CPA Firms Are Being Disrupted—And May Not Even Know It

History Doesn’t Repeat Itself but it Rhymes

Uber, Facebook, Alibaba, and Airbnb are prime examples of digital disruption, not just digital transformation. In each case, a new business model significantly changed the way consumers bought goods and services. The digital disrupters often started off by catering to a niche market—a specific geography or consumer profile—but then they expanded and eventually challenged established leaders of industry.

These four companies are examples of the platform economy. They built their business models around leveraging technology to connect consumers with providers, but the platform businesses don’t own the underlying assets typically associated with their industries.

Could the same thing happen to CPA firms? What would the threatening platform offerings look like? What would make public accounting firms more vulnerable to threats? How could we see it coming?

Sign, Sign, Everywhere a Sign

If disruptive entrants were headed for us, we would probably find them targeting a niche geography or consumer profile. They would look very similar to SOC 2 automation platforms like Vanta, Drata, SecureFrame, and OneTrust. These platforms focus their offering towards tech startups and cloud service providers—niche markets. And they represent a disruptive threat to CPA firms with practices in SOC auditing.

The platforms are starting to transform the SOC 2 compliance landscape by making the processes more streamlined, cost-effective, and less reliant on traditional audit firms. Prospective clients are wooed by promises to “automate the audit process.” When you speak to a sales rep for one of these platforms, they might quote the audit fees directly, without even telling you the name of the auditor (some have pre-negotiate fixed audit fees with certain firms enabling them to cut the audit firm out of the evaluation process).

The customer has the sense that they can use the platform to directly achieve their business goal—a clean audit report—without the hassle of dealing with a “pesky auditor.” These platforms offer an “easy audit” and they don’t even employ auditors…yet.

First They Came for the SOC Auditors, but I Wasn’t a SOC Auditor

CPA firms would be especially vulnerable to digital disruptors if they found themselves reluctant to adopt new technologies or new business models that may initially be less profitable or serve a smaller, less attractive market segment than their current operations. For example, if they drove their business through decisions that overly prioritized optimizing metrics like realization and utilization—an easy trap for accountants with naturally analytical personalities.

Many firms prioritize services that cater to large, established clients because these engagements are more profitable. New technologies or business models that initially serve smaller or less profitable segments might be ignored. But those could be the service offerings that disrupt the industry in the long run.

Firms are also invested in their current ways of doing business, from training and developing employees to investments in legacy systems that may not integrate well with newer technologies—or even with each other. The sunk cost fallacy can deter firms from investing in new processes or technologies that do not align with their existing systems.

Also, the professional care obligations of CPA firms can drive them towards conservative approaches to business practices, clinging to established ways, and emphasizing risk avoidance (e.g. overly cautious client acceptance procedures). Such a culture can slow the adoption of technologies or new service offerings, especially if those seem uncertain or risky.

Platforms that automate or simplify compliance, auditing, and other accounting functions have focused on marketing to smaller businesses or startups. Vanta’s early clients included other startups in the Y Combinator peer group. These platforms initially may not meet the needs of large clients—like the target prospects and current clients of an established CPA firm—however, as these technologies mature and their adoption increases, digital disruptors can move upmarket, eventually threatening the best clients of established firms.

All of these factors combine to present CPA firms with the classic Innovator’s Dilemma, deciding between sticking with your current, successful products and services versus investing in new, risky technologies that could eventually become mainstream and vital for future success. It's a tough choice because focusing too much on either can lead to missed opportunities or failures.

All the World’s a Stage

CPA firms, especially the top 50, are re-imagining some aspects of their business model. Many are investing in offshoring their workforce for their existing services. If they fixate on their existing business only, without considering risk of disruption to that business, optimization will receive all the attention and innovation could be sacrificed. There are sufficient populations growing in low-cost areas around the world to envision this path of expansion for the foreseeable future and to be lured into a false sense of security.

Automation of existing processes and services is another clear tactic for a mature practice. When properly designed, automation can improve productivity, reduce costs and errors, and allow people to focus on higher value analysis and processes that require judgement. But automation, if pursued blindly, can ossify processes—leaving them in place with little or no thought to the value delivered to clients.

