When Congress Is Involved, Change Is in The Air

With the fairways of Mission Hills Country Club serving as a backdrop on a colorful fall afternoon, executives from some of the leading accounting firms in the Kansas City region gathered on Nov. 9 for Ingram’s 2017 Accounting Industry Outlook. The meeting was convened to explore the state of things in accounting today, but also with a hope of exploring how tax-reform talk in Washington might affect clients of those firms, and business in general. Suffice to say, competing interests in D.C. and calls for structural changes that seem to shift every hour are making it more than a challenge for these firms to provide clients firm direction at this hour. But change, if not true reform, does appear to be coming, and they are preparing to deliver that guidance. The gathering, chaired by John Meara of Meara Welch Browne, also took at run at how technology is changing their game, how they’re attracting new talent, the impact of retirements at key positions and with key clients, and more. It was a powerful demonstration of the role that these key advisers play in the success of small, medium and large businesses, and a reminder that this region is blessed with talented and skilled accountancy. 

Recollections of ’86

John Meara, whose firm celebrated 40 years in business last month, greeted participants and offered a historical observation about changes in the profession: “Back then, you had pencil and paper, and you could outfit an office for about 250 bucks,” he said. “It’s not quite like that any more; it’s a little more technology-intensive, as you all know.”

As an opening question, Meara asked about the burning topic of the hour: ongoing efforts in Washington to reform the federal tax code, a task complicated by competing plans from the Senate and House. Julie Welch, a partner at MWB, suggested that the experience of 1986—the most recent major reform—might offer some guidance for understanding how
this process could unfold.

“There are lots of changes still to come, but I’ve talked to a lot of people who do tax stuff; half say without a doubt, this is going to be passed, the other half say there’s not a chance in the world,” she said. Somewhere in the middle, she said, some form of change would emerge. But in ’86,  “what an opportunity that was,” she said. It cut deductions, credit-card interest, things like that, and they put in two rates.” Congress later came back to add a third rate a few years later, then again to add more brackets, taking maximum rates up to 39 percent. No matter what comes of this year’s efforts, she said, “I don’t think the rates will stay forever.”

The greater impact for firms, she said, would be in the planning they need to do for clients, particularly as the population ages, creating demand for more wealth-management services. If some form of true simplification emerges, some taxpayers now turning to accounting firms to handle their returns might in fact be able to fill theirs out on the proverbial “postcard” return. That would cost some firms a bit of business, Welch said. But not everyone’s taxes will be able to fit on that postcard, she noted. 

Brad Sprong, managing partner at KPMG, said, “we’re pretty fired up. We’re telling mangers and younger folks, this is a career opportunity; you won’t see this again.” Recently, his staff spent a weekend analyzing early versions of proposed reforms, looking for elements that could create growth opportunities for the firm. “This may not happen again for a while,” he said.

Julie Welch pointed out one key difference between the process in D.C. and how firms are responding to it in ways dramatically different than they could have imagined three decades ago. “The big difference, in 1986, we didn’t have the ability to get the information so quickly,” she said. “Now, we’re sitting here, getting information as it comes out, with changes as they are being made.” In 1986, copies of a bill would arrive a couple of weeks after it had been assembled, she said, and the process was much more reactive.

Matt Robertson of CliftonLarsonAllen sees good things emerging from the potential reforms. “We are very excited about the tax opportunities, as well,” he said. “It’s rare that people actually want to talk to their accountants. I was really excited about it.” As someone who came up on the audit side, he consulted with some of the firms tax professionals, who didn’t quite share his level of enthusiasm, given some of the technical details still to be addressed. Still, he said, “it’s an opportunity to get in front of clients, talk to them about structure and opportunities for them to save money in taxes. That’s always a great opportunity for our industry. I think it’s a really fun time for us.”

Candace Varner of Creative Planning cited the opportunities for her firm, as well. For clients, she said, “we’re really big on tax planning as part of their overall plan” for managing wealth. “I would say it’s double-edged: When it came out, lots of us were excited, but on the flip side, when the president put out his bullet points, we were getting questions from clients, and I had no answer. At that point, we literally didn’t know.” But even with more details emerging, she said, the timing and remaining uncertainty “make planning we were supposed to be giving really difficult to deliver on.” And the potential for finding something out for sure on Dec. 20, she said, “is going to be a huge challenge.”

