To be, or not to be a CPA firm with Chase Birky of Dark Horse CPAsDownload MP3
Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Speaker1: [00:00:04] Public accounting doesn't need to be a farm system, right? Because for the 1% that make partner, that becomes a career, right? Some folks might find some other area within the firm to create a career out of, but the vast majority are not creating a career in public accounting. So then you look at this as, okay, this is a farm system for whatever's next, whether that's being a comptroller, a CFO, you know, that's what it's historically been looked at as. Whereas, you know, we want to look at this as, no, this is the major leagues. This isn't up or out.
Speaker2: [00:00:37] If you'd like to earn CPE credit for listening to this episode, visit earmark Cpcomm. Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hello everyone, and welcome to another episode of the Earmark podcast. I'm your host, Blake Oliver CPE, joined today by Chase Berkey, CPE CEO and co-founder at Dark Horse CPAs. Chase, welcome to the program.
Speaker1: [00:01:10] Thanks for having me, Blake. Happy to be here. Happy for this discussion. It's going to be great.
Speaker2: [00:01:14] Yeah. I have my dark horse CPAs hat right here in the background. Let me grab it for our listeners who are watching on YouTube. There we go. These are really these are like the the the coolest hats, I got to say, in the business. Not your traditional CPA firm. I mean, how do I describe this? They're like trucker hats. Yeah. With a big sort of like military style badge that you've, like, put on them, right? Dark Horse. And the and the tagline is Damn good CPAs.
Speaker1: [00:01:46] Yeah. No, it's something we wanted to make hats and shirts and just stuff that people actually wanted to wear because you can spend money on gear that is okay, but people aren't actually going to wear it. You know, we'd rather just spend a little bit more for something people are actually going to wear proudly, you know? And it's great for, you know, camaraderie and culture and all that to see people wearing, you know, the dark horse stuff on our teams meetings and those sorts of things helps, you know, bring people together.
Speaker2: [00:02:15] And it fits with your brand. It's on brand. You are not a traditional CPA firm, though. You are a CPA firm, right?
Speaker3: [00:02:23] We are.
Speaker2: [00:02:24] But not a traditional one.
Speaker1: [00:02:25] Not a traditional. Absolutely. We actually like to call ourselves the anti CPA firm.
Speaker2: [00:02:30] So the anti CPA firm. So unpack that for me.
Speaker1: [00:02:34] Jason Yeah, so my kind of path that got me here started Big Four then moved to a boutique, you know, local firm, and I saw, you know, the good parts and the bad parts of each. And, you know, I think the bad parts are maybe more broadcasted and known at this point, you know, which is created a talent pipeline issue that we're all aware of. There's many contributing factors, but at the end of the day, you know, CPA firms are moving farther away from the demands of talent, you know, and not keeping pace and relevancy with those folks. So, you know, we wanted to really create a firm that was the best of the big accounting firm, the best of the small accounting firm, you know, eliminated as many of the negatives as possible, you know, allowed people to be creative and autonomous and self-determining, you know, and not just chained to their desk and burned out for as long as we could get their labor for. So in a lot of ways, you know, we just looked at this through a very counterculture lens and kind of how we were looking at this.
Speaker2: [00:03:47] So so it's kind of an alternative path, right? Like, so let's pretend I'm a CPA at a traditional firm and I have in that firm the, you know, partner path, the traditional partner path. Right. Let's say I don't know, when do people start talking to you like manager level, director level like before their partner, obviously, right?
Speaker1: [00:04:08] Yeah. So we got two ways that you can become a principal of the firm. One is through our accelerator program and those folks are typically a manager or senior manager level at a traditional firm. And a lot of times they're kind of going through that decision process of, you know, do I want to be a partner in this firm? If I do, what does that timeline look like? You know, what is it actually going to mean from a compensation standpoint, you know, expectation standpoint? You know, so they're kind of a lot of times in this nebulous space of what's my next step. And so really what we're able to do that's super unique is we're able to bring those folks in, train them, you know, on how we operate our tech stack, all of that sort of stuff. But, you know, really invest in them as a business developer, you know, so that when they have these conversations with the inbound inquiries that we're generating, you know, they know how to go about those conversations comfortably and in an authentic way to themselves. And they're getting coaching along the way. So they're getting training upfront, then they're getting coaching on the X's and O's. You know, we're literally going through, you know, a recording almost like you would unpack game film, you know, in the NFL or some other professional sport. And looking at the X's and O's of, you know, what went right in that conversation, where can you improve, you know, And so we're just actively working with them through their accelerator time period, which can be anywhere from 4 to 9 months. And at the end of that, they've built a book that's around 200,000 in recurring revenue and they're eligible to become a principal.
Speaker2: [00:05:47] Got it. So you call your people principals so it's not a partner model.
Speaker1: [00:05:54] Right? So it is analogous to it, but we're actually a C corp, so our principals are W-2, but they're also equity owners in the company. We do stock options, so when they become a principal, there's a stock option grant and then there's an annual one each year based on the profitability of their book of business.
