The Business Journal recently asked executives at six Orange County accounting offices to talk about client and industry developments they’re anticipating for the second half of the year. Increased business, new regulations, and mergers within and without the industry were top of mind as the economy continues to improve. And then there’s the aging baby boomer generation to consider. Here are edited versions of their responses.
Dennis Parrott
OC managing partner, KPMG LLP
Business is improving, and our clients are seeing favorable signs in the economy. I think we are just about where we were prerecession. One of the key elements in Orange County is the resurgence in housing and homebuilding. That is a strong indicator of the future economics in OC. And now that it’s back on its feet, I think it bodes very well for 2013 and 2014. And we grow with our clients.
[In addition to the rebounding housing sector], we’re also seeing [growth in] technology, healthcare and the financial services sector. We’ve also seen pent-up demand for information technology as companies look to update their systems. Companies [also] are looking at global expansion, cost containment and outsourcing alternatives.
The other thing is … the mergers and acquisitions front. We’re seeing an uptick in activity there, as well. I think that’s a result of improvement in the economy. Companies have the strongest corporate balance sheet they’ve [had in years]. There’s a lot of cash, and the credit markets are in good shape for companies to be able to finance acquisitions.
We assist both buyers and sellers through the entire process, working with their other professional services advisers.
One thing about OC that’s particularly relevant is that a lot of M&A activities are in the middle market—generally companies that have up to $1 billion in revenue—and that market is the backbone of OC’s economy.
There’s a new generation of workforce that we’re looking for. Today, enterprises are more complex, business models are changing, [and] regulation is becoming an increasingly significant factor. So what we are trying to do at KPMG is identify high-performing individuals. … We put a premium on professional judgment, critical thinking, teaming and collaboration and relationship-building.
[Regarding new hires], we will be comparable with last year. One thing is that the increasing efficiency from using IT tools allows us to do more work that is less labor intensive. So it’s a balancing act. We’ll hire a comparable number of people, but we will actually expect an increase in business without having to add an equal [proportion] in head count.
Wayne Pinnell
Managing partner, Haskell & White LLP
The first half of 2013 yielded the lowest level of [merger and acquisition] activity in the U.S. in four years, while worldwide activity hit a 10-year low. This comes on the heels of a domestic spike at the end of 2012, when sellers of businesses tried to take advantage of short-term estate and gift-tax valuation exclusions, and concerns of an increasing tax on capital gains loomed large. M&A activity is likely to pick up again in late 2013 as business owners again consider year-end tax planning. This is of course subject to overall market conditions and business valuations, and the sellers’ overall state of readiness.
Meanwhile, M&A among accounting firms continues to be active locally and across the country as firms strive to match succession plans with growth and service opportunities.
There are three major issues we are watching within the accounting industry, all of which are working on their own timetable and have an uncertain date of completion.
First, new accounting standards for revenue recognition and lease accounting continue to be at the forefront due to the sheer magnitude of proposed changes.
While both are getting relatively closer to becoming final standards, the actual effects may not be implemented for several years. Despite this timetable, companies may still have plenty of work to do to get ready.
Second, the new Private Company Council has proposed modifications to certain accounting standards to lighten the load for private companies that may not need the level of complexity required of their public counterparts. Proposals submitted to the Financial Accounting Standards Board could [result in] future changes in accounting for intangibles acquired in a business combination, for goodwill and for interest rate swaps. Each of these proposed standards carries a unique set of pros and cons, which vary from company to company.
Finally, the Public Company Accounting Oversight Board has approximately 15 projects on its horizon. Two of the more controversial issues relate to an overhaul of the auditors’ reporting model and a possible “Auditors Discussion & Analysis;” and potential requirements for mandatory audit firm rotation. Both of these standards are intended to strengthen public company auditor independence, objectivity and professional skepticism. Meanwhile, the PCAOB is looking to incorporate new final, updated audit standards for a variety of areas and is planning to overhaul its published standards into a “codified” framework to improve the ease of use of the standards.
All of these potential standards may have a significant effect on preparers, auditors and users of financial information. Given the complexity of the matters, extensive education will be required. And companies may need to enlist the assistance of external accounting resources to help with the projects, such as conversions in the revenue- and lease-accounting areas.
