buried in the sand.”
London-based firms indicate that they have adopted technology earlier – and feel they have less to do – while those in the north of Scotland recognise significant change will be necessary.
Small firms (one to three principals) look set to change only when they must, while a significant proportion of larger firms anticipate that their working practices will change considerably.
Liz Smith, Business Development Director with IT consultancy Lugo, said: “A surprising number of practices think technology will not change the way they do things over the next two years.
Perhaps they are not aware of the changes that are available: simple things like ISDN being decommissioned will change communications and the way firms use them.
“We will also see a massive move away from email for internal communication and adoption of things like MS Teams and Slack.
“These communication platforms could also be used to collaborate with clients.”
Meanwhile, the survey indicates that a significant proportion of businesses that are mandated to enter Making Tax Digital for VAT have not made much progress towards compliance.
As many as 46% of firms report that only 50% (or considerably fewer) of their clients facing MTD requirements are ready for it. This is in stark contrast to the figures being put out by HMRC.
Trust remains an issue, given that 45% of firms believe the public’s trust in the profession has declined in the past two years (around 5% say it has increased).
Nearly 30% of respondents say they have declined to act for, or disengaged from, a client for ethical reasons in the last year; nearly 10% disengaged from more than one client on this basis.
This shows an increasing unwillingness to act for clients who are asking their accountants to breach ethical guidelines.
The most common failures to comply, on the part of clients, concern tax (23%), with data protection (15%) and pension regulations (10%) second and third.
Around six in 10 firms provide regular (at least annual) ethics training for staff, with larger firms more likely to do this.
The firms surveyed see the profession as “ethical” but not enthusiastically so: 29% say it is “highly ethical” and 10% see it as “slightly unethical” or “very unethical”. Perhaps effective ethics training needs to be an even higher priority.
Looking at staff costs as a percentage of turnover, there is a suggestion that two to three partner firms have reduced staff costs; a third of firms of that size have staff costs of less than 25% of turnover.
Coupled with a lower average fee income per partner, this may suggest that in smaller firms the principals are doing a lot of hands-on work themselves.
Conversely, the largest firms appear to be facing increasingly higher staff costs with several having a staff bill in excess of 50% of turnover. This could reflect an increased resourcing of business support services such as HR, marketing, IT, business development and compliance.
Has the “war for talent” returned?
Maybe not: almost 60% of respondents say they “rarely recruit” and, of those that do, 60% indicate “some difficulty” in hiring but normally manage to do so given time.
Only 15% say recruiting good people is “a real problem”.
Regionally, 30% of respondents in Glasgow and 20% of respondents in the north of Scotland indicate that recruiting staff is difficult.
The hardest categories in which to recruit are “qualified staff” and “part-qualified staff”; these are seen as harder than “partner/manager” level hires.
Most firms are apparently having little trouble recruiting admin/support staff or trainees.
Firms are typically looking for staff with cloud app knowledge and experience although processing staff for bookkeeping and payroll are also in strong demand.
This indicates that firms are not using technology to allow the client to absorb some of the low-value processing while the adviser concentrates on value-added services.
Firm culture is one of the factors that can help in recruitment. The survey asked respondents to pick the top five characteristics that defined their firm. The most popular choices were:
- “Professional” (71%)
- “Flexible working” (56%)
- “Supportive” (41%)
- “Ethical” (40%)
- “Busy” (35%)
Interestingly, among the less popular terms were “modern” (18%), “traditional” (16%) and “forward thinking” (19%).