Speaker2: [00:06:16] Got it. So W-2 employee with stock options and then. Practically speaking, if I'm a principal at Dark Horse, I have my own book of business that I serve. These are the clients that I'm responsible for. So that's kind of analogous. It's similar to a traditional firm where I would as a partner, have my own book of business often. So what's different from a legal perspective, from a business perspective is can you actually walk me through that? Because I think a lot of folks are not actually familiar with how it actually works in a partnership type of entity. When I become a partner as a young partner versus what you're doing, right?
Speaker1: [00:06:57] And I think the biggest difference that's pertinent for listeners is that in a traditional partnership model, there's kind of been this historical third, a third, a third, you know, a third of revenue goes out in partner compensation, a third goes out in staffing and a third goes out into overhead. Whereas in our model, you know, we're not allocating these broad costs, you know, in a black box that folks have a hard time determining what that's actually going to result in in their pay beyond whatever their guaranteed payment might be in that partnership. We're actually running specific panels within the firm that are class based and QBO so folks can see their exact revenue and expenses on a daily basis because we're updating it every single day. And then twice a month their net profit is utilized to generate a profit split, which is essentially what their wages are based on so they know exactly what's being allocated to them, their direct expenses. And as a result of being leaner and operating in a more horizontal fashion, our folks are typically bringing home 40 to 50% of their revenue in terms of their actual compensation versus that one third. That's more common in the industry.
Speaker2: [00:08:18] Say that again. So it's one third in traditional. And for you guys, it's.
Speaker1: [00:08:21] Between 40 to 50%.
Speaker2: [00:08:22] Typically. And that's that's not bad, right? Like so so basically you're kind of you're accelerating my earning potential versus in a traditional firm where a lot of that third that goes to overhead is really going to retiring partners or who knows where it's going. Right. Right. I mean, it's going it's going up the chain up the pyramid somewhere. Yeah.
Speaker1: [00:08:43] Also, you got the shared staffing pool, right? So that's a common characteristic of a partnership. So how that staffing cost is going to ultimately get allocated to you, how the administrative cost is ultimately going to get allocated to you, It's out of your control, right? Unless you're the managing partner. I think a lot of folks just don't realize, you know, when they're part of a partnership group, they're really upper level management. Yeah, you might have equity, but you're not actually making the decisions. You're just a vote in those decisions, you know? And so we really want to, you know, to the best of our ability, make sure that folks have the autonomy in their own practice and, you know, can determine what they're going to earn without, you know, some opaque overhead burden for them. And so ultimately, they end up with their own staff. We don't believe so much in the shared staffing model. There is definitely a use case for it when it's done right, but when it's not done right, you get a lot of partners, you know, pulling at your attention with, you know, their project being priority over all else.
Speaker2: [00:09:53] Well, that was my life in the client accounting services practice of a of a mid-sized firm. It was a large firm, really 1000 staff, 100 partners where I'm a manager and I oversee a team of like a dozen people and I'm getting pulled by every partner that needs help with their clients. So I had, you know, a dozen bosses in that office that I was in often, and the staff would get pulled even more directions, right? It was it was it was a challenge to like staff anything. It's like Peter.
Speaker1: [00:10:22] Gibbons in office space having eight different managers ask him about the cover page on his reports.
Speaker2: [00:10:29] Yeah. As you take a swig from your mug there.
Speaker4: [00:10:34] Yeah, yeah, yeah.
Speaker2: [00:10:36] I'm going to need that on on Monday.
Speaker1: [00:10:38] Hey, Peter, we're going to need you to come in on Sunday. Yeah, we're playing catch up here.
Speaker2: [00:10:44] You know, it's funny, David and I, David Leary, my co-host on The Cloud Accounting Podcast, we love office space. I feel like everybody from our generation, like, grew up with that as sort of the, you know, divergent Yeah, right. It's sort of woke me up to like corporate everything wrong with corporate culture. And I feel like the younger generation needs to see that movie. Like we need to do everything we can to make sure that accountants in their 20 seconds see office space 100% because it was so, so ahead of its time in many ways now. Now it's sort of like maybe it even seems passé, right? It's it's just part of the the Gen Z culture to think that way. But but. For me, Like the idea of like prioritizing your personal life and your personal goals over work. You know, I never was taught that totally.
Speaker1: [00:11:28] And I mean, I think one of the major downfalls of the traditional CPA firm is that the level of dedication you have to have to that firm and, you know, the amount of your soul that you have to sell to that firm to be able to become a partner, you know, is untenable for a lot of folks. It ruins marriages. It, you know, disrupts families. You know, people don't really want to talk about that. But if you go to any major public accounting firm and you look at the partner group, I remember my own experience of looking at the partner group when I entered public accounting and I saw people that were divorced on second, third, fourth marriages, people who were unmarried because they just had delayed that, you know, and not to pass any judgment on anyone's, you know, personal story.
Speaker2: [00:12:17] But but what you said is true. And I don't think they would disagree with you that to become a partner takes a huge commitment. And there's only so many slots, I think in the Big four, which is the extreme example, one in every 100 new hires becomes a partner, right? So the odds are extremely against you. Now you go into the top 100, it might be better odds, but it's still probably 1 in 10.
Speaker1: [00:12:42] One might call that a pyramid scheme, right?
