PCPS Survey of Top 5 Practice Management Issues

November 2005

Background
Since 1997 the PCPS Survey of Top 5 Practice Management Issues (formerly known as the Management of an Accounting Practice (MAP) Top Five Issues Survey) has polled managing partners of CPA firms to ask them to rank the most important practice management challenges currently facing their firms. PCPS provided to its vendor, IntelliSurvey, a list of 35,600 members who were invited to the survey.

Approximately 5,200 of these emails bounced, for a 15% bounce rate.

865 respondents completed the survey, for a 3% completion rate.

Survey Methodology
Respondents were asked to rate a series of factors along a five-point importance scale. These factors were organized by subject areas -Regulatory Environment, Personnel and Staffing, Technical Skills/Standards, Marketing, and Firm Administration and, new for 2005, Partnership. At the end of the survey, respondents were asked to rank the 5 most important issues for their firm out of a list of those for which they indicated a high level of importance earlier in the survey. This design enabled the survey to identify both the issues that are of concern to practitioners, and the ones that matter most.

Survey Methodology
In past years, respondents had a significantly different firm-size profile. A larger proportion of smaller firms completed the survey in 2005 than in its last iteration in 2003. Firm size is a major importance differentiator -- and thus sample weighting was deployed to ensure that differences compared to prior years would not be noted due to variances in the sample. Most of the statistics presented in the remainder of this report are weighted at the proportions observed in 2003; those not weighted are noted.

Executive Summary
The five most important issues named by respondents are listed below. Note that the issues are listed in order of final rankings. Finding and Retaining Qualified Staff is the most important issue, with 18 percent ranking it the most important, and one in three ranking it one of the five most important.
% Ranking Issue Finding and retaining qualified staff Keeping up with changes and complexity of tax laws Seasonality/workload compression Client retention Top Issue 18.0% 7.6% 5.6% 6.7% In Top 5 36.9% 28.6% 24.3% 23.3%

New standards' effect on smaller firms & businesses

4.2%

20.9%

Previous Top 5s
2003 1. Finding & retaining qualified staff 2. Succession planning 3. Marketing/practice growth 4. Seasonality/workload compression 5. Fee pressures/ pricing of services 2002 1. Finding & retaining qualified staff 2. Marketing/practice growth 3. Seasonality/workload compression 4. Effect of new regulatory environment on local/regional firms 5. Succession planning

Executive Summary
Issues related to the "Regulatory Environment" had particularly high ratings on the non-ranked importance scale. The three most highly rated non-ranked "importance" scores were New Regulations & Standards Effects on Smaller Firms, Public Perception of the Value of a CPA License, and Public Perception of the Ethics within Our Profession, with with 55%, 50%, and 46% of respondents respectively assigning these issues the highest importance scale available.

Executive Summary
However, these issues were not as highly rated as others in the final ranking process -- for example, New Standards Effects was assigned the highest importance scale by 55% of firms, more than any other issue. This issue was ranked fifth in the final ranking. Additional comments about other areas are included on the slides for each subject area.

Executive Summary
Data analysis reveals a high degree of difference between the importance rankings of larger firms and smaller ones. Statistically valid differences were observed in 17 of the top 20 issues ranked (at a 95% confidence interval). For example, 44.1% of sole practitioners assigned Keeping up with Technology the highest importance rating. However, as firm size increases, the importance assigned to this issue declines; 41.5% of firms with 2-5 CPAs, 32.7% of firms with 6-20 CPAs, and just 17.7% of 21+ CPA firms did so. These striking disparities are observed for many different issues.

