Industry Trend Report on Accounting Services - Coursework Example

Memorandum January 20, Transmittal for Industry Trend Report on Accounting Services In response to your request, I have prepared and analyzed the report on trends in the accounting Services industry. I am pleased to present the enclosed report, which outlines, describes and summarizes major problems and opportunities as well as present trend with possible historical perspectives and likely future trends of the industry. I compiled this report using library and internet information as well as results from a single interview conducted for the purpose of this report. Feel free to contact me in case you may want to discuss the trend report or need any additional information. Enclosed Report NAME COURSE INSTRUCTOR DATE ACCOUNTING SERVICES INDUSTRY TREND REPORT Table of Contents MEMO 1 TITLE PAGE 2 EXECUTIVE SUMMARY 5 DESCRIPTION OF INDUSTRY 6 Competitive Landscape 6 Product, Operations, and Technology 6 Sales and Marketing 7 Financial Regulation 8 International Insights 9 Industry Growth Rating 10 PRESENT TRENDS 11 Quarterly industry Update 11 Industry Forecast 13 Industry Drivers 14 Critical Issues 14 Business Challenges 15 LIKELY FUTURE TREND 16 CONCLUSION 18 WORK CITED 19 Appendix 1. Interview Questions …………………..……………………………………………………………………………….. 21 LIST OF FIGURES Figure 1 7 Figure 2 13 Figure 3 14 EXECUTIVE SUMMARY Globally, the accounting services industry generates close to $435 billion in revenue. Even though, accounting services are required worldwide, Europe and the US are the two greatest markets due to the concentration of both small and international companies. Accounting services industry is among the fastest growing industries because it is recession-proof, and it keeps getting hotter as a result of increasing influx of companies or businesses that need such a service.The accounting services industry of the USA includes more than 109, 000 companies with a combined revenue of about $94 billion. The revenue is expected to rise at a moderate rate over the next five years. The key growth drivers for this industry are increasing the number of companies requiring accounting services, due diligence and increasing demand for accountability and transparency. The growth rating of the industry is slow. In the last quarter of 2014 the accounting services industry experienced an annual growth rate of 2.4 percent. In the third it grew by 1.3 percent while in the second quarter the accounting services industry experienced the highest annual growth rate of 3 percent. However in the first quarter the accounting services industry experienced the lowest annual growth rate of 1.2 percent. Industry’s critical issues include susceptibility to accounting scandal and high competitive industry. The industry experiences challenges such Vulnerability to regulation, litigation, high cost of service innovation and dependence on large businesses and clients. Finally, its likely future trends include increased focus on client service, technology integration challenges, Digital mobility opportunities, talent management and succession planning and social media as a business tool. INTRODUCTION Accounting services industry consists of firms that are certified and licensed to audit the accounting records of both the private and public organizations. In addition, the firms are required to exhibit compliance with generally accepted accounting practices (GAAPs). This industry has Certified Public Accountants (CPAs) that offer a number of accounting services, for instance, designing accounting systems, auditing accounting records, developing budgets, preparing financial statements as well as providing advice on matters that relate to accounting to their clients. Companies in accounting services industry offer services such as bookkeeping, auditing, tax return preparation and payroll processing. Major firms, which are commonly known as the “Big Four” in the industry, includes Ernst & Young, PricewaterhouseCoopers, Deloitte Touché Tohmatsu and KPMG, and they all have international operations. In addition, there are other leading firms in the industry including US-based Automatic Data Processing (ADP), H&R Block, and Paychex. DESCRIPTION OF INDUSTRY Competitive Landscape The rising demand for accounting services is brought about by the increasing complexity of corporate business, new business formations as well as higher personal income. The profitability of individual firms largely depends on effective marketing and the right mix of accounting services. Small firms can compete efficiently and effectively with large forms as well as other by particularly specializing and offering superior service (ibisworld.com). Larger firms, on the other hand, have advantages in offering wider range of services to large, local and international clients. In addition, they have the necessary resources to serve customers with many locations or branches. The US accounting services industry is fragmented; the 50 biggest US firms account for only less than 50 percent of the total revenue (hoovers.gov). Product, Operations, and Technology “Payroll services account for 25 percent of US industry revenue, tax preparation for 20 percent, and auditing for 15 percent” (ibisworld.com). General accounting as well as tax consulting account for 5 percent each of the industry revenue, bookkeeping accounts for 10 percent. Other services include financial statement review and procedures, training, computerized systems, and management consulting. A good number of accountants have branched into business consulting, accounting-related information technology consulting, and personal financial planning. A substantial number of small firms usually rely heavily on such accountants’ accounting firms for advice. This