Speaker2: [00:12:45] So multi-level marketing and you see it in the compensation. And this is something that I've been digging into that I find just fascinating is that, you know, we have trouble attracting staff kids in college into the accounting profession because starting salaries are relatively low compared to other professions or just even other things you can do with a four year college degree. And I think, you know, in many areas, starting salaries are 50, 60, $70,000 for a staff accountant, staff auditor and the partners, however, are making ten times that amount or more, right? Sometimes 20 times or 30 times. So it's funny to me that we have this situation where there's a lot of money floating around in accounting. There's a lot of potential, a lot of opportunity, but it's not getting to the people who we need to recruit into the profession, right? You know, like in salaries, like really don't haven't been rising, even though there's been all this demand over the last few years, they're not rising quickly enough.
Speaker1: [00:13:49] Yeah, I totally agree with that. You know, one of the things that I was always puzzled by, you know, in my own experience, the Big Four is how much money was being spent on each new crop of employees each year. You know, that was hired in a new starting class, two weeks offsite training, you know, the inefficiencies that happen with a new hire that doesn't know their head from their ass when they're trying to do their work, you know, And maybe they also have to be studying for the CPA exam. On top of that, any other business would look at that as a major investment for a long term employment, you know, because you're really reaping the benefits. The longer they stay, you know, and the longer that they continue to grow and add more value to your organization. But the mindset has really always been just turn and burn, right? So how much money is being wasted on these trainings and, you know, inefficiencies in terms of getting the work done, you know, knowledge, it's not transferring as a result.
Speaker2: [00:14:51] Yeah. Well, and it's been okay in the past because we always had this I mean, setting aside the the personal impact on these people from churning and burning them, let's just set that aside. Let's look at them as numbers. It's been okay because we've had enough young people going into accounting where, you know, some go to partner track the very, you know, select few do and the others learn. And I've had people who tell me, you know, I had a great experience. I learned a lot. And it prepped me for my role as a controller or now as a CFO or something like that in private. And I don't regret that. And I think that that's great. It worked when it did. But I think for a lot of people, you know, maybe another 50% said like, I didn't get anything out of it. Right? I hated it. It was terrible. And I think that alternative paths are cropping up now for those folks. And, you know, Dark Horse is one of those where you're a talented person. You made it to manager, but you've decided, you know what, I want a little more work life balance, right? I want to make more money now. I don't want to wait another five, ten years. Right? Yeah, you have that right.
Speaker1: [00:15:59] And we believe that, you know, public accounting doesn't need to be a farm system, right? Because for the 1% that make partner, that becomes a career, right? Some folks might find some other area within the firm to create a career out of. But, you know, the vast majority are not creating a career in public accounting. So then you look at this as, okay, this is a farm system for. Whatever's next, whether that's being a controller, a CFO. You know, you name it. You know, that's what it's historically been looked at as. Whereas, you know, we want to look at this as, no, this is the major leagues. This isn't up or out. You know, there's a place for you within this organization that can be tailored on, you know, the lifestyle that you're trying to build. You know, what you're trying to do career wise. You know, it doesn't have to be up or out. It can be a career. Yeah.
Speaker2: [00:16:47] And I want our listeners to know that I'm not if you're a partner and at a firm and you worked really, really hard and you work long hours, like there's nothing wrong with that that's right for you, but it's not right for everybody. And I feel like part of the problem we have in accounting is that the only path so far to be successful has been to work those long hours. So it's been like a lack of flexibility. If you were either willing to be totally dedicated to the firm or you weren't, and if you weren't, you weren't going to fit in, right? And so firms that are creating a more flexible environment where you get to choose how much you want to work, do I want to work 40 hours? Do I want to work 60 hours? Do I want to work 80 hours? Maybe? I don't even want to work 40. Maybe I just want to work. You know, a part time schedule like those firms are thriving, Right?
Speaker1: [00:17:38] And it's not like you said about right or wrong. You know, it's not like a traditional accounting firm is wrong and we're right. It's nothing along those lines. It's just a matter of what is the marketplace telling us? What is talent telling us by not going the route, you know, that we can learn from? And ultimately, you know, I think what is being told to us in this narrative that the marketplace, you know, is demonstrating to us is that what has worked for the last 120 plus years is not working to the extent that it needs to for the profession to be viable into the future, which means we've got to really rethink, you know, how we're doing this. We're at an inflection point, you know, because technology isn't to a place yet where, you know, you can substantially get by with substantially less labor. You know, you still need these people, especially when it comes to audit and the confidence, you know, derived from what happens in an audit. I mean, and that's just one of many examples, right? But we need talent. Maybe in the future we won't need as much of it. But we're really in a rock between a rock and a hard place as a profession right now because we're lacking that talent that we need in the here and now, you know, and ultimately there's more supply or sorry, more demand than there is supply in terms of, you know, the demand for our services, which is leading to people being underserved because there's firms that are trying to accommodate it all at prices that, you know, are too low. You know, so the demand is getting accommodated. But is it being served to the extent that, you know, we put ourselves out there as CPAs?
