Why Have Compliance Services Been So Profitable?
Compliance services have traditionally, and currently still, account for between ninety to one hundred percent of the fees revenue of the majority of the twenty five thousand accounting practices in Australia.
The almost exclusive focus by accounting practices on providing compliance services has historically made a lot of sense and been generally financially rewarding for three reasons:
- The legal requirement for the various documents to be prepared and lodged with the relevant government bodies meant accountants had recurring customers that had to have the service prepared every month, quarter or year. There is no better customer for a business than one that is legally required to use your service at fixed regular intervals.
- Taxation preparation, BAS preparation, and auditing services are all government regulated and can only be provided by accountants who have the applicable licences having met the strict educational, experience, and other obligations. For example, only Registered Tax Agents who have complied with Tax Practitioners Board (TPB) requirements can charge a fee for preparing a tax return for a client. Of the two hundred thousand accountants in Australia, only sixty thousand are Registered Tax Agents and can charge a fee for tax services. The TPB licencing requirements reduce competition, restrict the number of accounting practices providing these services, and assist in producing above market incomes for these practices (This is all economics 101 and the normal result when supply is restricted – above average profits).
- As the services provided are repetitive with the accounting practices basically providing the exact same service to a client every quarter or year, efficiencies are inevitable. For example, once an accountant has prepared the financial statements and tax return for Mr A’s company this year, it is expected that the same job should be able to be done next year twenty or so percent quicker. This efficiency gain has generally been split with one third going to the accounting staff as higher annual wages, and the majority going to the practice principals as higher profits.
With the benefit of these three structural or industry advantages, accounting practice principals could be financially rewarded from operating one hundred percent compliance based accounting practice. All they needed to do was managing it efficiently and gain new compliance clients (whether from competitors or new clients starting a business).