Accountants are expensive. If you have access to your firm’s rate card, you’ll probably find that they charge exorbitant prices to the client on a per-hour basis. It’s not uncommon for a know-nothing associate fresh out of college to cost the client $180 or more per hour. Directors’ and partners’ rates regularly clear $800 per hour. Why in the name of unrelenting bottom-line growth are companies agreeing to pay these rates for public accountancy services?
Clients Are Required to by Law
Part of the reason clients hire expensive public accounting firms is that clients are a captive audience. If they’re publicly traded, they are required to have audited financial statements. Accounting firms know this, and although audit and assurance services usually aren’t high-margin offerings, they do provide a regular stream of revenue that gets the accountants in the door. As long as they don’t catastrophically bungle the audit, the audit team knows that they’ll probably have this work again next year, and they can continue charging high fees to the client.
If a client wants to engage in some cheeky merger and acquisition shenanigans, they’ll almost certainly need audited financial statements. Firms on the buy-side of the equation want a thorough understanding of the fiscal health of their target, and sell-side firms know that they won’t attract serious offers without providing an accurate snapshot of their finances.
Regulatory compliance is no joke. The SEC, IRS, and a veritable alphabet soup of other three-letter agencies lurk in the shadows, ready to pounce on financial missteps. Most companies dread the thought of navigating these regulations on their own. Like a DIY root canal, wrangling the arcane laws wielded by the tax authorities can be painful, messy, and unnecessary. Public accountants thrive on this stuff. Partner Pamela gets a thrill from ticking all the regulatory boxes on behalf of her clients. Like an accomplished endodontist, she’ll charge you a princely sum for her services, but it’s better than the alternative. Sometimes you have to spend money to save money.
Provide Extra Knowledge in Niche Fields
Savvy clients will also use public accounting firms to paper over areas where they lack knowledge or manpower to be effective. If I’m a manufacturing firm making car parts, I probably don’t want to hire a 25-person accounting team to extract marginal gains from our tax planning strategy. I can hire KPMG to do that for a fraction of the price, and since it’s their job to craft effective planning strategies, they’ll know all the details that a car parts manufacturer doesn’t.
This is particularly true in domestic and international tax, where regulations can change dramatically and rapidly. Rather than keep an expensive team of tax accountants on staff, clients will outsource that role to public accounting firms. The public accounting firms then subcontract the role to their offshore team in India, which subcontracts the role to Google. Could the client have performed the Google search necessary to learn the international tax rules? Absolutely, but then they wouldn’t have the confidence of having that Google search interpreted by a tax partner and a swarm of subordinate tax professionals.
Businesses are typically encouraged to focus on what they know, and contract other professionals to handle what they don’t. Although accountants are expensive on a per-hour basis, paying them a hefty fee frees the client to focus on what they do well, which improves their profitability.
Make More Money Later
In some rare instances, hiring public accountants can result in greater profits for clients. Companies that experience quick or unexpected growth will often find themselves disorganized and leaking cash. This is particularly true of companies that grow through acquisitions. Hiring a public accounting firm to reconcile all the new assets and liabilities, align them with the preexisting business, and find favorable tax solutions for the entire enterprise can save a company millions of dollars in the long run.
Companies often achieve net-positive cash flow on hiring public accounting firms through improving their tax structure, reducing their effective tax rate. Public accountants in the tax world know that clients love to reduce their effective tax rate. They dream about dropping the ETR by a few basis points in high-tax, high-volume jurisdictions. A good public accounting team will help the client achieve this goal, making them look like a rockstar to their bosses.
Accounting firms also provide value through pre-IPO or due diligence services to ensure a client is (or at least appears) ready to go public or be purchased. Stress-testing a client’s financial health increases the likelihood of a successful and lucrative transaction, meaning more money for the client leaders and shareholders.
Protecting the Client’s Reputation
The obverse to the “make more money later” reason is the “cover my ass now” corollary. If a client hires KPMG to create a tax plan, and that plan attracts IRS scrutiny, the client has multiple means of recourse. They can hire KPMG to defend their own plan, adding an ally to the fight with the tax authorities. Alternatively, they can fire KPMG and hire a competitor with more experience in tax planning and negotiating with the IRS. Had the client’s internal tax team crafted this strategy and been audited by the tax authorities, all of the scrutiny and obligations that KPMG was shouldering are now on the tax director. A smart tax director recognizes the value in having a scapegoat when things go wrong, and public accounting firms fill that role splendidly. At the end of the tax audit, the client tax director can tell his bosses, “KPMG screwed the pooch, don’t blame me. I fired them and resolved the audit, so things are fine now. There is no need to punish me or my team.”
Alternatively, if things go well and KPMG crafts a plan that saves the client millions of dollars, the tax director can tell his bosses, “I had the foresight and good sense to hire the best accounting professionals in the industry. My team and I should be handsomely rewarded.” Relying on public accounting firms allows client leadership to shift blame when things go poorly and receive credit when things go well.
Are Public Accounting Firms Worth the Cost?
In the end, the reasons clients hire public accounting firms vary based on client need. Whether it’s to tap into niche knowledge, comply with regulations, secure future profits, or protect their leadership’s reputation, accounting firms provide a one-stop-shop for a wide swath of professional services.
The next time you’re exasperated looking at the $2,500,000 engagement letter your client just signed, remember: the client isn’t grossly overpaying for your team to just crunch numbers. You’re also providing peace of mind and saving the client from potential embarrassment. If you’re really good, you’ll even help them turn a large expense into bottom-line profits. Businesses pay generously to have problems removed, and public accounting firms are great at removing problems (and cash) from clients’ plates.