Speaker2: [00:19:22] So your principles are W-2 employees. They are compensated with their given ownership with stock options. So this is more of a kind of startup style environment, which, you know, anybody who's worked in startups knows that stock options are always a part of the puzzle there and can be pretty sweet. I'm surprised that more firms aren't adopting the this model. You're a CPA firm. Are there any issues with running a CPA firm as a as a C Corp? Is that allowed Or, you know, did you have to do something special to make that happen? Is this is this possible to do for everyone?
Speaker1: [00:20:01] Yeah, no, it definitely is within California, which is where it was created. It's an accountancy corp, so it can be either a C or an S, And we originally went with the S for think reasons that are probably known to anyone listening to this podcast, but we eventually revoked that. And with the C Corp route because we've got some larger ambitions, you know, that we would like to accomplish in the future, which may or may not include outside investment. And those investors don't happen to love S Corp's.
Speaker2: [00:20:36] So now I'm going through that myself right now. And it's like the Delaware C Corp is the gold standard. So I'm having to tear apart my S corp at this moment. I kind of wish I'd just bit the bullet and set it up the right way to start, but. Right. You know, it's always it was a little I was a little short term with that. But anyway, you can't go back in time and change it.
Speaker1: [00:20:57] Yeah. And for us, the other thing too, is that, you know, this is a play for volume and scale, you know, so it won't be that far in the future where we would exceed the number of shareholders that An. S Corp could even have. Right? Yeah.
Speaker2: [00:21:09] So what is it, 100? Something like that. Yeah.
Speaker1: [00:21:12] Yeah. So what we end up doing is, like I said, we have these stock options for principals once they become principals and then annual. Thereafter, but we want to make sure that that actually gets down to the staff level. And so when we do a given grant, we might say, hey, you've earned 20,000 shares. Would you like any of this share grant allocated to your team? And if they say, Yeah, 5000 goes to my accounting manager, then we're actually doing that in the form of an RSA so they don't even have to pay to exercise it. Rsa is Restricted stock award.
Speaker2: [00:21:46] Okay, got it. So they just get that they don't they don't pay.
Speaker1: [00:21:49] Right. They get taxed on it, but they don't have to actually pay to exercise it.
Speaker2: [00:21:54] Well, that's huge. Like, I don't know of any firms that are doing that equity down at the staff level. Well, actually on the Cloud Accounting podcast, we just talked with Ted Callahan from Intuit, and I learned that QuickBooks Live bookkeepers get stock options. Oh, yeah, yeah.
Speaker1: [00:22:08] Quickbooks Live and think TurboTax Live as well. Yeah. Which makes up for what might be looked at as maybe below market wages.
Speaker2: [00:22:17] But when you add in when you add in their bonuses and their stock option grants, it's closer to $32 an hour on average that they're getting paid, which when you consider they're recruiting people from, you know, post-industrial towns in like Tennessee, like that's a good wage there.
Speaker1: [00:22:37] Yeah, 100%. And we also wanted to add a liquidity element to this, too, because it's one thing to have stock that might be, you know, funny money for another 10 to 20 years, right, until there's some sort of liquidity event. So what we actually recently instituted was whenever we get our 401 (K) done, which is typically March of each year, there's a 90 day period thereafter where folks can choose to sell up to 20% of their vested shares back to Dark Horse. And we'll we'll buy those at the 401 (K) price because we're also then issuing options that are at that same price. You know, so really the point is not to incrementally sell the company as much as it is to provide liquidity opportunities and show that there's real value to the stock. And as it grows, you get to participate in that.
Speaker2: [00:23:30] Oh, that's great. Yeah. You're not locking people in for ten years or however long it takes, right? That's great. Well, so so you set up as a CPA firm. Do you do audits?
Speaker1: [00:23:41] No, No test work at all. And that was really informed out of my own experience in audit.
Speaker2: [00:23:48] I You didn't you didn't love it.
Speaker1: [00:23:51] No, I hate to admit I did not love it. There are some people who love it, but I was not one of them. Ultimately, we wanted to be able to work with clients in a way that was strategic, you know, and didn't have concerns of independence baked into everything we were doing for them. So I personally didn't love the audit practice. I felt like it was a little bit out of alignment with what we were trying to do with clients, and it's not something you can just dip your toe in the water. It's it's a whole thing. So for a lot of reasons, we opted out.
Speaker2: [00:24:25] So if you're not doing audits, I got to ask, why be a CPA firm? There's a lot of red tape that comes along with being a CPA firm in in most states, you can practice accounting, you can do accounting. You can call yourselves accountants without being a CPA firm. One of our most popular episodes of this podcast is an episode with Michael Lee, who's the CEO and founder of Reconciled, who's doing a bunch of acquisitions of small firms. He's rolling them up. He's not a CPA firm. So when he buys these firms, even if they're a CPA firm, he just buys the employees the book of business and then casts aside that entity. You know, why go through the the CPA firm red tape?
