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Accounting firms question the partnership model (FT)

8 July 2023


Financial Times title: Accounting firms question the partnership model
FT subtitle: BDO USA is ditching the profession’s traditional structure and becoming a corporation
By: Stephen Foley in New York and Michael O’Dwyer in London
Date: 30 June 2023

“It is a coveted status. Just one in 50 people entering the accounting profession make partner, joining an elite and lucrative club whose members get to carve up their firm’s profits among themselves.

So why are the 860 partners of BDO USA giving it all up?

The firm, the sixth-largest in the US, is switching this weekend to a professional services corporation, a designation more akin to a typical company. Partners will instead become shareholders and employees.

The move has captured the attention of the profession at a time when many firms are reconsidering their business models. It comes on the heels of EY’s radical plan to spin off its consulting business and float it on the stock market, which ended in failure after a group of US partners blocked the deal.

Large firms have been finding decision-making unwieldy with partnerships that run into the thousands. Smaller firms have been trying to work out how to fund acquisitions or invest in their consulting businesses, while keeping the cheques flowing to partners.

The partnership model has drawbacks at every level, executives concede, even as it fosters a sense of ownership that binds a firm culturally. If BDO USA’s move is a success, it is likely to be copied by others.

“I think the partnership model has sailed,” said Kevin McCarty, co-founder of the digital consultancy West Monroe who earlier in his career was a senior manager at Arthur Andersen’s business consulting practice.

He said the structure no longer works for ambitious staff who want to progress their careers or ambitious executives who want to expand their firms.

“If you’re willing to stick it out and you’re good enough, you can get on the partner gravy train but it’s becoming harder and harder, and taking longer and longer,” McCarty said. “Meanwhile, distributing all the profits and not focusing on earnings, enterprise value and equity appreciation is a flaw.”

Wayne Berson, BDO USA chief executive, has not publicly expanded on the firm’s short statement last week that “conversion offers tax and other advantages to position our firm for ongoing success as we continue to grow and transform”.

People who have spoken to him say the tax benefits were the main driver. A partnership does not itself pay tax. Its partners pay tax on their share of the income, often at high personal tax rates. By contrast, a corporation is taxed directly on its profits, at rates that were substantially lowered by then-president Donald Trump.

Switching to a corporation also means partners will not have to file tax returns in every US state where the firm does business, a process that has become painfully complicated as BDO USA’s annual revenues have grown to $3bn from $618mn a decade ago.

The change of structure could make the firm more fleet of foot financially as it contemplates big deals, observers say.

Several US accounting firms have taken investments from private equity groups to pay for acquisitions. In an interview with the Financial Times last year in which he revealed BDO USA had entertained the idea of taking private equity money, Berson rued that there were now deep-pocketed rivals vying for acquisitions he wanted to make.

“Private equity has cheque-writing privileges that a partnership doesn’t have,” said Allan Koltin, an accounting sector M&A adviser. “We are also seeing wealth management firms buying up accounting firms using cash in hand. You can’t compete without capital.”

A corporation able to retain more of its annual profits could more quickly build up a war chest or show a record of earnings that could allow it to raise debt. It can also make big decisions faster, said Koltin.

“While most firms boast about their love for the partnership model, they often get frustrated with the dysfunctionality of decision making,” he said. “As firms grow, rank and file partners can’t be consulted all the time on most major strategic moves. Firms need to be built for speed if they are to excel and compete.”

A case in point has been the debacle at EY, whose global chief executive Carmine Di Sibio argued that both the accounting and the consulting sides of his firm would benefit from being split. While the accounting business would have retained its partnership structure, consulting would have become a publicly listed company, raising money from outside shareholders.

The idea needed approval from EY’s 13,000 partners worldwide, though, making selling the plan something like a political campaign. It foundered amid resistance from retired partners and auditors in the US business, and Di Sibio is now planning to retire a year early.

“We are not a corporate where the CEO says something and it just gets done,” he said at the Milken conference last month, shortly after the collapse of the project. “We’re a series of partnerships, which takes a lot of momentum and a lot of knowhow to try to get something done.”

Executives at other large accounting firms are not giving up on the partnership model, even if they are clear-eyed about the pros and cons.

“The partnership structure, if managed appropriately, is a workable model assuming two things,” said Bob Moritz, PwC’s global chief executive. “That partners are getting sufficiency of economic returns on their activities and on the capital they put into the organisation; and that [the firm] has sufficiency of capital.”

Gary Wingrove, chief operating officer at PwC’s Big Four rival KPMG International, acknowledged that large investments, particularly cross-border acquisitions, can be more difficult for a partnership to pull off than in a “globalised, corporatised model”.

But he added: “The success of these partnership models is proven. All you have got to do is look at the growth rates that the Big Four have delivered over the past 10, 20 or 30 years. They all grow strongly. They all attract talent. They all deliver profits that mean that the partners do well.” “



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