Automation and offshoring may lead to the commoditization of certain services. If the firm is also innovatively creating value for clients, then commoditization of services is offset by growth opportunities. But when combined with a static business model, these types of “innovation” can devalue the firm’s services and leave them more exposed to disruption. This “Innovation Theater" appears as if it is innovative without actually driving meaningful technological or business model innovation.

This type of innovation could potentially accelerate disruption. As tasks become more standardized and automated or are offshored to reduce costs, they may become less differentiated in the eyes of clients. This can make it harder for firms to justify premium pricing or to maintain a competitive edge based solely on service quality or expertise, especially when similar services can be obtained more cheaply elsewhere—for example, through digital disruptors.

Offshoring, particularly when client-facing roles are involved, might lead to a loss of direct engagement with clients. This can erode the quality of service and client satisfaction, as relationships are de-prioritized. The staff that work in disjointed teams across cultures also face development challenges that could lead to loss of affinity with the firm and loss of motivation for growth.

A disaffected workforce might lead to a skills gap within the firm. This skills gap could result in further loss of innovation or adaptation to new market demands. The two forces could feed off of each other, exacerbating the challenges.

But surely, with all their digital transformation expertise, management consulting practices, and advisory services, the best and brightest firms won’t be as vulnerable to disruption, right? Don’t the most innovation firms and companies tend to stay one step ahead of the curve?

How Twitter Missed the Creator Economy

Remember Vine? That looping-video app that people were using back in 2015?

Bring back Vine?

— Elon Musk (@elonmusk) April 17, 2024

Twitter owned the company, which was an early success as a viral video platform before TikTok was even launched. In fact, Twitter had some creators who would eventually become huge content powerhouses.

But somehow management at both Vine and Twitter neglected to establish strong relationships with these entrepreneurs. They let the viral stars of the platform abandon them for YouTube and Instagram, where those influencers went on to build their brands and businesses. Despite having a head start, Twitter failed to leverage video capabilities for reaching a broader user base.

 source: StaDaFa.com

When Twitter neglected its creator economy, it wasn’t just Vine that withered away—a whole generation of creators jumped ship for greener, more lucrative pastures, and other platforms benefitted from Twitter’s failure. This tale of missed opportunities serves as a stark reminder that even innovators like Twitter and Vine get disrupted.

But there’s another interesting aspect of the Vine/Twitter story: Without successful creators, platforms fail. After all, a platform’s success is not entirely determined by its innovation or technology but by high engagement from communities of users, which is heavily driven by the most prolific creators.

Platforms are disrupting traditional business by empowering users; however, the trade-off in this scenario is that platforms are more vulnerable to changes in user behaviors. Are these lessons applicable for accounting firms?

The Firm-as-a-Service Model

Given the incoming disruption from platforms, some CPA firms potentially could experiment with platformization of their business model. The extent and nature of firm platformization experiments would probably depend on the history, size, vision, and market position of the firm. Taking the disruptors head on could be a difficult road to travel for an existing firm. A brand new startup firm would be more likely to experiment this way.

The Firm-as-a-Service model (FaaS)—a re-imagining of traditional firm structure into a service-oriented platform—would be a platform where entrepreneurial accountants access a suite of services and tools to build their own practices. In this model the firm is primarily a shared provider of back office services, and the entrepreneurial accountant builds a practice as large or small as they are willing and able. The approach and strategy would be bottom-up, rather than top-down.

A FaaS model firm might include:

• Software for bookkeeping, tax preparation, payroll, etc.

• Subscriptions to authoritative guidance and research publications to keep up to date on the latest regulations and compliance requirements.

• Training and continuing education resources.

• Practice management tools to manage relationships, documents, billing, and communication with clients.

• Assistance with branding and access to marketing tools or services to help attract and retain clients.

But building a firm-as-a-service platform would not be without its challenges. A platform may require significant investment in technology, talent, and marketing. The questions of risk management and professional liability would be complex. And there is no guarantee that it would succeed.

But what about the other lesson from Vine/Twitter, that failing to empower creators contributed to the platform’s failure?