Speaker1: [00:25:10] Yeah, I mean, it's a question, you know, we're asking ourselves as time goes on, you know, and there's obviously pros and cons. You know, I think when you first start a firm having that CPA designation to showcase to the marketplace is instant credibility, right? If you're not a CPA firm, then you've got a longer road to create a brand with trust embedded into it. But, you know, there becomes a certain point where your firm creates enough of a brand with consumers that the trust is actually in the brand more so than it is in the designation. I don't think we're at that point where I could confidently say that that's the case for us. You know, we're not a household name at this point, but, you know, at a certain point then, okay, you know, it's not to say we don't have CPAs, right? If someone's really concerned about that, they're going to see that the principle they're working with is, you know, X name, comma, CPA. So it's not like we don't have CPAs. It's just that maybe we drop that designation. So I think there's a. Host of things, a host of reasons why you would go one way or the other. But there's a couple of reasons, you know, that I think are worth talking about from a devil's advocate point of view, on why you might not go to the CPA firm route or, you know, maybe convert your CPA firm to a non CPA firm that. Yeah, tell me tell.
Speaker2: [00:26:42] Me about what you've had to go through because I never was a CPA firm, right? I'm a CPA, but my entity was always, you know, not so I never had to do peer review. I know that's one of them. Do you go through peer review?
Speaker1: [00:26:55] Yeah. So even though we don't do a test work, we do do prep and compilations. So the compilations require us to have that peer review, which is once every three years. There is value to that. You know, I'm not going to say that, you know, it's just this bureaucratic red tape thing that provides no value. There is value to it. However, that value compared to what goes into making sure that you pass it is not quite an alignment. So in other words, it's more work than it's worth.
Speaker2: [00:27:29] So tell me about that. Like what is what actually is a peer review? So because I know people complain about it, but I've never actually done it.
Speaker1: [00:27:38] Yeah. So a peer review again, once every three years you get to select typically at least in California who you want to do your peer review. They essentially look at a, you know, a sampling of all of your engagements that are prep and compilation. At least in our case, it's got to be different for reviews and audits, but they'll make a selection on a certain number of engagements that they want to take a look at. They'll ask for your engagement letters. They'll ask for the financial statements, you know, with the cover letter and disclosures. You know, so pretty much everything that goes into that compilation or prep engagement, they're going to want to take a look at. And then, you know, they're going to look at the disclosures that you put on the cover of that compilation letter and whether that's, you know, in conformance with the current SARS. So a lot of it ends up being forum. Yeah. Formalities and you know a little bit on the legalese in terms of what the current guidance says you should be saying about certain situations and.
Speaker2: [00:28:47] Did I hear you correctly you get to pick who does the peer.
Speaker1: [00:28:49] Review in California. Yeah.
Speaker2: [00:28:51] Okay. So you could say like you could call me up and say, Hey, Blake, buddy, I need you to do the peer review on my firm. We're good friends. You're going to go easy on me, right?
Speaker1: [00:29:01] Right. So, I mean, you would in that case, have to actually be registered to do that. So it's there are some hoops to jump through, you know, in terms of you can't just make that happen overnight. You know, there's a lot of things that go into, you know, you actually being able to put yourself on that list to do peer reviews. But, you know, there could be some conflict. You know, in theory, if you did have a really close personal relationship with someone who is a peer reviewer, I think ethically, it would be up to them as to whether they were going to accept that engagement or not, and in theory shouldn't accept that engagement. But you never got it.
Speaker2: [00:29:41] Okay. That's interesting. So it's very similar to companies selecting their own auditors. Yeah. In that way, right. Like and I think we all know just how there can be many conflicts of interest and that can you have the same peer reviewer over and over again is that or do you have to select a new one?
Speaker1: [00:29:57] Um, I think at some point you do. We've had two peer reviews, use the same person for both. But I got to imagine at some point there's got to be a cycle.
Speaker2: [00:30:09] So okay, walk me through anything else. So we did, we got through the peer review. What else do we got to do as CPA firm owners that we don't have to do if we're not?
Speaker3: [00:30:18] So I mean, there's issues around, um.
Speaker1: [00:30:22] There's contingency fees, right? You can't charge contingency fees as a CPA firm you can get.
Speaker2: [00:30:28] Oh, yeah. Yeah. Well, that's a big one, because all those firms were out there who are not CPA firms charging contingency fees for Idle and.
Speaker1: [00:30:36] And you.
Speaker2: [00:30:37] Name it, CRC. I don't know if you could do it for PPP. I think that was I know people were, but I don't think you're supposed to. But yeah, contingency fees like you can't do that as a firm CPA firm, right.
Speaker1: [00:30:47] And anyone who thinks that that's not actually happening is kidding themselves. You know, CPA firms are creative in ways of approximating what they want to get, you know, in terms of what could be looked at as a contingency fee, although it's never, you know, cloaked in that language, you know, but people will find ways to get the amount of money that they believe is due to the value that they derived.
Speaker2: [00:31:14] So you just estimate what it is and fix it in advance, Right? That's the that's the easy way to do it. Right.
Speaker1: [00:31:20] And so I would argue that that's actually more unethical than charging a percentage for result, you know, because that's obscuring from the client's site. You know exactly what and why you're getting paid, you know, because you're going to get that fixed fee whether or not you end up achieving the result, you know, that you have indicated to them. So there's a little bit of an issue of alignment from my standpoint. So I would almost say, you know, as opposed to trying to, you know, back into a contingency fee equivalent, having a contingent fee, you know, clearly disclosed in the why behind it is actually more ethical than the alternative.
Speaker2: [00:32:00] Which, yeah, it just encourages us to hide it. All right. Let's keep going.