The Six Subject Areas

Regulatory Environment Personnel and Staffing Technical Skills/Standards Marketing Firm Administration Partnership (new in 2005)

Regulatory Environment
New standards' effect on smaller firms Public perception of the value of the CPA Public perception of CPA ethics Enforcement of ethics across the profession Independence - limitations on services Private company GAAP State initiatives to duplicate/extend SOX Client privacy issues Fraud related responsibility & expectations Practicing across state lines Peer review and transparency
0 One -- Not Important Tw o 9% 20 Three 10% 9% 4% 7% 9% 15% 32% 27% 19% 37% 40 Four 60 29% 11% 14% 18% 22% 23% 22% 28% 31% 32% 32% 36% 35% 34% 23% 30% 40% 22% 34% 80 55% 49% 45% 37% 31% 30% 25% 24% 21% 15% 15% 100

Five -- Extremely Important

Regulatory Environment
New Standards Effect on Smaller Firms is the most important issue in this category and also ranked in the top 5. Only Practicing Across State Lines and State Initiatives to Duplicate/Extend SOX scored less than 4 or 5 in importance by the majority of participants.

Personnel & Staffing

Finding and retaining qualified staff (at all levels) Attracting students to public accounting in local firms 6% Keeping professional staff in the profession
6% 12% 23% 23% 25% 28% 26% 28% 30% 31% 37% 28% 20 Two Three 40 Four 60 26% 31% 35% 39% 38% 39% 37% 37% 33% 27% 29% 80 54% 31% 31% 29% 22% 21% 21% 20% 17% 11% 10% 4% 100

Work/life balance initiatives 3%4% Training partners & staff (non-technical, i.e. computers, etc.) 5% 7% Establishing accountability for performance at the staff level 5% 8% Compensating staff/using bonus and incentive programs 6% 7% Effective utilization & management of human resources 5% 9% Staff becoming CPAs Mentoring & career coaching Outsourcing
0 One -- Not Important 9% 10% 10%

16% 28%

Five -- Extremely Important

Personnel & Staffing

Finding & Retaining Qualified Staff remains the #1 issue, with 76% rating it a four or five, followed by Work/Life Balance Initiatives. Fewer than 20% of firms believe that any of the top 9 issues listed in the category are slightly or not important.

Significant differences between small and large firms understandably appear within many of these issues, due to the distinct staffing needs of sole practitioners/ smaller firms vs. medium to large sized firms.

Technical Skills/Standards
Keeping up with the tax laws Keeping up with standards Keeping up with technology Training partners/staff (technical) Access to specialized training
0 One -- Not Important Tw o 10% 12% 15% 6% 28% 29% 20 Three 40 Four 32% 39% 46% 37% 41% 60 80 56% 47% 38% 25% 20% 100

Five -- Extremely Important

Keeping Up with the Changes & Complexity of the Tax Laws ranked #2 in the top 5 list. Each issue was ranked very or extremely important by the majority of firms. Very few firms ranked any of the issues as minimally important.

Technical Skills/Standards
Smaller firms assigned each of these issues greater importance. For example, 44.1% of sole practitioners assigned Keeping Up with Technology the highest importance rating. 41.5% of firms with 2-5 CPAs did so, 32.7% of firms with 6-20 CPAs, and just 17.7% of 21+ CPA firms.

Marketing
Marketing/practice growth Selling expanded services to present clients Fee pressure/pricing of services Bring in new name clients Competition (inc. competition from non-CPA organizations) Marketing and sales training for partners Marketing non-attest services to small public companies Accountability for marketing and sales activities Alliances with other CPA firms Marketing and sales training for staff Developing int'l relationships with firms to serve clients Acquiring SOX-related opportunities
0 One -- Not Important Two 13% 14% 15% 9% 8% 15% 32% 20% 20% 18% 48% 39% 20 Three 40 Four 25% 60 8% 8% 9% 10% 16% 14% 23% 26% 29% 28% 34% 33% 31% 17% 35% 36% 36% 22% 22% 41% 40% 37% 34% 33% 27% 28% 21% 24% 22% 23% 18% 23% 80 24% 22% 21% 19% 17% 16% 12% 9% 8% 8% 8% 8% 10% 100

Choosing and developing a niche or specialization 6% 10%

Five -- Extremely Important

Marketing
Small firms are significantly more likely to place higher importance on competition. Nearly half of sole practitioners say it's very or extremely important; just 37% of 21+ CPA firms do. Generally, importance ratings are somewhat lower in this category than other subject areas.

