Pa. is losing accountants. Small businesses and municipalities could be hit hardest.

Pennsylvania accounting firms are contending with a scarce talent market, and it’s driving small and medium-sized firms to rethink how they do business.

Hiring is one of the greatest headaches facing local accounting firms, the Pennsylvania Institute of Certified Professional Accountants (PICPA) said in its latest report, released Wednesday, summarizing the state of the profession in Pennsylvania.

Pennsylvania has seen the number of active CPA licenses decreasing, as the number of new licensees fails to keep up with the number of people retiring. The total number as of January 2022 was just over 25,000. The number of licensees statewide has been stuck around that number since 2019, when it had been growing by about 1,000 per year from 2013 to 2019.

CPAs analyze financial records of individuals and organizations to make sure they are complying with financial regulations and advise them on key business decisions. A shortage of these professionals is creating roadblocks for smaller clients, who can’t find someone to do that analysis in time for strict deadlines.

The local challenge is in line with a shortage of accountants across the U.S., as fewer people are sitting for the CPA exam nationally since 2016. It’s now trickling down to certain regulated businesses, governments, and nonprofits that require auditing services.

“Every single accounting firm is challenged right now [with] more work than they can handle,” Jennifer Cryder, CEO of the PICPA. “Smaller organizations are not able to get the services they need because either the fees are so high they can’t afford them, or nobody will take the work.”

In some cases, municipal governments are losing their credit ratings because they don’t have anyone to audit their finances, so they struggle to get funding for planned projects. This month, S&P Global Ratings withdrew ratings for 64 local governments and utility systems that failed to file their financial information on time, Bloomberg reported earlier this week.

“Flat year-over-year hiring is not sustainable: shifting demographics and career preferences mean more talent is leaving the profession than is coming in,” the PICPA’s report said.

A large part of the problem is a mismatch between the traditional accounting workforce model and the preferences of recent generations, Cryder said. “The profession is losing great talent at that mid-tier level because there are other options that offer better balance, better salary.”

During the pandemic, salaries were growing faster in other professional services such as finance and marketing, while fields such as private equity continued to offer greater incentives for midlevel professionals than accounting did.

Most firms that increased hiring last year did so at the entry level, PICPA’s report said, following the traditional pattern. Public accounting firms generally employ an “up or out” model for employee progression, Cryder said, starting with a large cohort of entry-level accountants each year that gradually thins out while the strongest ones advance. In recent years, she said, a many young accountants are jumping off that ladder earlier than previous generations had done.

“The premium really kicks in at the highest levels when you’re an owner, a partner, or shareholder,” Cryder said. “I talked to many students who are entry-level staff at firms who say, ‘I am not gonna wait 10, 15, 20 years to see that gigantic premium someday in the future.’ ”

While many firms are increasing pay to get the employees they need, smaller firms aren’t doing so as much as larger ones. While 62% of midsize accounting firms surveyed by PICPA increased starting salaries last year, just 35% of small firms did so. For existing employees, 71% of midsize firms gave larger-than-usual raises last year, only 41% of small firms did so.

The vast majority of firms surveyed are turning to more flexible work arrangements as a way to attract staff and keep others from leaving. Back before remote work was common in professional services jobs, public accountants were already accustomed to working wherever a client needed them.

“Accounting firms were really ahead of the curve and flexibility,” Cryder said. But “just because we were ahead of the curve, doesn’t mean that we should stop.”

The difficulty in hiring enough accountants has pushed some firms to consider merging, PICPA found. It’s also motivating them to lean into technology improvements, but that’s something they should be doing anyway, Cryder noted.

“Most of what I did the first couple of years in my career, technology does all of it today,” Cryder said. That could be a good thing for the industry’s talent problem, she noted, because it means that new hires get to the more interesting analytical work earlier in their careers.

Cryder said the PICPA has been working on getting more young people interested in the accounting career path, sending CPAs to schools in the Philadelphia area to familiarize young people with the opportunities available in accounting and how to get the necessary education. But, she said, firms will still have to rethink their business models, particularly on salary, to stay competitive among other fields that require similar education and offer wealth more immediately.

Making that investment is a tough task, when they’re also spending more on technology, and potentially giving up clients to keep workloads manageable — a lose-lose for accounting firm revenue and the ex-clients who are now faced with new obstacles.

“When accounting firms are struggling with talent ... these impacts that we have in the capital markets start to become challenged, which is a really big deal,” Cryder said. “At the end of the day, we need a strong and diverse pipeline of CPAs coming into the profession.”