Speaker3: [00:32:05] So also, I mean, I think a big.
Speaker1: [00:32:09] Thing from my standpoint is, you know, talent, right. We've talked about the the shortage of talent that's out there. And so when you think about folks that are not going to pursue the CPA license, those folks are also not going to pursue working at a CPA firm because they know that there's a short shelf life in terms of how long they could be at that firm, at least within the function of doing the audit tax or advisory work without that CPA license. So they're not typically going to go to a CPA firm if they're not going to actually get the CPA license. And so that doesn't necessarily mean that they're not interested in a career in accounting or tax. So, you know, if you're not a CPA firm, then there's the ability to recruit talent that would not have looked at you if you were a CPA firm. So, you know, there's that's a big one, right? So there's there's an element of your opening your talent pool to a larger audience. You might be potentially excluding some that really feel like they need to be at an actual CPA firm. But, you know, again, I think the marketplace is telling us something different than that. And so if your firm is positioned in such a way where you can actually make a good case to those folks who are not going to be CPAs or at least in the here and now, are not going to pursue it, as to why they would want to work with your firm and you know what the growth opportunities could be there that just wouldn't exist. You know, in a CPA firm.
Speaker2: [00:33:54] Do your principles have to be CPAs?
Speaker3: [00:33:56] Currently? They do.
Speaker1: [00:33:58] You know, it's something it's an active debate because there are folks out there that have very successful practices and drive a ton of value for clients that aren't CPAs. Right? So it's something we're always going to be talking about and open to, you know, because we recognize that that credential does not in a binary way, say whether someone is good or not. And so, you know, it's really just a question of does that potentially dilute our brand as seen through the eyes of our principals? You know, so if they feel like, well, we're lowering the bar, you know, and being a principle has less prestige as a result, you know, we got to look at the optics of it.
Speaker2: [00:34:43] That's true. Yeah. So, you know, I'm hearing that. If I could summarize, let me know if I get this right. A lot of it's a brand. A lot of it about being a CPA firm is you have CPA in your firm name. It's respected. We all know just how valuable that brand is. And having all your principals be CPAs, By the way, is that a requirement of being a CPA firm or is that just your own internal requirement? At the moment.
Speaker3: [00:35:12] It's our internal requirement. There's so it.
Speaker1: [00:35:15] Depends state by state. But in California, you actually can't have non licensed CPAs that have equity that are performing certain job functions. So, you know, there's an issue in recruitment if that's, you know, the state board of accountancy laws that you're under, you know, you might want to have someone at a very high level in your organization with equity, you know, and you're not able to do that because of these rules that are, I would argue, arbitrary, you know, especially when you look at what the accounting firm of the future needs to be. It looks a lot less like, you know, the accounting firm of the past where, you know, it was really just about, you know, practitioner led partnerships and organizations. You know, we're talking about moving into something that looks more like an actual traditional company, a traditional corporation or start up, you know, So to be able to get the right level of talent, there's got to be equity on the table. And, you know, it's just a hindrance to making that happen.
Speaker2: [00:36:17] So. Summarizing again. It's it's the brand. It's having s.p.a in the company name. It's it's having principals who are CPAs. It's very well respected. And then on the other side, we've got a way, the costs of compliance of doing the peer reviews of what what else was it mean?
Speaker1: [00:36:38] Impediments. The strategy really is how I would summarize a lot of it. You know, the red tape that prevents you from, you know, doing certain things strategically, whether it's a contingency fee or hiring someone and giving them equity. That's not a CPA, right. You know, or the amount of time you have to spend to jump through certain hoops, you know, because while you're a CPA in one state, you might not be eligible to actually transfer that license to another state because that state might say something like, in the case of Nevada, that you have to have met the requirements when you were licensed in the foreign state that were applicable to our state at that time, you know, which it's just another impediment to, you know, running a business and it's not something that's actually offering value to the public or, you know, to the firm in question.
Speaker2: [00:37:33] So I'm a CPA, you're a CPA. We see the numbers declining. They're going down every year a little bit. It's not like plummeting off a cliff. But even just to keep up with economic growth, we really should be producing 5% more CPAs every year. And instead it's going the other direction. Average age of a CPA firm partner in a firm under $2 million is something like 60 years old. Now, in larger firms, it's in the 50 seconds. We see this inching up a lot. Most CPAs, 75% of CPAs are at or near retirement age, according to the CPA. It just seems like we're kind of like aging. In this in this world. If you were elevated chase to, you know, president of the AICPA or chair, what would you what would you be saying to firms is like what we need to do to to fix this? Or first I should ask, you know, do you perceive this as being like a burning issue? And then if so, how how bad is it and what would you do about it?
Speaker3: [00:38:40] Yeah, I mean, I think it's.
