Academic journal article Journal of Accountancy

Build on Your Firm's Strengths

Academic journal article Journal of Accountancy

Build on Your Firm's Strengths

Article excerpt

CPA firms delivering new assurance services won't succeed unless the services they choose both meet market demand and match the firms' capabilities. Not every accounting firm can provide every assurance service. A firm must know not only how to identify customer needs for assurance services but also how to choose the services that best fit the firm's expertise.

This article explores how firms can decide on new assurance opportunities to develop. But such an exploration cannot be comprehensively covered in a single article. Each firm should consider its own characteristics, resources and capabilities as well as the potential fees from and costs of offering a new assurance service.

MATCHMAKING

The assurance service a firm decides to offer should fit the firm's reputation and culture. A firm with a boutique, high-margin practice, for example, would have to think carefully about offering a service based on high volume and low margin. A misfit not only could reduce the likelihood of success in the new venture but also hurt the firm's already successful operations.

The more closely the competencies needed for a new service match the firm's strengths, the better the fit. A good fit offers a firm a competitive advantage over other providers of the service that lack desirable strengths. Clients are more likely to believe, for example, that tax planning is top level when a CPA already has services, known skills and experience in tax compliance work than when the provider has no experience related to taxation. The competitive advantage of a good fit also can come from being able to sell the service at lower cost or to provide a better service at a competitive price.

ESTIMATING COSTS AND RETURN

To determine potential revenues, multiply the anticipated fee per engagement by the estimated number of customers. To estimate a fee, start with a fee clients will accept. This means valuing the service's importance to clients--that is, the degree to which it will make them better off economically. The estimate might be made by using the fees for comparable services and refining that figure with formal or informal market research. When fees for comparable services are too rough to be relied on, make a direct estimate of the value to the customer. For example, the value to a client of assurance on compliance with regulations would be influenced by the potential risks of being found in violation. The higher the dollar value of the potential loss and the more diligently potential violations are pursued, the more valuable the service to the client.

Audit fees evolved over the years and were not subjected to this model, but if they were, the ingredients for value to the client would be clear. Audits lower the cost of capital. The basis points by which the audit lowers the cost of capital times the amount of capital gives the audit's value to the client in dollars. The relevance of this example, so true and yet so unappreciated and rarely applied, is that a client's tolerance for a fee must be based on its understanding of the service's value. The assurer can help clarify the understanding but in the end is bound by the client's beliefs and attitudes, which define what the market will bear. That is why focus groups and other market research are sometimes needed to sharpen estimates.

To estimate the number of probable customers, three figures are used: (1) the total possible number of customers for the service in the marketplace, (2) the percentage of those who are likely to actually purchase the service and (3) the percentage of the purchasers that your firm can expect to get (that is, market share). Multiplying these three factors gives the probable number of customers for your firm. Various information sources can help in making the estimates. For example, total possible customers might be available from census data for the area, from other public sources or from economic consultants. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.