BKD’s Teal Dakan, a tax partner, looked back at the timeline for the 1986 reforms, calling that process much more deliberative, and perhaps a better example of law-writing “when everyone was not hovered over their PC or iPad and picking up their phones to call the lobbyists with a knee-jerk reaction to general provisions.” In the big picture, he said, “the corporate provision is to make this a business-friendly environment for large corporations, and the rest of the bill is figuring out who is going to pay for it, and arm-wrestling over that.”

BKD LLP’s managing partner, Abe Cole, said the current reform move emphasized how firms are trying to position themselves to be trusted business advisers for clients. “We’re really excited about it, diving through it, talking about what guidance we need to be providing for our clients,” he said.

Mark Radetic, managing partner at MarksNelson, confessed up front that “I’m not a tax guy—I don’t even do my own taxes any more.” But what we’re seeing on Capitol Hill is not necessarily tax simplification, he said. “We’ve been hearing that over and over, but there’s going to be a lot of uncertainty,” he said. That uncertainty is casting a shroud that falls across state capitals, as well. A connection in the Missouri General Assembly has expressed concerns about the elimination of state and local taxes on federal returns, and what impact that might have on the state’s own revenues.

Dan Haake of Hutchins & Haake said he was “chagrined that we went from tax simplification to corporate simplification. There’s nothing simple here for the average taxpayer.” One immediate red flag he sees: the hospitality industry could be devastated by the loss of deductions for business-entertainment expenses. “With tax laws, if you get the wrong law, they don’t do a lot of good,” Haake said. 

Mize Houser’s Sean Dawson also recognized the opportunities being created to renew conversations with clients. Although the calls from clients started as soon as reform measures were introduced in the House, those discussions won’t always have positive outcomes right away. Just the day before, Dawson said, he’d had a conversation with a client about a purchase agreement for a business. “It’s kind of hard right now to tell them if you don’t know what’s going to pass. It’s a big deal for a lot of our clients, and a big deal for the construction industry and manufacturing industry.”

Scott Martin of Summers, Spencer & Co., also sees in this an opportunity to provide service to clients, an aspect that his colleague at the firm, Gary Summers, affirmed. A significant number of clients, Summers said, follow news articles and call his office after seeing them each day with questions about what they’re reading and how it will affect their business or planning needs. “We saw this not as an opportunity, but a problem we were going to have to deal with, trying to explain to folks the issues they might have to face negatively, as well as the positives they may face,” Summers said.

Deb Dibben of Dibcon said the frustration at this point is not knowing what the final product will be. “When I think of reform, I think reform: Fix it, clean it up,” she said. She’s not hopeful that a cleaner set of tax policies will emerge from the current climate in Washington.

John Meara, drawing on his extensive experience, said he not only lived through the 1986 reforms, but those of 1969, a year after he started in the business with Price Waterhouse. “It was a lot more fun,” he said, “because we were coming off a 90 percent maximum tax.”

No matter what the final look of a reform bill, everyone at the table agreed, time is already of the essence. The closer we get to the end of this year, the harder it becomes to create and deliver the guidance necessary to help clients position themselves for 2018. And should a measure of retroactivity apply to any of the reforms and affect filings for 2017, the window is already nearly closed.

“We’re already trying to digest these proposals” at KPMG, said Brad Sprong, “but if this passes close to Dec. 31, we’re looking at a disaster.”

Business Specifics

The main thrust of reforms proposed by President Trump, and reflected in both House and Senate proposals, is a 20 percent business rate, down from the current 35 percent. But attempting to drill down on aspects of other reforms, Meara asked which of them might be of particular interest to smaller businesses.