Firms see Developing International Opportunities and Acquiring SOX-Related Opportunities as least important by a significant margin.

Firm Administration
Seasonality/workload compression Client retention Professional liability/risk management Investment in technology Developing/implementing strategic/long-range plan Client acceptance Learning/sharing best practices with other firms Time and billing systems Forming strategic/practice alliances Merging your firm/acquiring a firm
0 One -- Not Important Two 6% 9% 7% 7% 9% 10% 20% 20 Three 11% 19% 19% 20% 40 Four 5% 17% 20% 24% 29% 29% 35% 34% 36% 36% 32% 60 36% 36% 42% 43% 39% 37% 32% 25% 26% 20% 80 41% 37% 27% 20% 19% 19% 16% 12% 9% 8% 100

Five -- Extremely Important

Firm Administration
Seasonality/Workload Compression does not vary much by firm size and is #3 in the top issues. Large firms are significantly more likely to place highest importance on Developing/Implementing Strategic/Long-Range Plan, while smaller firms place a much higher premium on Client Acceptance and Client Retention. These last two issues were new additions to the 2005 survey. Client retention ranked #4 in the top 5.

Partnership
Developing a succession plan Partner accountability Partner compensation Partner unity Funding partner retirement Identifying and developing new partners Partner agreements
0 One -- Not Important Two 8% 6% 13% 13% 19% 13% 16% 17% 6% 10% 10% 20 Three 5% 6% 19% 18% 18% 7% 19% 22% 21% 29% 40 Four 60 35% 33% 35% 27% 33% 29% 27% 80 32% 30% 29% 29% 26% 23% 18% 100

Five -- Extremely Important

Developing A Succession Plan moved from the top 5 to the #9 spot this year. Understandably, nearly every Partnership issue is significantly more important to larger firms than to smaller ones.

Ranking
Respondents were shown a list of the attributes that were marked with an importance rating of 4 or 5 (the top two ratings). They were asked to indicate which of these selections was the most important, second most important, up to the fifth most important. This structure was designed to enable respondents to prioritize the most critical issues they see as facing the profession.

On the following charts, the red bar represents the proportion of firms ranking the issue most important; the composite of the red and green bars represents all firms ranking the issue among the top 5.

Issues 1 - 10
Finding and retaining qualified staff (at all levels) Keeping up with changes and complexity of the tax laws Seasonality/workload compression Client retention New regulations' effect on smaller firms and businesses Work/life balance initiatives Keeping up with standards Marketing/practice growth Developing a succession plan Keeping up with technology 0%

Most Important Issue Top 5 Issue 5% 10% 15% 20% 25% 30% 35% 40%

Issues 1 - 10
Almost 2/3 of large firms (21+ CPAs) include Finding and Retaining Staff among their "Top 5" issues. Only 30% of firms with 2-5 CPAs do so. It is the most important issue for 43% of firms with 11-20 CPAs, and for 27% of the firms with 21+ CPAs. Almost half of sole practitioners, and one third of small firms (2-5 CPAs) include Keeping up with Changes in the Tax Laws among their top 5 issues. Fewer than 1 in 15 CPAs from large firms (21+ CPAs) so indicate.

Issues 1 - 10
Seasonality/Workload Compression and Work/Life Balance are both found to be more important among smaller firms. Developing a Succession Plan is particularly important among larger firms. In general, small firms have a wider breadth of "most important" concerns, while larger firms are predominantly focused on staffing.

Issues 11-30
Fee pressure/pricing of services Private Company GAAP Bring in new name clients Public perception of the value of the CPA Professional liability/risk management Identifying and developing new partners Partner compensation Developing/implementing strategic/long-range plan Choosing and developing a niche or specialization Keeping professional staff in the profession Funding partner retirement Independence - limitations on services Selling expanded services to present clients Investment in technology Partner accountability Compensating staff/using bonus and incentive programs Enforcement of ethics across profession Public perception of ethics within our profession Attracting students to public accounting/local firms Effective utilization & management of human resources 0%

Most Important Issue Top 5 Issue 2% 4% 6% 8% 10% 12% 14%

Issues 11 - 30
Professional image issues, such as Public Perception of the Value of the CPA and Public Perception of Ethics are significantly more important to sole practitioners and small firms. The battery of partnership-related issues, particularly Identifying and Developing New Partners, Partner Accountability, and Partner Unity (on next page), are especially important for larger firms.

