The Statement
The Statement

Succession planning: A vital issue for CPA firms

Editor's note: The following article is provided by the American Institute of CPAs.

The numbers are shocking.

An AICPA Private Companies Practice Section (PCPS) study shows that 60 percent of the CPA firms surveyed have owners between ages 55 and 62. In addition, 74 percent of these practices predicted that at least one of their staff members will retire in the next five years, according to the 2004 study.

This study from PCPS, the AICPA's alliance for firms, surveyed nearly 500 practices to understand how they're handling succession planning.

Here, though, is the real shocker: Eighty-one percent of the firms said they had no documented succession plan in writing.

That's a worrisome figure, considering that the expected massive transfer of management could profoundly impact firms of all sizes. Not only is the number of retiring baby-boomer CPAs expected to soar, but with so little succession planning now, the next 10 years may see a shortage in management staff and a likely buyers' market for firms that must sell out to survive.

Fortunately, PCPS research indicates that firms are not oblivious to the trouble on the horizon. Over several years, the Survey of Top 5 Practice Management Issues has shown succession planning to be among firms' biggest concerns.

Additionally, the previously discussed study reveals that 62 percent believe succession planning will be a significant issue for them in the near future, with most practices stating they would face challenges with this issue before 2015. Of the total, 28 percent expected the need to address succession in five to 10 years, 18 percent in three to five and 14 percent in one to three years. Along with that, 10 percent were in the midst of succession planning challenges, 16 percent did not expect challenges for a decade or more, and only 14 percent did not believe any issues in this area would be a problem.

At the same time, few practices have actually begun work in this arena. Fifty percent of those without a succession planning process stated they intended to start it soon, and 22 percent did not even see the need for one. A scant 23 percent indicated they had begun a plan and expected to complete it soon, while 5 percent had completed one but had yet to get it approved by others at their firm.

Why is succession planning so important?

Besides preventing the possible management shortage and buyers' market for firms, succession plans aid in a leader's smooth transition to retirement and the long-term success for a practice of any size, building its strength and ultimately protecting its largest asset on the balance sheet: its staff.

If smaller firms lose a partner or other key player, they may feel the loss more keenly than a larger firm. With fewer people, smaller firms have more difficulty filling leadership roles, especially if such practices haven't prepared or trained well in advance.

Beyond that, the importance of succession planning is about more than just finding the right person to take over. It's also about always operating effectively in all aspects of your business, from marketing to strategy and management to grooming and training staff for leadership, thereby not only extending your firm's life but also increasing its value.

So how can your firm begin tackling succession? Try these guidelines to start the process:

  • Recognize the need to plan. Every action that owners take today builds a foundation for what will happen to the firm five or 10 years from now. As a result, it's better to have a strategic plan for where firm leaders would like to be in 10 years — and how they will get there — than to wait passively to see what will happen next.
  • Treat succession planning as an everyday business activity, not one more item on the firm's to-do list. Succession planning encompasses many other areas, including leadership, recruiting, retention, compensation and more. It's simply good business to address all of these issues, and this can be accomplished under the umbrella of the practice's succession planning efforts.
  • Put together a corporate structure. In some firms, owners make decisions about their own parts of the practice on an ad hoc basis. When a practice plans for the future, it becomes clear that transition in particular will run more smoothly if there are firm-wide procedures in place to address such topics as hiring and firing, compensation and other administrative issues. Practices may also want to consider putting together a board of directors. Even the smallest firm can benefit from a board's advice and oversight.
  • Create a written succession plan. The process of putting the plan together helps practitioners to address issues in an orderly fashion and organize their thinking about succession. It also documents firm policies. A firm can begin by outlining these important aspects of succession planning:
    1. Retirement. What's the required retiring age, if any? How does your firm handle retirement funding? What's the compensation for retiring owners?
    2. Client transition. When and how will owners relinquish control over longstanding clients and engagements? How will younger staff become involved in existing accounts?
    3. Developing future leaders. What's the career path for promising prospective owners? What kind of training should they receive? What requirements will there be for new owners?
  • Each firm will have its own set of issues to address, but this list provides a draft outline for an initial written plan. For each strategic area, a practice can add its own questions, like the ones above, until it has a list of topics to discuss. Then that firm can begin to form its own answers to all of these questions. Once the answers are formulated and set in writing, they become a firm's written succession plan.

For more information on succession planning, check out the following:

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