“I’m not a huge fan of the bifurcated rate for small business, particularly based on the Kansas experiment,” said Teal Dakan, saying a single rate would be vastly preferable. “There are a lot of smart people in this room and elsewhere who will do their best to see that things are in the 25 percent category, and that’s energy that doesn’t grow the economy. “

Dan Haake said that among his biggest concerns was the financial impact for clients—not in taxes paid, but the costs of determining those amounts. “Fee-wise, our clients are going to experience shock when it comes to having to sit down and figure this out,” he said. “The calculation is going to have to be done, and there is going to be some fee shock that clients are going to see.”

That’s already starting, as are frequent contacts as each twist and turn of the D.C. drama unfolds. John Meara, for example, cited the case of a C-corporation client filling up his e-mail inbox with questions about the various elements of the bills as they come to light.

Among the most significant factors for companies that finance a lot of equipment, Julie Welch said, will be the way depreciation is addressed as a deduction for capital improvements. Construction companies and manufacturers in particular could be exposed to some additional tax risk. “That can have a big impact in terms of the economy,” she said.

The temporary nature of some of the provisions also makes long-term planning hard, said Teal Dakan. Going back to ’86, people who had made investments in real estate found the rules change dramatically “and it nearly destroyed multiple industries,” he said. Enhanced-depreciation features now being discussed run only five years, while other key elements could be permanent, creating barriers for business decision-makers. 

Those at the table checked off a short list of key elements for taxpayers to be tracking through the process: Changes in reduction of tax rates, losses of certain deductions, including medical costs and state income taxes, and changes that might alter the calculus on business structure, especially involving S-corporations and C-corporations. Taxing pass-through income at different rates would also be something to watch, said Julie Welch, and would likely prompt a re-definition of what constitutes flow-through income. “Everything’s getting simpler—not,” she said.

With one potential exception, as Brad Sprong pointed out. If they receive the proposed doubling of the standard deduction, lower-income payers “will get 24 grand off their income, and their return will be on a postcard,” he said.

Overall, though, there is nothing simple, about the looming changes, said Sean Dawson. “We’re going to have to talk to clients about fees that in some situations are going to be higher,” he said. And taxes for some could be higher, as well, said Dan Haake, because of the deductions that are being eliminated. 

Julie Welch said the whole goal of the process was to get the lower stated business rate “so the world will want to do business here rather than somewhere else because our stated rate of 35 percent is one of the highest there is.” But if it does go to 20 percent, she says, the challenge becomes “how do we pay for that?”

John Meara noted that his firm’s clients are in the top 20 percent of taxpayers, a group that accounts for 95 percent of all the income taxes paid, and a constituency that won’t be filing returns on postcards. He also pointed out the potential impact on college enrollment, with potential limits coming for, or outright elimination of, the deduction for interest paid on student loans.

Finding Talent

John Meara asked about the impact of technology, which by some measures affects the accounting sector more than any other aspect of the work force. The accounting profession has seen significant upward movement in hires in recent years—can that be sustained?

 Abe Cole said a lot of investment in technology was taking place now, along with efforts to anticipate what the audit of the future might look like. As for those going into the profession, they’ll have to assess where they might fit into the employment equation within the next few years. Lower-level jobs may go away, but over the next five years, the amount of succession planning work will soar, and automation isn’t likely to inflict job losses there, he said. 

“As long as your firm continues to grow, you’ll be able to place those new hires,” said Mark Radetic. “We are recruiting them earlier and earlier; you’ve got people hired out to 2019 already,” he said. One thing that’s changing with the applicant pool in recent years, has been a decline in the numbers of young accountants sitting for the CPA exam, a trend that finally reversed in 2016.

“I don’t know if many are taking the CPA exam; I know some don’t feel like it’s as important as it was in our day,” Radetic said. One thing that’s changing in hiring, he said, is the types of graduates. In years past, you were going out on a limb by hiring someone with a degree other than accounting. “Now, I tell the story, about a year ago, we hired a gentleman with a degree in urban planning, right out of college. I think this is where firms are going in terms of looking at specialties and various niches, being thought leaders in a particular area.”

