The Silent Disruption of the Accounting Industry

Jun 24th, 2019

As Featured in the Australian Financial Review on 19/6/19.

Amidst the protest of taxi drivers against ride-sharing, the headlines of more manufacturing companies closing and uproar over telecommunications jobs moving overseas, the mature accounting industry is quietly undergoing a dramatic innovation transition. And, the $1Billion Australian FinTech Industry is not the only one to blame.

‘Disruptive Technology’ has been commonplace business language since it was first coined in 1995 by C. M. Christensen. 25 years later, there are not many industries which have been immune to innovation. The accounting industry is no exception. In fact, it was one of the first Australian industries to innovate online systems. In 1999, the ATO launched its first online tax submission for individuals [1], followed by the first Business Portal in 2004 [2].

Yet disruption has not (yet) impacted the core role of the industry to provide accounting services such as auditing of accounting records, preparing financial statements, preparing tax returns and bookkeeping [3]. This is because Financial Technology (FinTech) has always been designed for accountants to do accounting. Therefore, the accounting industry has required minimal reinvention and remains a necessary obligation for Australians.

In 2018 the NAB Key Insights into The Australian Accounting Industry Report, highlighted that 96% of Small to Medium Businesses (SME’s) use accounting services [4]. And the ATO Statistics Division showed an increase in businesses utilising tax agents to lodge tax returns and BAS (Business Activity Statements).  

Businesses which utilise a tax agent to submit tax and BAS

Businesses Which Utilise A Tax Agent To Submit Tax And BAS Table

In addition to this, the ATO estimated that in 2016, 74% of Australians still consulted a Tax Agent to lodge their tax returns.

There is arguably no other Australian Industry that can boast such market dominance.  But hidden behind these impressive figures are signs the accounting industry is already amid a major transition.

The Accounting Industry Success Façade

Research released by benchmarking.com.au has uncovered the accounting industry has lost its growth momentum and is now losing its value proposition.  The firm’s findings, which analyses a sample of 184 accounting firms across Australia, showed average net profit for SME accounting firms in Australia [5] decreased by 41% from 2013-2018; revealing the industry is well into its mature lifecycle.

Average net profit of accounting firms

ABS Data also reveals that the five-year average annual growth rate of the accounting industry has slowed to just 0.97%, compare to the Australian average of 2.18%.

Number Of Accounting Businesses

Benchmarking.com.au, an online comparison tool that analyses the financial performance and productivity output of thousands of Australian businesses, further highlighted that on average, accounting firm spends 39.51% of their total income on wages and can expect their fee earners to generate $3.25 to every $1 the firm invests in their salary.  Benchmarking.com.au Research Analyst Tim Chamberlain said the industry is starting to move to quality over quantity and ‘The take home message is – the more you can leverage high quality staff the more you can drive profits.’

In addition to the benchmarking.com.au findings, a new report by recruitment consultancy Robert Half highlights that skilled accountants will be in high demand in the next 12months, with experts forecast to earn in excess of $160,000 p.a. Whilst this may be good news for highly skilled accountants, for business owners, increase in wages is just one cause in the decline of average net profit as seen in figure 1.

In addition to higher business costs, the demand for high level skills and big pay packages means a growth-decline of overall jobs in the industry is imminent.

Despite being resilient to change over the past decade, administration and repetitive positions within the accounting industry are forecast to decline in the next five years. The Department of Jobs and Small Business predict Accountants and Payroll Clerk positions will only increase by approximately 4% by 2023, with Accounting Clerk positions forecast to decrease by 1.1%. The total growth gain across the four employment categories is just 2.2%, compared to the Australian average of 7.1% for all Industries.

Five Year Growth Forecast for accounting firms

“Our research proves what many already know: the accounting industry is – and has been – in the mature stage life-cycle for more than a decade.” Said, benchmarking.com.au CEO Markus Hugenschmidt, “the stagnated climate of the industry also means there is also much opportunity for firms to innovate and create a competitive advantage.”

strategic Capabilities And Organisation Factors

Figure 4: Source: Tovstiga, George & Birchall, David. (2019). Capturing Opportunity In Disruption: Strategic Capabilities And Organisation Factors.