Speaker1: [00:38:41] An existential crisis. It's a it's a, you know, fork in the road for our profession. Um, so I absolutely think it's it deserves our full attention and not just something that happens in the background that we're hoping the AICPA does something to make it easier and, you know, things that are outside of my control, you know, ultimately yield more candidates and it just fixes itself. It's not going to, um, what I would say if I was head of the AICPA, which I know it's easy to say this when you're not in that seat, but I would really put the onus on firms themselves, because really what I see from my vantage point is, yes, there's a high barrier to entry, five years of school, CPA exam process, The cost, you know, it's a lot just to get in the door. But the problem is, once you open that door, that does not look attractive. Whether it's the salary amount that you're paid, the number of hours that you have to work, the amount of stress you're under, the conditions that you're working in, you know, and all of that has been captured in a ledger which is called Reddit. There's other alternative ledgers out there going concern and some others. But, you know, we'd be naive to think that, you know, younger talent isn't reading that and absorbing it and saying, okay, these folks are generally miserable and it takes a lot just to get to a place where you're actually miserable, you know? So why am I going to invest the time and the money to make that happen? So my point, you know, with firms would be, look, there is a certain standard that we're going to hold all of you to as a member firm.
Speaker1: [00:40:37] And if you, you know, go beyond these parameters, if you work someone 100 hours in a given week, you know you're going to be cited and fined because that is an act discreditable to the profession. You know, and I really think until we change employment experiences, we're not going to see any meaningful movement, you know, in or increase in talent. And as a firm owner myself, you know, I feel pretty put out by other firms that are creating a bad name for the profession. You know, in a working people in insane conditions. A good friend of mine years ago was on an audit and he had 103 degree temperature and he was told instead of to go home to just quarantine to a different part of the audit room and ended up billing 120 hours that week. You know, and so you look at something like that and. It's shocking. And obviously it's not the norm. But, you know, when you look at what's out there, you know, people saying, oh, well, they're working, you know, 60 to 70 hours a week, it's like it's often way worse than that. You know, and engagement by engagement, you know, is a different company. And so I think a lot of times firms aren't even fully cognizant of how, you know, how much someone might be working on a given engagement, you know, because that is out of line with, you know, maybe what the firm's policy is. But nonetheless, it happens and it continues to happen. So again, until we can, you know, really rightsize what the employment experience looks like, um, you know, we're we're going to continue to get more of the same.
Speaker2: [00:42:30] So you mentioned Reddit, so I got to go on and just browse through the accounting subreddit to see what's the hot take today of the younger generation and for our listeners who haven't actually seen the accounting subreddit or don't know what Reddit is, it's quite illuminating. Now, there is an argument to be made that a lot of the people posting are dissatisfied, so you get a rather one sided view. But it's a view of the profession that hasn't been seen before. So it's a counter to this, you know, the recruiters that they that students talk to. So picture an accounting student talking to a recruiter from a big firm and then going on Reddit and reading this and balancing those two pictures. And here's one post that I found interesting. This is from 15 hours ago as we record. Why do firms post everyone utilization percentage and hours? My firm posts everyone's utilization hours and percentage for everyone to see. What's the point of this? How does seeing my coworkers utilization rates affect me? And the answer is the top answer is they're trying to breed competition to get people to work. Billmore right. Yep. And and I think this goes to what you just said, Chase, about, you know, the overwork, not necessarily being intentional. On the part of the partners, but it's the way that the firms are set up to incentivize where the people who are to be a top performer, you got to build a lot. Right. That's that's how they rank staff in a lot of cases. So it encourages people to build 60, 70, 80 or more hours. And if you want to make partner, right, that's how you do it. You got to be profitable.
Speaker1: [00:44:15] Yeah, 100%. And I mean, you know, it's just these structures that are.
Speaker3: [00:44:20] Almost.
Speaker1: [00:44:21] Subconscious, you know, in terms of what ends up materializing and people working that many hours, you know, without a conscious thought of, okay, this is clearly creating, you know, a hall of or a wall of shame. You know, this is creating competition amongst type people that, you know, thrive on competition and, you know, want to be at the top of, you know, any list they can, which is how they got into the firm in the first place, setting up, you know, that sort of scheme for folks that are predisposed to, you know, overachievement. It's obvious what's going to happen. But I don't necessarily think that's, you know, intentionally malicious. It just happens too. Well.
Speaker2: [00:45:11] And and like you said, the people who thrive are the ones who rise to the top of this system, who work the hours and aren't bothered by it, which is great. That's fine. I know there's some people who live to work and that's great if that's who you are. But then I think they don't understand the response from the people who don't feel that way because those are the only people who make it to partner. Right, Right. Here's another one I just got. I got to read this. This is more to your point about the like number of hours. Right. And the expectations. This is four hours ago, 18 hour days. How the hell how in the hell, fellas, I am beyond exhausted, mentally drained and tired first year during busy season. So of course, this would be a rough experience. But 18 hours a day seems way too much. This field should never warrant 18 hour days. You'd think we're actually saving lives. I refuse to believe any of you are comfortable and fine with working this much every day and having no weekends off. Though you'd work like 8 to 10 hours instead. I can barely type this post without wanting to close my eyes and sleep, let alone tinker with spreadsheets for the rest of the day. What I will say, though, is we were just working 15 hour days, but since we filed this week we bumped it up. Why don't we refuse this shit? Who cares if the work doesn't get done? It's not our business, not our own client. I don't care. I value my own health more than some fucking billion dollar firm we are auditing. Besides, if you were to die in the office at your desk or die from driving home, they'd still just replace that position with someone else anyways. So I didn't cherry pick these posts. These are just as I'm scrolling through this page, which is the representation of accounting on the social media site Reddit, which is a top five social media platform. These are the two that I saw.