Among the sea of changes at KPMG, said Brad Sprong, the firm is investing “tons” in robotic-process automation. “About 20 percent of our hours are offshore right now,” he said. “We’re pretty bullish about the robotic processes, that it will replace the offshore resources, not the on-shore think-tank knowledge.” KPMG is building processes that will eliminate much of the data-pushing, he said. “I think it will change a lot, I think what our new people do will change a lot.”

Mark Radetic, who also sits on the board for the Missouri Society of CPAs, addressed the decline in numbers before 2016, and wondered whether the cost of attaining that certification—especially the additional 30 graduate credit hours needed—might be tipping the calculus on the value proposition of that achievement. “Also, a lot of people who take the test fail, and they’re done,” he said. “I think there’s a real push to keep people going, to keep the course.”

One reason why the CPA designation matters is that at some firms, including MarksNelson, you can’t become a manager without having attained CPA status. But Brad Sprong pointed to another concern about the requirements for such attainment, from a diversity perspective. The cost of that additional year of study falls hardest on lower-income students and their families, prompting higher numbers of minority candidates to opt out of that track.

To address some concerns about diversity, he said, KPMG had instituted a program by which the firm would pay for employees to attain master’s degrees in areas such as data security, in exchange for an agreement to work there for three years. As for the CPAs needed, the additional courses forsaken don’t entirely represent knowledge forsaken at the firm. Through his training regimen at KPMG, he said, the firm in effect will “give them their master’s anyway.”

Abe Cole agreed, saying that BKD sees the training it gives young accountants as an investment for the long-term good of the firm, as well as for those hires personally. 

Still, he’s concerned that young accountants put themselves in career peril when they have no experience in an audit track, and limit their options to other lines of accountancy. As firms attempt to reach prospects at younger ages, he said, young accountants “are making a huge decision without having the necessary exposure.”

For Dan Haake, there are deeper issues involving the types of preparation that students receive at the collegiate level. Some time ago, he said, “our industry went to the universities and said that the people they are giving us are not going to be able to hit he ground running. They’re still not.”

No matter what the challenges are at the academic level today, John Meara noted, the prospect of federal tax reforms being debated could make things even more challenging on campuses nationwide. Two of them in particular—potential limits on endowments and the loss of deductibility of interest on student-loan debt, “could be a big hit on colleges.”

The Grey Tsunami

Increasing numbers of Baby Boomers retiring from long careers and senior leadership roles presents a critical challenge to accounting firms today—as do the retirements of those who own companies that have long been clients of these firms. 

Mark Radetic offered a key perspective on how great that industry challenge could become. “Of about 45,000 CPA firms today, only the top 400 are above $5 million in revenue,” he said. “When you look at the numbers, we continue to see a lot of consolidation still coming.” Firms that are in acquisition mode, he said, are not just looking to add volume to their books, but are pursuing boutique and niche firms that offer the potential for adding new service lines.

As a large regional firm, BKD is seeing an uptick in unsolicited inquiries from owners who are looking to sell their firms, said Abe Cole. 

One potential reason for that is more than just demographic: As the technology demands across the industry become ever more costly, small firms are facing a disproportionately high barrier to success. “I don’t see how they can keep up as the tech costs are going up,” said Brad Sprong.

“The real problem at CPA firms is security,” John Meara offered. “The lack of that tech will be a driver for those owners.”

Some of those owners, suggested Matt Robertson, may already be in tenuous positions. With a buyer’s market emerging for firms in acquisition mode, every day that passes puts pressure on the current small-firm owner. “Some have already missed opportunities,” he said. For those potential buyers simply seeking volume, there’s no reason to even make an offer right now: “They can just wait until you shut your doors and take your clients.”

Wrapping up the discussion, John Meara asked for a show of hands from those who believe some measure of tax reform will pass. Most agreed, given the wiggle room provided by “some” reforms.

As thing stood in mid-November, the prospect of approval by year-end seemed to be diminishing daily. In any event, John Meara said, with the current climate in Washington and with the disparate starting points for House and Senate reform measures, “it’s clear that drain-the-swamp is not going to happen,” at least with tax policy, for 2017 or 2018.