helps them to follow due diligence thereby making sure that they are accountable and transparent (McKee et al 98). Accounting Services Segmentation by Revenue-Census Bureau Figure 1. Accounting Services Segmentation by Revenue-Census Bureau. Sales and Marketing Typical clients are corporations and small businesses both public and private. Depending on the needs of the customer, provision of services, can be consumer-specialized or provided in whole. Large corporations account for 65 percent of the whole revenue, and the rest is for small businesses, according to the census bureau (ibisworld.com). The prospective and current clients normally contact the nearest office for the services they require. The office then sends officials to the company’s premises to assess the status of the company. The company may also send the necessary details, both financial and non-financial, to the head office of the accounting firm. They then analyze them and send the report back to the company (hoovers.gov). Major types of marketing employed by the accounting and auditing firms include internet ads, newspapers, and magazines. Social media outlets like Twitter and Facebook are also popular ways to reach prospective clients, and build brand loyalty. Customer services operations are very extensive because bad publicity is able to severely damage the reputation of the firms. Companies have invested heavily in internet promotions by developing interactive websites to ensure that their clients’ needs are satisfied, and their queries are well and fully addressed (Cooper, 4). The “Big Four” and other relatively large firms manage electronic data interchange (EDI) systems or restricted-access intranets to facilitate the provision of accounting services to their clients. Other small firms also specialize in online provision of accounting services to their clients. Finance and Regulation Cash flow of the industry has experienced a steady growth over the years. Accounting services industry has recovered from a decline in demand that was caused by weak private investment, falling number of businesses and shrinking corporate budgets. However, the revenue has showed an upward trend since 2011, sustained by rising equity market, economic growth and growing number of new businesses (Cooper, 4). The accounting services industry is highly regulated by international bodies as well as by federal and state government. The government regulation vary with countries, however, for ease of comparison, international regulations are adopted by companies. This ensures uniformity in the reporting for all companies around the globe. Such bodies include the Security and Exchange Commission (SEC), the Governmental Accounting Standards Board (GASB), the Financial Accounting Standards Board (FASB), Internal Revenue Service (IRS), International Accounting Standards Board (IASB), International Auditing and Assurance Standards Board (IAASB), the Public Interest Oversight Board. Such bodies make sure that accounting fraud and scandal like the Enron scandal does not occur again (hoovers.gov). International Insights The global accounting services industry generates more than $435 billion. Worldwide revenue from accounting services industry is expected to exceed $510 billion by 2020, according to Global Industry Analysts (GIA) (ibisworld.com). The USA and the Europe hold the largest share of the industry due to the high concentration of industries in the region. Europe region is the largest consumer of accounting services in the world. It is followed closely by the US region. This is so due to their strict regulations. Latin America and the Asia/Pacific region are growing consumers of accounting services (hoovers.gov). The Asia/Pacific region experiences the fastest growth due to high economic growth. It increases by about 5 percent annually through 2017, according to GIA. International trade has also played a key role in the accounting services industry as many global firms seek such services to enhance their reputation and global image (McKee et al 58). Competition in the accounting services industry is very fierce, and this is able to pressure some CPAs to compete for clients and businesses using price alone. However, this may be a losing proposition because they will have more clients to be able to cover expenses which may then leave the CPAs with little tome per client or business to offer quality services that is able to retain existing businesses and clients, reduce immense pressure to add businesses and clients and generate better margins (hoovers.gov). Furthermore, it leaves CPAs overworked as well as stressed out about the future of the firm (bls.gov). In a bid to address such a challenge, firms that provide accounting services have transitioned from Type 1 services, providing only compliance-related work, for instance, payroll, taxes and general bookkeeping (census.gov), to Type 2 services, those that go beyond only compliance and hence add value to the businesses and clients (ibisworld.com). This has helped in deepening the relationships with existing clients and businesses. In addition, it has made services of such firms (the Big Four) more attractive to the types of businesses and clients most coveted. The rising competition arises from similar service providers that cannibalize key clients. Currently, more firms are offering accounting services due to the response to rebounding demand, particularly from insurance and finance companies. In particular, the fierce competition escalates from the following industries: Management Consulting, Software Publishing, Law Firms, and Payroll and Bookkeeping (ibisworld.com). Consequently, accounting services industry will face numerous challenges in four years to 2018. However, firms will be able to hedge such