Steve Rapattoni
Partner in charge, Irvine office of Marcum LLP
I am fairly optimistic about the economy, and I think things will continue to improve. The June job numbers were better than expected, and companies are hiring, which of course is good news for the economy as a whole but also for us, because as companies expand, so does their need for accounting and advisory services.
Orange County experienced significant job growth in the first two quarters, which is now impacting a robust real estate market. We should expect to see the construction industry continue its comeback the second half of the year, as further evidenced by the announcement of several new real estate IPOs. Several of my clients have been successful in raising capital and are more confident in taking the opportunity to expand into new markets, including overseas. For example, the solar industry, which has benefited from government subsidies and reduced materials costs, is currently experiencing significant growth and expansion within Southern California, as well as the neighboring Western states. Some of this expansion is a result of joint ventures with overseas investors, as well as a credit market with an appetite for financing residential and commercial projects. Our clients are looking for us to assist them in locating the capital and structuring from a tax standpoint.
The expanding economy brings with it a more accommodating compliance environment for small and midsize private companies in the form of flexible new financial reporting guidelines announced in June by the [American Institute of CPAs]. The new rules provide more options in choosing accounting methodologies in an effort to better meet the needs of financial-statement users and streamline the highly detailed U.S. [Generally Accepted Accounting Principles] reporting standards and voluminous disclosure requirements for smaller companies. This is a significant change from the “one-size-fits-all” approach currently in place for all private companies, regardless of size, and is expected to lead to substantially simplified reporting for smaller companies. This will improve compliance, enhance functionality for users, and free up resources.
With Orange County being a hub for medical device companies, I am fielding questions from my clients about the 2.5% medical device excise tax that went into effect on sales of taxable medical devices after Dec. 31. Unlike sales tax, which is passed on to a taxpayer’s customers, this tax is imposed on the taxpayer/manufacturer/importer and requires quarterly reporting beginning on April 30. This adds one more compliance requirement to what is already a burdened small-business environment.
On the bright side, I visited a new housing development in South Orange County this past weekend, and it almost felt like the good old days, with so many interested families. Perhaps this exuberance has something to do with my confidence that the economy is getting back on its feet.
Paul Treinen
Tax and advisory services partner, White Nelson Diehl Evans LLP
The first half of 2013 has been very good for our clients and our firm. We have seen a tremendous amount of activity from our clients from the standpoint of deal activity, whether it be acquisition or divesture through [the second quarter]. The early results from our clients have also been very encouraging as it pertains to operations. Through our consulting efforts and our clients’ increased focus on their cost structure, it appears all efforts have led to increased efficiencies inside of their businesses, which ultimately led to increased dollars to the bottom line. We have no reason to believe that this will not continue through the remainder of 2013. This increased deal activity reinforces our thoughts that entity selection and sound tax planning is a must, now and in the future.
Although it appears that our clients are feeling better in general, there are a number of items that will require their focus and challenge them in 2013 and beyond. From a federal tax perspective, the implementation of Obamacare will be difficult for businesses to handle in the coming years. This will increase internal and external costs to be compliant and challenge our clients during a very busy time.
This was recently reinforced by the Obama administration’s announcement of a delay in the implementation of the employer mandate.
Because of the increased costs that will be levied on our clients directly from a tax perspective and/or via increased insurance premiums and fees, our clients will need to monitor and manage this process to prevent an erosion of profits. We will continue to assist our clients in focusing on sound tax planning and consulting strategies during this implementation.
From a state perspective, it appears that Proposition 30, which was a retroactive increase in California’s income tax rates, was not favorably accepted by many of our clients. In some cases, this retroactive nature handed a big tax bill to certain clients, and the general consensus from our clients has been that the impact of the proposition was too onerous. This has caused increased focus on our state tax practice.
Because of the increase in client activity from the above items, we believe the accounting industry has tremendous opportunities for growth for our firm and for our staff. We are hopeful that the remainder of 2013 will continue to be fruitful.
