New accountancy firm formations fuel talent crisis
Structural changes within the profession are tightening the screws on the skills and recruitment crisis accountants are experiencing, according to research from IRIS.
For the past few months, IRIS Software Group head of market insights Steven Cox has been sounding the alarm about divergent trends that have seen firm formations rising while the growth in accountancy trainees continues to decline.
Using a variety of statistical sources ranging from HMRC to the Office for National Statistics and information on IRIS’s own customers, Cox has built up a broad picture of a profession that has grown by more than a third since 2018.
Back then, Cox’s model estimates there were 71,000 accountancy and bookkeeping firms. That figure is now around 94,000. “The dominant group in that boom came from the smallest practices, particularly those formed during the pandemic,” Cox explained to AccountingWEB.
“Mid-tier firms have been shrinking during this period and a lot of skilled people have walked out and set up on their own. They’re increasing the talent crisis for mid-size firms because they’re competing for the same people too.”
Talent shortage
But just as the number of new entrants has risen among accountancy’s lower tier, the recruitment pool for new accountants has been tailing off. According to the IRIS analysis, the percentage growth of students in the UK and Republic of Ireland (ROI) declined by 2.1% in 2019–20 and the percentage growth of qualified accountants in the UK and Ireland increased by just 1.9%.
While there is no denying the profession’s recent growth, the slowing supply of accountancy trainees has added to the talent and skills shortages firms have been experiencing in the past few years, Cox said.
“We’re seeing a reduction in the average number of staff per firm because the ‘accountrepreneurs’ are growing in volume. They’re deciding to break away and be the masters of their own destinies. Then we have students who don’t want to go to work for a firm. They’re a new generation and want to do things for themselves,” he said.
“When I started it was really difficult to get into accountancy. Now I can get cloud accounting software and a website within 24 hours. As long as I’ve got existing clients, I can build out from there. It’s a lot easier. You don’t need a massive accounting infrastructure behind you to do it.”
The squeezed middle
The structural impacts of these changes are hitting mid-sized accounting firms the hardest. While the bottom tier has exploded, the firms classed as mid-tier in the IRIS analysis contracted by 1,000 since 2021.
Some of that attrition may be part of another important practice trend. A wave of consolidation has seen the arrival of new top 500 firms such as Xeinadin and Azets that include multiple mid-size firms, Cox said. Fuelled in part by the private equity money that has been coming into accountancy in recent years, bigger firms frustrated with the slow pace of organic growth have been acquiring smaller rivals to boost their balance sheets.
“Accountancy continued to thrive during the pandemic, so we started to see more external investors coming into the market. It’s a pretty safe investment and they can see the momentum of cloud invest. If they invest now, they will see it grow even more,” he said.
Yet when firms merge there are often overlaps and some of the people they didn’t need started their own firms to fuel that continuing formation boom, which Cox acknowledged has now started to slow following its peak during the pandemic.
As another side effect of the talent gap, IRIS has noted an increase in outsourcing over the past year or so. “Not just short-term contracts to get them over tax returns, but taking on longer contracts, because it’s going to be much longer term,” Cox said.
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John Stokdyk sadly passed away in June 2023. He had been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he investigated the profession's use of technology around the world. He devoted his spare time to technology history and an oddball collection of stringed...
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The claimed "broad picture of a profession that has grown by more than a third since 2018" is misleading ... in that the "71,000 accountancy and bookkeeping firms (that is) now around 94,000" doesn't sound to have much changed the number of active practitioners - viz. most of “that boom came from the smallest practices", (whilst) “Mid-tier firms have been shrinking during this period".
So ... near static supply (retirees broadly balancing the newly qualified), but increasing costs - in particular where overheads are less easily 'shared' per capita in a very small business - which requires an increase in demand in order to maintain let alone grow profits.
A lot of these new practices were banking on the mandation of MTD to drive this demand and allow for increased charges (it wasn't just the software companies who were "all in") ... and the dilution / delay (or abandonment depending on your perspective) of MTD will be the real story as the dreams of many crash & burn in the next couple of years.
Mrs Accountant has a life changing decision during the pandemic, leaves her mid tier firm where she works like a dog to have an easy life working less hours from home and earning more money - result = where once there was one firm there are two, but it is highly unlikely she will be competing with mid tier for staff.
My view has long been that mid tier firms are inefficient for most businesses sizes. Its really only when you get into multi company / big payroll / complex business model than having a larger team you can draw on cross disciplinary talent makes sense.
I have kept my business size to 2 people for the simple reason that I think we run into too many diseconomies of scale if I was bigger. The economies of scale are small for an accounting practice.
Clearly IRIS has a big worry in this as they flog software to big firm, but smaller firms like mine dont need complex software to run them.
yep same here, few years ago cut the business in half, result = less turnover, more profit
We are also just 2 x ACCA, we have considered setting up office and hiring but reckon it would take a good 3-4 years to cover all of those new costs and get back to the current level of profits we enjoy.
All a balancing act though as holidays are a pain, obviously the new Corporation tax rate change is a bit of a pain as well!
I did the same maths, and we can do well north of £200k t/o as a two hander, and make a very decent income with low overheads. But to set up a 'proper' office i would need to double that to see any increase in my profits.........which means 3-4 years of making less money and loads of hassle..........and for what.....killing my business model of not handing off all the work to juniors.