threats by familiarizing themselves with the competition to gain a competitive advantage. Industry Growth Rating The growth rating of the industry is slow. Risk: vulnerable to manipulation and window dressing of values. The industry needs effective marketing, quality service, and efficient operations. The demand for accounting services is motivated by the need for accountability, transparency and increased regulation (ibisworld.com). PRESENT TRENDS Quarterly Industry Update 12/3/2014 Trend: The consumption of accounting services is high in Europe and the US, where about 65 percent of the total revenue of the industry comes from the region. Although China and other parts of Asia are regarded as a key growth market or region for the industry, consumption of accounting services remain relatively low. Deloitte was named the largest accounting service provider with an income of $32.4 billion (census.gov), according to the survey from International Accounting Bulletin (IAB). The accounting services industry experienced an annual growth rate of 2.4 percent (hoovers.gov). Industry impact: the Big Four are currently seeking growth in the new and emerging markets like Asia and China. 9/10/2014 Trend: slow growth forecast for the industry- demand for accounting services is expected to grow by 1.3 percent in 2015 according to the latest industry forecast from the IAB. Industry impact- due to the fierce competition of the accounting services industry, some firms will have to compete by price alone to offset increasing costs. The firms have to transition to Type 2 services to create revenue growth (ibisworld.com). 6/25/2014 Opportunity: the accounting services industry experienced the highest annual growth rate of 3 percent. The industry has grown by 5 percent over the past five years. This has been necessitated by the increasing accounting frauds that have to be addressed. Industry impact- accounting services firms can reach new emerging markets and create new revenue streams by taking advantage of increasing demand for accounting services (McKee et al 58). 3/18/2014 The accounting services industry experienced the lowest annual growth rate of 1.2 percent. Percentage growth trend Figure 2. Accounting services growth rate per quarter Industry Forecast The demand for accounting services is forecasted to grow at an average annual compounded rate of 3.8 percent between 2014 and 2018. Over the five years, accounting services industry has recovered from a downturn that was caused by weak private investment, falling number of businesses and shrinking corporate budget. Nevertheless, revenue has been increasing since 2011, kept up by economic growth, growing number of new businesses and rising equity markets (hoovers.gov). “Over the past five years, the industry has recovered from a downturn in demand caused by a falling number of US businesses, weak private investment and shrinking corporate budgets” (ibisworld.com). Generally, industry establishments are spread according to the demographics of the regional population since the general need for tax consultancy and preparations as well as similar accounting services and auditing. Much of these services are conducted by smaller, regional or local offices of such larger accounting service companies (Bangemann, 27). Larger and medium-sized industry companies are concentrated in metropolitan regions with high business activity and high corporate presence. This implies that industry establishment and industry revenue concentration are not perfectly aligned. Even though, it is the home of just 15.5 percent of industry establishments, the Mid-Atlantic area or region accounts for 25.5 percent of the total industry’s revenue (ibisworld.com). This is so because the Big Four accounting firms all have offices in New York (ibisworld.com). Date published: June 2014 Accounting services growth stabilizes Figure . Accounting services growth rate The forecasts are based on INFORUM forecasts. Industry Drivers Changes in economic environment can positively or negatively impact industry growth. Accounting services industry is driven by changes in regulation as well as information technology. Technology innovation such as advances in software leads to the creation of fast and effective software that can track accounting fraud (ibisworld.com). Critical Issues Susceptibility to accounting scandal The accounting services industry is highly susceptible to accounting fraud. This leads to the loss of trust in the accounting firms that fail to discover such problems in time as well as the accounting firms that have participated in the corrupt act (MacKee and Garner, 132). High competitive industry The accounting services industry also competes with other similar service providers that cannibalize key clients. Currently, more firms are offering accounting services due to the response to rebounding demand, particularly from insurance and finance companies. Business Challenges Vulnerability to regulation, litigation Increasing tendency of accounting fraud has made accounting services industry to be much more vulnerable to federal regulation and litigation. Providers of accounting services routinely face lawsuits from clients and businesses that blame them for colluding with high-level managers to defraud the company. Companies have been greatly advised to take into consideration both internal and external regulation to ensure that such challenges are dealt with accordingly. This will help such firms to stay a step ahead of federal clampdowns on advertising and potential lawsuits (hingemarketing.com). Cost of service innovation Launching sophisticated software to tackle fraud can be very expensive. Most software is hacked by highly trained individual hence affecting their applicability. Additionally, accounting