Firms posted a net fee revenue increase of 9.7 percent in 2005, up from 7.0 percent in 2004 and the best since an 11.8 percent increase in 2000. According to the report:

• Revenues of firms with over $10 million in net fees grew 15.8 percent.
• Revenues of firms with net fees of $2 million to 10 million grew 8.3 percent.
• Revenues of firms with net fees under $2 million grew only 4.4 percent

"Business is booming for firms and would be even better if the severe shortage of professional staff wasn't throttling the CPA industry's ability to get the work out," said Marc Rosenberg, CPA, founder and creator of the survey. "Smaller firms throughout the country tell us that they could have obtained more business but that they didn't dare go after it because they wouldn't have anyone to get the work done."

Evidence of this was the fact that only 3 percent of the "over $10 million" firms had fee increases of less than 4 percent.  By contrast, 28 percent of the "$2 million to $10 million" firms had fee increases of less than 4 percent, and a stunning 48 percent of the "under $2 million" firms experienced growth of less than 4 percent; some of these smaller firms actually experienced revenue declines.

Not surprisingly, the biggest factor fueling the boom in demand for CPA services is Sarbanes-Oxley work. All firms, big and small, are benefiting from what the industry has termed the "trickle-down" effect of Sarbanes-Oxley: The largest firms are enjoying the most benefit from Sarbanes-Oxley, but it limits their ability and desire to go after smaller clients, who trickle down to the next size level below them, and so on down to small firms. Twenty-three percent of the firms in the "over $10 million" group reported that their revenues were significantly impacted by SOX.

A major factor fueling the growth of the largest firms has been some mild success at increasing their staffing levels. No size of firm in the country, from the Big Four on down, has been able to hire the number of staff they need. But the larger firms are able to recruit more effectively because they are more attractive to staff than smaller firms, and their firms are investing substantial amounts of time and money into making the work environment at their firms more enjoyable. The "over $10 million" group experienced a 5 percent to 10 percent increase in their professional staff headcount in 2005.  The "$2 million to 10 million" group was barely able to maintain their overall professional staff level from 2004 to 2005. Firms under $2 million actually suffered a net decline in staff.

The firms in our survey posted excellent increases in profitability, as measured by income per partner:

• The "over $10 million" group posted income per partner of $456,000, up 21.5 percent from last year.
• The "$2 million to $10 million" group posted income per partner of $277,000, up 9.4 percent from last year.
• The "under $2 million" group posted income per partner of $191,000, up 6.7 percent from last year.

The above shows how the disparate growth rates of the three firm groupings also produced profitability increases that were quite different.

Other survey findings:

• Industry-wide average annual billable hours for staff increased to 1,539, up from 1,528 last year and the highest this figure has been since 1,576 in 2000.
• Outsourcing of tax returns continues to be an activity that is simply not catching on with CPA firms. Only 8 percent of firms report that they plan to outsource a significant amount of their returns next year, about the same percentage as last year.
• The average valuation of goodwill for internal buy-out purposes remained unchanged at roughly 80 percent.
• 4.51 percent of the partners at firms are over the age of 50.

Finally, there seems to be a small movement for firms to change their partner compensation systems from formulas to the compensation committee approach. Though formulas are still the most popular system across the board, for larger firms the compensation committee approach is the system of choice. 

"This trend reflects a growing understanding that in addition to traditional production measures such as business origination and billable hours, intangible contributions such as firm management, mentoring of staff and teamwork also need to be recognized in the compensation system," said Rosenberg.

The survey includes the results of 281 firms, most of which range from $2-15 million in annual fees, and measured nearly 100 MAP statistics. It can be purchased for $300. To order, go to www.rosenbergassoc.com or call (847) 251-7100.