Bottom 27 Issues
Partner unity Establishing accountability for performance at the staff level Merging your firm/acquiring a firm Fraud related responsibility and expectations State level initiatives to duplicate or extend SOX provisions Competition (including from non-CPA organizations) Practicing across state lines Mentoring & career coaching Learning/sharing best practices with other firms Peer review and transparency Training partners &staff (non-technical, i.e. computers, etc.) Time and billing systems Access to training for specialized skills Alliances with other CPA firms Client acceptance Forming strategic/practice alliances Marketing and sales training for partners Staff becoming CPAs Client privacy issues Training partners &staff (technical) at a 40 hr/yr min Partner agreements Marketing non-attest services to small public companies Marketing and sales training for staff Acquiring SOX-related opportunities Accountability for marketing and sales activities Outsourcing Developing int'l relationships with firms to serve clients 0%

Most Important Issue Top 5 Issue

1%

2%

3%

4%

5%

6%

7%

Bottom 27 Issues
Developing International Relationships and Outsourcing were the least important issues, ranked among the top 5 by less than1% of the respondents.

Firm Size Makes A Difference

Analysis reveals a high degree of difference between the importance rankings of larger firms and smaller ones. Statistically valid differences were observed in 17 of the top 20 issues ranked (at a 95% confidence interval).

Top 5 Overall vs. Sole Practitioner

1. Finding & retaining qualified staff

2. Keeping up with changes and complexity of tax laws

3. Seasonality/ workload compression 4. Client retention

1. Keeping up with changes and complexity of the tax laws 2. Seasonality/ workload compression 3. Marketing/practice growth (tie) Client retention 5. Work/life balance

5. New regulations' effect on smaller firms & businesses

254 respondents not weighted

Top 5 Overall vs. Firms 2 5 CPAs

1. Finding & retaining qualified staff 1. Finding & retaining qualified staff

2. Keeping up with changes and complexity of tax laws

3. Seasonality/ workload compression 4. Client retention

2. Client retention
3. Keeping up with changes & complexity of tax laws

4. Seasonality/ workload compression

5. New regulations' effect on smaller firms & businesses

5. New regulations' effect on smaller firms & businesses

356 respondents not weighted

Top 5 Overall vs. Firms 6 10 CPAs

1. Finding & retaining qualified staff 2. Keeping up with changes and complexity of tax laws 3. Seasonality/ workload compression 4. Client retention 5. New regulations' effect on smaller firms & businesses 110 respondents not weighted 1. Finding & retaining qualified staff 2. Client retention (tie) Developing a succession plan

4. Keeping up with changes and complexity of laws 5. Seasonality/ workload compression (tie)

New regulations' effect on smaller firms & businesses

Top 5 Overall vs. Firms 11 20 CPAs

1. Finding & retaining qualified staff 2. Keeping up with changes and complexity of tax laws 3. Seasonality/ workload compression 4. Client retention 5. New regulations' effect on smaller firms & businesses 72 respondents not weighed
*new in 2005

1. Finding & retaining qualified staff 2. Partner unity* 3. Client retention (tie) Developing a succession plan Partner accountability* Independence limitations on services*

Top 5 Overall vs. Firms 21+ CPAs

1. Finding & retaining qualified staff 1. Finding & retaining qualified staff

2. Keeping up with changes and complexity of tax laws

3. Seasonality/ workload compression 4. Client retention

2. Partner unity
3. Marketing/practice growth (tie) Developing a succession plan Keeping professional staff in the profession

5. New regulations' effect on smaller firms & businesses 62 respondents not weighted

Survey Vendor

Jonathan Ephraim Managing Director jonathan@intellisurvey.com 310.392.3907