 

Benchmark data

Figure SEQ Figure \* ARABIC 5: Source: NAB Key Insights Into The Australian Accounting Industry, 2018

The long road to a rapid disruption

The accounting industry is primed for disruption. A 2015 Deloitte Report argued there are five key catalysts serving as a sign for disruption; enabling technologies, customer mind set, platforms, economy and public policy. The accounting industry has all in abundance.[6]

1, Enabling technologies: Financial Technology (FinTech) in Australia is booming. The average business growth in 2017-2018 was 125% [7] and it is forecast the industry will add $1Billion of value to the Australian Economy in 2020 [8]. FinTech dropped to second place in 2018 on Start-up Musters most common start up industry in Australia, only behind Artificial Intelligence.  FinTech is still being designed for accountants, but it is now focused heavily on automation and artificial learning. All popular accounting software includes a range of automated systems including:

  • Simple BAS reporting via Xero, MYOB and QuickBooks: enabling businesses to report and lodge BAS quickly (and for free) online.
  • Single touch payroll: accounting systems are now integrated with the ATO regarding payroll and all businesses will be required to report via the new ATO single touch payroll system by 1 July 2019. [9]
  • Real time reporting: online payments, automated bank feeds and automated cost reconciliation is streamlining general accounting processes.
  • Super stream: businesses can utilise accounting software to automatically pay and reconcile employee super payments, reducing time and hassle.

Despite these features, it’s artificial intelligence (AI) that will replace large quantities of human accounting work. A report conducted by the World Economic Forum on how artificial intelligence is transforming the financial ecosystem [10] shows AI will shift the value proposition and customer expectation of financial management. Key findings of the report include:

  • Increased competition for accounting firms: banks and institutions are forecast to develop AI-enabled back-office operations into external services for financial management.
  • Pricing wars: a ‘race to the bottom’ style price competition will be introduced with firms and institutions buying customer loyalty at the cost of revenue.
  • Automated finance: consumers will have (and expect) real-time, continuous, automated financial outcomes which will continually improve their financial position.
  • Bifurcation of market structure: it is forecast that AI drive a market divide as firms attempt to define themselves as industry innovators.

2, Customer Mindset: A change in demanded services from business customers is waging new competition between firms to remain relevant in today’s business climate. The aforementioned NAB Report highlights a disparity in what additional services SME’s want from accountants and what accountant think SME’s want.  This shows SME’s value services surrounding business strategy, business analytics and advice on growth opportunities. Where are accountants believe value is on financial planning, legal services and IT Services. The report confirms that accountants need to dramatically diversify their business offerings to remain relevant.

“It’s important that accountants don’t stand still. The overriding reason SMEs change their professional services firm is that their business needs have altered. This means accountants need to move with the times and modify their service offerings to their business clients as they grow and evolve.” – NAB Key Insights Into The Australian Accounting Industry

3, Platform: streamlined automated processes, via new platforms, are forecast to have dramatic impacts on industry employment. The Financial Services IRC’s 2018 Skills Forecast [11], revealed accounting clerk and bookkeeper positions are poised for disruption with a 97.5% probability of automation for these occupations by 2020. Further, automation of platforms is supporting e-commerce growth across the nation. From 2015-2017, the ABS reports that internet income increased from $285B to $394B [12]. Online payments platforms streamline accounting processes by offering automatic stocktaking, reconciliation and reporting thus, minimising cash lost via theft and human error.

4, Economy: Whilst it can be argued that the accounting industry has remained stable due to the necessity of accountants for tax and compliance purposes, the industry is currently experiencing a wave of new customer expectations which is shifting the demand curve left and, reducing pricing.  This is combined with a slight increase in supply of accounting firms resulting in a reduced value for traditional services. The mature life-cycle of the industry (see figure 4) also represents that the industry is reaching market saturation; therefore, the introduction of any new firms will only decrease shared industry revenues and net profits.

Supply Demand Model

5, Public Policy: the accounting industry is greatly driven by ATO policy and compliance requirements. The ATO is continuing to invest in streamlining and standardising reporting and this includes working closely with FinTech companies to ensure Australians can remain compliant. In addition, the government invests in its own technology. The new ATO myTax usage has increased from 1.7 million people lodging their tax return online in 2014–15 to over 3.5 million in 2017-18 [13].  Since 2010, the treasury has also invested in driving Standard Business Reporting to simplify the process for businesses.  

