Academic journal article Journal of Managerial Issues

Assessing the Managerial Objectives of CPA Firm Partners

Academic journal article Journal of Managerial Issues

Assessing the Managerial Objectives of CPA Firm Partners

Article excerpt

Managing a CPA firm has become increasingly complex over the past ten to twenty years due to increased environmental pressures, including greater competition for clients, staffing cost pressures, greater litigation, and the need to maintain and enhance the firm's skills and capacity. CPA firms, unlike many professional organizations in law and medicine, do not hire professional managers. Instead, firms normally depend on their partners to hold dual roles of providing professional services to clients and exercising managerial responsibilities. As owner-managers, partners need to adopt behaviors that reflect the firm's needs.

The partner/manager responds to this complex environment facing the firm by balancing the firm's various objectives. These objectives include: (1) short-term profitability; (2) client service, which translates into longer-term profitability and increased competitiveness in attracting and maintaining clients; (3) declining work that cannot be handled, which affects the firm's risk of litigation; (4) managing the firm's labor force, which impacts the firm's cost efficiency; and (5) maintaining the skills and capacity of the firm through the training of personnel, which affects competitiveness and litigation risk.

Few studies have addressed the role of the partner as the manager of the firm. One study (Baker, 1977) investigated the overall management strategy of a single large CPA firm ming a participant observation methodology. Baker found that the management strategy of a CPA firm includes three components: "doing" -- performing client services for a fee; "representing" -- developing relationships with outside parties other than clients; and "being" -- developing the firm's image. Baker's research argued for a need to balance the strategic elements of client services, outside relationships, and firm image, but did not provide a model on which to base further research. Maister (1982) discussed the economics of a generic professional service firm, characterized by a multi-level staff structure, work performed by project teams, and fee revenue based on billable time (all of which describe a CPA firm). Such a firm interacts with the market for professional labor as well as the market for the firm's services. In dealing with the market for professional labor, the managers of the firm are concerned with hiring, promotion policy, growth planning, and turnover. In dealing with the market for the firm's services, concerns include the type of services to be offered and the team structure necessary to deliver the services. Management's role is one of balancing the firm's economic/organizational structure with the two markets in which it operates.

The professional literature on practice management emphasizes the notion of balancing multiple objectives. The AICPA's Management of an Accounting Practice Handbook (1985) discusses client service, financial administration, and personnel management as key functions in the management of the CPA firm. Earlier editions (MacNeill, 1962) began explicitly with chapters on fees, staff personnel (including hiring, training, and utilization), and client relations. Similarly, Miller (1987) cites the importance of the interaction of fees, a quality stafF, and timely client service in the management of a practice.

The academic literature has indirectly examined the behavior of CPA partner/managers via studies such as those on price premiums charged by national CPA firms (Palmrose, 1986; Rubin, 1988; Francis and Simon, 1987), initial price discounting ("low-bailing") to achieve a client (DeAngelo, 1981; simon and Francis, Schatzberg 1990, 1994), and the role of the firm's production cost function in setting audit fees (Stein et al., 1994: O'Keefe et al., 1994; Copley et al., 1995; Gigler and Penno, 1995). These studies involve consideration of short-term versus longer-term profit tradeoffs, the value of client retention, and the role of production costs in firm competitiveness. …

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