“It’s the Accountants, Stupid”

In 1992, James Carville, a strategist for Bill Clinton during his presidential campaign, famously said, "It's the economy, stupid". He meant that when it all boiled down, the economy was supremely important to voters. If the campaign didn’t stay focused on the economy, all other efforts might be for nothing. One might be tempted to restate the hard-knocks lesson that Twitter didn’t learn early enough as, “It’s the creators, stupid.”

For a platform-oriented firm—or at least a firm headed in that direction—perhaps the phrase "It's the Accountants, Stupid" would prove true. The core focus would be on the accountants—the primary users of the platform. A platform-oriented firm may need to place even greater focus on the goals, motivations, needs, challenges, and workflows of the accountants, the “creators” in the platform firm. Making their work as efficient, enjoyable, and effective as possible would attract the most users and lead to the most growth.

If the accountants thrive, the platform thrives. Network effects could create a positive feedback loop where the platform with the most accountants attracts the most clients, which leads to more accountants joining, and so on. The success of the platform would hinge on the satisfaction and loyalty of the accountants using it.

The trade-off, of course, is that fickle accountants could leave a platform with little notice. But these challenges already might be happening for traditional firms. Recent recruiting challenges may be indicators that firms are already experiencing the negative impacts of failing to attract enough new accountants or failing to effectively engage with the current professional workforce.

If a firm's technology, work culture, compensation, or professional development opportunities are not attractive enough, it may struggle to attract top talent—a warning sign for a firm. If those factors are industry wide, it may be a sign for the industry as a whole.

For several years, headlines have been warning of a CPA shortage. While the profession is struggling to attract new talent, experienced CPAs are retiring in large numbers. Factors like intensive educational requirements and the allure of seemingly more lucrative careers in tech and finance may be diverting potential recruits.

Negative perceptions about the industry can deter potential candidates. Furthermore, failing to keep up with technological advancements or to innovate in service offerings can make public accounting less appealing to prospective employees.

Current succession challenges—contributing to the trend in private equity buyouts—may be an indicator that this trend has been slowly stewing for quite some time. Firms with aging leadership teams face a leadership vacuum when senior members retire. This situation is made worse by an anemic recruiting pipeline leading to a lack of internal candidates prepared to step up and take over.

Both recruiting and succession challenges may indicate that the industry has neglected to align its business model with the evolving demands of the market and the expectations of the incoming workforce. These challenges could leave firms less prepared to innovate and even more exposed to disruption.

In fact, the most successful firms are often the most vulnerable to disruption. Their very success and the processes that have made them successful can create blind spots. These blind spots allow new entrants with innovative business models or technologies to establish a foothold in overlooked market segments.

The Big 4's Big Dilemma

If the most successful firms are most at risk, then in public accounting, the target would be on the backs of the Big 4 accounting firms: Deloitte, EY, KPMG, and PwC. These old-guard firms could be watching fresh talent slip through their fingers, not just in headcount but in potential future leaders.

The Big 4 tend to focus intensely on their largest and most profitable customers. This focus can blind them to the needs and opportunities presented by smaller, less profitable markets, which can be the initial footholds for disruptive technologies. Big successful firms have mature resource allocation processes that tend to favor projects with the most immediate and apparent return on investment. Disruptive innovations, which initially might not seem profitable or might target unproven markets, would struggle to gain traction.

Even if they are disrupted, the Big 4 likely would continue to exist for the indefinite future, but their growth and prestige might suffer. Today, X (the rebranded Twitter) is hustling to make up for lost time, rolling out the red carpet for creators with promises of ad revenue shares and more space for their voices and videos. But is it too little, too late? Are accounting firms following a similar path?

Many CPA firms are experimenting with remote work, alternative career paths, and compensation increases. These sustaining innovations are useful, but business model innovations are more rare. Schellman’s focus on IT audit services and Ascend’s capitalization model are good examples of business model innovations. But they are not common. If disruption is headed for the industry, then the time for more experimentation with the business model of the firm is now.

For those of us who work in public accounting, the call to innovate is an important opportunity. We can contribute to experimentation and encourage change in the right direction. The business world is evolving—are you?