Whilst AI FinTech will greatly impact the industry’s processes, the greater force disrupting the industry will be the increased intensive competition amongst SME accounting firms. Whilst less than 1% of businesses currently change accounting firms each year, 31% of businesses said they would leave their incumbent services provider if their business needs changed.[14] This is compared to only 5% wanting to change firms because they didn’t use the latest state-of-the-art technology.

There will always be a requirement for businesses to use an accountant for tax, but as the value earned per ‘business tax return’ decreases; firms need to look at how they increase value per client – not necessarily the number of clients.

 

Getting ready to rumble

For the foreseeable future, accounting firms will be required to continue to undertake traditional accounting. But in order to remain competitive, firms will need to rapidly diversify offerings and revenue streams. Put simply, the future of Accounting Industry is no longer about offering the basic accounting and tax service.  

Benchmarking.com.au research identified three key success factors accountants will need to implement to remain competitive and relevant through the disruption:

  1. Build customer relationships to increase customer satisfaction: understanding business customer needs and demands is just the beginning of the industry transformation. Accountants needs to build relevant products and services for business customers to increase customer satisfaction. This will support in retaining customer; even when their business needs change.
  2. Invest in value added services: firms need to consider how to increase the perceived value offering to customers. The research shows net profit is being diluted and this can be rectified with diversifying services and providing product packages. Firms needs to consider how they can add services such as business strategy, growth strategies and detailed analytics.
  3. Improving brand reputation: memberships and associations are key for the accounting industry as it create credibility and confirms compliance. With disruption brewing, firms now need to look beyond traditional brand associations (such as the CPA) and build relationships with brands that focus on business growth.

The future is in the black

An Accountants Daily survey revealed that while 38 percent of accountants view new technology as a threat to their profession, 96 percent are confident about the future of accounting. [15]

Accountants are, and should be, positive about the future. It is an opportune time for innovative SME firms to lead the transition and show that accounting firms can be much more than tax agents.

“In this industry, disruption is not just about inventing new technology systems.” Said Hugenschmidt “The accounting and finance industries have always been privileged with heavy investment into FinTech (Financial Technology). Real innovation and disruption in this industry will come from re-inventing the value proposition, and showing that accountants are, and always will be relevant for businesses.”

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The Methodology of the research included:

  • Analysis of responses directly received by benchmarking.com.au from 184 Australian accounting firms with a turnover of $80M or less in FY18
  • Analysis of the publicly available research reports from leading brands active in the accounting and finance markets (please see references for a links to reports)

References;

[1] https://www.ato.gov.au/Media-centre/Media-releases/ATO-retires-e-tax-in-2016/

[2] https://www.anao.gov.au/work/performance-audit/tax-agent-and-business-portals

[3] Australian and New Zealand Standard Industrial Classification (ANZSIC) Class 6932 Accounting Services

[4] https://business.nab.com.au/wp-content/uploads/2018/02/J002905-Professional-Services-Insights-Report_v5.pdf

[5] Net profit as a % of revenue, SMEs businesses are between 1-250 employees and less than $80M in annual revenue as of FY18. Figures are before principals’ notional salary

[6] https://www2.deloitte.com/insights/us/en/focus/disruptive-strategy-patterns-case-studies/anticipating-disruptive-strategy-of-market-entrants.html

[7] https://fintechauscensus.ey.com/2018/Documents/EY%20FinTech%20Australia%20Census%202018.pdf

[8] https://australianfintech.com.au/fintech-market-growth-to-add-a1-billion-new-value-to-australian-economy-by-2020/

[9] https://www.ato.gov.au/business/single-touch-payroll/

[10] https://www.weforum.org/reports/the-new-physics-of-financial-services-how-artificial-intelligence-is-transforming-the-financial-ecosystem

[11] https://nationalindustryinsights.aisc.net.au/industries/financial-services

[12] 81660DO001_201617 Summary of IT Use and Innovation in Australian Business, 2016-17

[13] https://www.industry.gov.au/sites/default/files/2018-12/australias-tech-future.pdf

[14] https://business.nab.com.au/wp-content/uploads/2018/02/J002905-Professional-Services-Insights-Report_v5.pdf

[15] https://www.accountantsdaily.com.au/sponsored-features/11042-is-new-technology-a-threat-to-accounting

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