Roger Weninger
Partner in charge, regional managing partner, Moss Adams LLP
We continue to see significant growth opportunities in OC and throughout Southern California. … We are aggressively looking for combination opportunities that can help to further grow our presence and capabilities in our local markets. During 2012, we completed a large combination in Northern California that had an impact on firmwide growth numbers [in] head count and revenue. In addition, we added smaller specialty-practice acquisitions in various locations and remain very active and open to these types of situations in OC. There are many strong CPA firms in OC that have done well through the recession and are well-positioned to move forward with the positive direction of our local economy.
We believe that there are opportunities to bring other firms into Moss Adams and allow both groups to move forward faster.
As the economy has improved, we have seen an improved employment market and increasing opportunities for people to evaluate. We are looking at adding between 20 and 30 people to our office in OC between now and the end of the year. Roughly half of these are already committed to start at various times over the summer and through the fall. The remainder will come through our normal recruiting process.
We see OC as a perfect Moss Adams market. There is a very large middle market that is not as attractive to the larger firms and can present challenges to smaller firms. As we have grown and become more visible in the market, we are getting greater traction and recognition as an alternative to other options in the market. This is a great position to be in and will continue to fuel our growth and continuing hiring plans.
One [industry] trend that we have seen has been substantial growth driven by changes in the regulatory environment over recent years. This includes Sarbanes-Oxley, tax law changes, healthcare reform, [International Financial Reporting Standards] and the lease-accounting rules, to name a few. This is a trend we expect to continue as some of the newer regulations, such as the Affordable Care Act, go into effect.
The ability to adapt to these changes is an important part of our profession that can be used as a driver for new business opportunities and growth in existing client services.
We are operating in a market where there is and should be an expectation that we as professional service providers are bringing value to our relationships. This applies to our clients and our people. Our ability to attract and retain the best talent will drive our success in securing and retaining clients in the second half of 2013 and beyond.
The market for people will continue to get tighter. To some degree, this is a function of the practices within the profession, including many firms’ sending work offshore and hiring fewer people when the recession first kicked in. I believe we are doing what is necessary to keep our business moving forward, which would include having the appropriate level of personnel resources, both from a quantity and quality standpoint.
Finally, we will continue to see an expectation for professional services firms to have the ability and willingness to deliver industry-focused and specialty-type services, including tax-related services. This will drive more merger activity among professional service firms to combine strengths and create more full-service opportunities for businesses and their owners.
Steve Williams
Managing partner, HMWC CPAs & Business Advisors
Despite the rhetoric from Washington surrounding a simplified tax system, the tax world is ever-changing, with increasing complexities. This keeps us busy serving the needs of businesses and individuals. Our healthcare clients are dealing with the uncertainties in their industry surrounding the future delivery of healthcare in Orange County. Our construction industry clients are cautiously optimistic about what lies ahead, as the headlines indicate a resurgence in the residential market. These challenges present opportunities for us as business advisers to work alongside our clients to accomplish their goals. For example, our Complete Financial Office Solutions department, which provides full-support accounting and tax services for small to midsize businesses, has really stood out in the marketplace, and we continue to receive great response from these businesses.
Within the accounting industry, I believe that more firms will adopt a team approach to client services. In order to deliver this effectively, firms must be of a certain size to ensure enough knowledgeable staff to provide good service to clients in a timely manner. Also, just as we have formed a Women-Owned Business practice, accounting firms are experiencing growth in this area; more women will move into leadership roles.
Challenges bring opportunities. At HMWC, we position our services and staffing to meet the challenges that our clients face. For example, the senior community continues to grow rapidly as baby boomers age, and this group has a number of accounting concerns. Our Accounting Services for Seniors practice helps these clients navigate through various issues relating to managing finances, such as when the money handler passes away or becomes incapacitated, protecting them from scams and assisting them with the management of their estates, [as well as transferring] to heirs.
One of the great challenges facing accounting firms today is the aging baby boomer generation. Many CPA firms are made up of these baby boomers who will be retiring from the profession in the next few years. HMWC has been around for 45 years, and we are now into our third generation of partners running the firm, so we have figured out this succession issue. However, many firms are not as well prepared, and that presents opportunities for us to expand through acquisition.