firms are reluctant to create new services thereby eroding their reputation. Dependence on large businesses and clients Providers of accounting services depend on large firms. Such clients represent 50 to 60 percent of total revenues. Accounting firms maximizes their profits by managing costs and transitioning to Type 2 services, those that go beyond only compliance and hence add value to the businesses and clients. This helps in deepening the relationships with existing clients and businesses. In addition, it has made services of such firms (the Big Four) more attractive to the types of businesses and clients most coveted (McKee et al 58). Accounting firms spend millions to develop and reformulate new services to ensure that changing needs and regulation are addressed. LIKELY FUTURE TREND Trends that shape the future of accounting services industry include Increased focus on client service While providing strategic and more personalized advice, as well as counsel to clients, , accounting firms should be able to provide enhanced customer service, leverage technology to free up staff and automate processes. They need to engage their clients to enhance close relationships. For this reason, firms that will be able to focus more on agility other than raw ability will thrive in the future (accountingweb.com). Technology integration challenges Firms should provide a smooth migration as well as integration path to emerging and new technologies. Such firms that can make sound and strategic investments today will thrive in the future. Digital mobility opportunities Firms need to reduce costs, increase service and employee productivity by leveraging digital platforms and mobile devices and integrate and consolidate cloud-based information repositories. According to survey results by IAB, digital mobility opportunities will play a vital role in accounting firm’s business within the next five years. Implementation of mobile solutions will ensure improved client service and improved productivity as well as work-life benefits for staff (accountingweb.com). Talent management and succession planning Firms need to take advantage of talent management as well as staff succession planning to look into the future. They need to identify and manage talent, develop new and different sets of skills and management retirement of their senior leaders. This will help reduce expenses necessary to select and hire new employees (MacKee and Garner, 102). Social media as a business tool Implementation of social media as business tool enhances client satisfaction as well as attracting and winning new businesses. Social media allow firms to listen to their clients and understand their industries making it a powerful tool to connect and deepen their relationships with the client. Firm, therefore, need to become more sophisticated in the use of social media platforms such as Twitter to market their businesses, find and engage their clients online and monitor the competitive landscape (accountingweb.com). Conclusion Accounting and services industry offer a number of accounting services, for instance, designing accounting systems, auditing accounting records, developing budgets, preparing financial statements as well as providing advice on matters that relate to accounting to their clients. It is highly regulated by international bodies as well as by federal and state government so as to reduce and eliminate accounting fraud. The growth rating of the industry is slow, however the firms need to transition to Type 2 services, those that go beyond only compliance and hence add value to the businesses and clients. This has helped in deepening the relationships with existing clients and businesses. Work cited Accountants and auditors Retrieved from: http://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm Accounting services in the US: Market Research Report. Retrieved from: http://www.ibisworld.com/industry/default.aspx?indid=1398 Accounting services industry report summary. Accessed on 1/31/2015 Retrieved from: http://www.hoovers.gov/industry-facts.accounting-services.1299.html Accounting, tax preparation, bookkeeping, and payroll services Retrieved from: https://www.census.gov/econ/isp/sampler.php?naicscode=5412&naicslevel=4 Bangemann, Tom O. Shared Services in Finance and Accounting. Aldershot: Gower Pub, 2013. Print. Cooper, Irving M. Accounting Services for Small Service Firms. Washington, D.C.?: U.S. Small Business Administration, Management Assistance, Support Services Section, 2012. Print. Global accounting Services: Market Research report Retrieved from: http://www.ibisworld.com/industry/global/global-accounting-services.html McKee, David L, Don E. Garner, and Yosra A. A. McKee. Offshore Financial Centers, Accounting Services, and the Global Economy. Westport, Conn: Quorum Books, 2010. Print. The top 5 business challenges for accounting and financial services firms Retrieved from: http://www.hingemarketing.com/blog/story/the-top-5-business-challenges-for-accounting-financial-services-firms Top 5 trends shaping accounting’s future Retrieved from: http://www.accountingweb.com/article/top-5-trends-shaping-accounting%E2%80%99s-future/224057 Appendix 1. Interview Questions 1. For how long have you been in the accounting field? 2. From your own perspective, what consists of accounting services? 3. What do you think is the current status of accounting services in the country and the region? 4. Does this status relate to the global condition or is it different? How different is it? 5. What do you think are the factors affecting the accounting services? How do these factors relate to the efforts the experts are taking? 6. If asked to name in relation to your experience, what is the future of accounting services in the country? Read More