Speaker3: [00:46:50] Yeah, I mean, it's on the surface, which means.
Speaker1: [00:46:52] Anyone who is even casually looking sees it, right? And so this is what's out there about our profession and the fact that that's not part of the conversation, you know, in terms of what's being pushed out there by the AICPA is kind of disappointing because this is the again, the ledger of the sins of our profession that are finally now, you know, caught up with us in a way that we've got to, you know, reconstruct.
Speaker2: [00:47:20] I really like what you said, that idea you had about holding firms accountable for creating better working conditions. I feel like that could actually work because if one firm decides to create better working conditions and reduce hours for staff, that puts them at a competitive disadvantage. Because of the way the whole system is set up, they make less profit. They can't attract partners. It's very difficult to do. But if the entire profession decided to do it together, then everyone's on an equal playing field. So cap, the hours that you work staff and gradually lower them, you know, lower the temperature of the room. And what will happen is fees will have to go up. If partner compensation is going to go up, it will actually force these firms to raise the prices, which they're also reluctant to do because you're competing a lot of times on what's perceived to be a commodity. Right. The audit, for instance, and I feel like this is one reason auditors are overworked is because the only way to make more money in audit is to work your people more because you can't raise the fee on the audit or you'll just lose the audit engagement. I don't know. That's. That's my crazy theory.
Speaker3: [00:48:28] No, no. What do you.
Speaker1: [00:48:28] Think? That makes a lot of sense. And, you know, outside of, you know, having this level of oversight, which is really wrestling with the powers that be, whether they actually want to do something like that, you know, an alternative approach could be to create some sort of equivalent to, you know, being a certified B corporation, where if you're part of this organization, it means that you're adhering to certain values in terms of, you know, the employment experience, really the core of what it means to be in public accounting. So, you know, if you subscribe to these, you know, these values which you're held accountable to, you know, maybe it is a periodic audit to make sure that, you know, your time billing system doesn't show anyone worked over a certain number of hours, you know, or whatever the criteria might be. You know, there could be that level of, okay, you know, we're just going to take this in a positive direction by saying this is a designation that we give to firms that, you know, agree to adhere to certain employment practices. And as a result, you know, talent might look at those firms, you know, in a more positive light than firms that are not part of it.
Speaker2: [00:49:44] I love that because we all love getting badges. We all love getting certifications, right? Why not have some sort of authoritative certification that we create that positive work environment for our staff because we know there are firms that are doing that, But they aren't the ones that we're hearing about. We're just hearing about the the subset of firms, which is very large still, unfortunately, that is creating this horrible environment. And they're the ones pushing people out of the profession. Right. And causing people to avoid it entirely. And that's.
Speaker3: [00:50:15] Also part of the.
Speaker1: [00:50:15] Calculus, too, on being a CPA firm or not a CPA firm. If you are a CPA firm, you know, the challenge that you encounter is when you're small, you know, you're looked at by prospective talent and a bit of a myopic lens, you know, And I just put myself back in, you know, the shoes I was in, I guess it was 13 years ago, 14 years ago, where, you know, the calculus was okay. Public accounting is public accounting. So I should go for the firm that's going to be best on my resume and is going to give me the most experience. You know, that's relevant to the career that I ultimately want to pursue. And when that's your mindset, the Big Four looks really attractive. Top 100 looks really attractive, small firm looks a lot less attractive because they're not big. So your career path within there is questionable. You know, it might depend on 1 or 2 people deciding to retire. Then you also have, you know, the lack of, you know, potential niching or expertise you could get into. You know, you're working with smaller clients potentially, you know, so all that to say that you're at a little bit of A or not a little bit a lot of a disadvantage when you're a CPA firm that might be looked at, commoditized in terms of what public accounting is, and then you're small and relatively unknown and you're going to be overlooked in a lot of cases by that talent unless you're actively pursuing folks and, you know, being a part of that recruiting conversation and not just hoping that they come to you.
Speaker2: [00:52:01] Well, Chase, that's all the time we've got for today. Thanks so much for joining me and talking about this important topic. I loved your stories, your ideas. If our listeners want to get in touch with you, where's the best place for them to go?
Speaker3: [00:52:16] So I'm on LinkedIn.
Speaker1: [00:52:17] My name is unique enough that I'm pretty easy to find. If you want to learn more about what we're doing for accountants a Better way. Cpa is the website that will give you everything you need to know there and also have a way to reach out to us to engage in a conversation. So those are probably the two best ways.
Speaker2: [00:52:40] Thanks everyone for listening. I am Blake Oliver, CPA. I've been speaking with Chase Berkey, CPA CEO and co-founder of Dark Horse CPAs. As a reminder, you can earn CPE for listening to this episode with the earmark CPE app. Download it for free from the App Store and find the earmark channel on the app. Find this this course and take a quick quiz and get your CPE certificate. You will never have to rush to earn CPE ever again with earmark.
Speaker1: [00:53:10] Thanks, Chase. Thanks, Blake. Really enjoyed it.