Finance

CPA Australia and the value of staying humble: Lessons from the big end of town

Michael Stapleton /

CPA Australia Alex Malley

CPA Australia chief executive Alex Malley. Source: AAP/Alan Porritt

“And everybody praised the Duke
Who this great fight did win.”
“But what good came of it at last?”
Quoth little Peterkin.
“Why that I cannot tell,” said he,
“But ’twas a famous victory.”

(“After Blenheim” by Robert Southey)

 

What lessons could there possibly be for owners of small and medium sized businesses from the dramas at CPA Australia? It’s an organisation that exists solely for accountants, after all.

I think there are plenty.

But first, a disclosure: I am neither a member of Chartered Accountants Australia and New Zealand (CAANZ) nor of CPA Australia (CPA).

Nevertheless, because of what I do I have followed the unfolding dramas at CPA, which culminated in the departure of that body’s chief executive, Alex Malley, and resignations of most of its board.

Let’s set the scene by comparing CPA and CAANZ.  They are the pre-eminent, professional membership bodies for accountants in Australia.  

CPA has about 30% more members than CAANZ, with around 161,000 members versus 117,000 for CAANZ.  Accordingly, CPA has higher revenues and costs than CAANZ.

For a comparison of the financial performance of CPA and CAANZ on a per member basis take a look at the graph below:

CPA

Source: CPA and CAANZ annual reports

When I look at this graph I wonder why there has been such a fuss. I understand that there can be disagreements about strategy and direction, but from this comparison it is clear there is little difference on a per member basis between the financial performances of CPA and CAANZ.

It seems to me that the noisiest argument, which has revolved around the chief executive’s salary at CPA, is a very narrow argument once the context of CPA’s financial performance is understood relative to CAANZ.

I suspect not too many CPAs have done this comparison and most would be surprised by the outcome.

So, the first lesson for owners of small and medium size businesses is:

Before making major changes to the organisational structure of your business make sure you understand the wider picture. Make a considered decision, not an emotional one.

Does this mean that CPA’s chief executive should not have resigned? Well, I think subsequent events have shown his resignation was the correct outcome.  

Specifically, his strategy for CPA to establish its own financial advice business has resulted in the refusal of the Professional Standards Council to renew CPA’s participation in the insurance scheme that caps member liability. This is because the Professional Standards Council (the regulator of these schemes) has determined that CPA competes with its members to sell financial advice, which in their view, means CPA doesn’t have the objectivity to discipline its members — a legal requirement to participate in the scheme that caps member liability.

The loss of the liability limitation under this scheme means that the insurers of CPA members in public practice will demand to review their policies and in most cases, the liability for potential loss will be increased. The insurance premiums for these members will increase. Add to that, there will be a need to change disclaimers on websites and stationery once the current scheme expires in October.  

I don’t know about you, but if I was a CPA member in public practice I would be furious. The actions of CPA, which are meant to benefit me, will result in my business being less profitable and/or less competitive.

CAANZ is on to this and has offered a pathway for CPA member with more than 10 years’ experience as a CPA to become members of CAANZ. I reckon they’ll pick up quite a few new members.

The following graph show CPA’s membership profile by age. You can see that around 75% of its members are aged between 30 and 60 years old. Most of these members would have more than 10 years’ experience as CPAs and hence would be at risk of leaving CPA to join CAANZ.

CPA

Source: CPA Australia

It seems to me that by losing sight of its core function — being a not-for-profit member based organisation that exists to provide benefits to its members — CPA followed fringe activities (i.e. establishing CPA Australia Advice) that were already being offered by other players in the market.  

So, the second lesson for owners of small and medium sized businesses is:

When making changes to your business think very hard about the impact of those changes on the core of your business.

But, you know what has really bothered me about this saga? No-one seems to have considered what happens next. Get rid of the chief executive, great, but what happens next? What is the plan from the disaffected members?

The answer to that question is on the disaffected members’ website: the plan is to build the numbers, design and agree changes to CPA’s constitution and force a general meeting to vote on those changes. Currently, they are at the building numbers stage.

I don’t know about you, but this seems to me to fit the category of “a most famous victory”.

Here is what I think will happen next:

• CPA will lose members to CAANZ (it is already happening), particularly those in public practice facing an immediate monetary loss from staying with CPA. There are about 7000 CPA members holding a public practice certificate;

• Fewer students/aspiring accountants sign up to the CPA program. The reason most people join CPA or CAANZ is because of the perceived benefit to their career prospects from being a member of these organisations. Clearly, the reputation of CPA has been damaged and this will be a factor that potential accountants will consider when deciding between CPA and CAANZ;

• As these factors impact on CPA, the organisation will be forced to reduce its cost base, either by reducing member services; or through redundancies; or through a lower marketing spend. It will take several years for this process to fully play out; and

• Disaffected members will continue to agitate, taking up board and management time at CPA, slowing the adjustment process and continuing the reputational damage to the organisation.

Using the average member based financial information, I reckon if CPA lost 7500 members to CAANZ then that would reduce its surplus to nil, based on 2016 costs. The table below shows the sensitivity of CPA’s financial performance to member numbers:

CPA

Source: CPA Australia

Here is the third lesson for owners of small and medium sized businesses:

Understand your cost base, what proportion is fixed, what is variable and how long it takes to adjust. Work out the potential vulnerabilities in your revenue stream (reliance on large customers, for example) and have a plan to deal with unforeseen changes (product quality issues, recalls etc).

If you want a blue-print for a real life example of what may happen, take a look at another member based organisation that lost its focus — Murray Goulburn.

In my opinion, there is a key (and common to each) miscalculation that each of Murray Goulburn, CPA and the disaffected members have made. In the strategies each has followed, they assumed their members could not leave their organisation.

In Murray Goulburn’s case, it was the price setter for milk in Victoria and south east New South Wales. It assumed the other processors would follow its price lead and so, its membership was effectively locked up by MG’s price setter status and its spread of processing facilities. It was wrong. The other processors are all offering better prices than Murray Goulburn and so it is losing members and milk, creating production inefficiencies, and resulting in the organisation closing plants. It is in a downward spiral.

Similarly, CPA (and the disaffected members) assumed there was no other accounting body their members could readily join. CAANZ has blown that assumption out of the water with its offer of a straightforward pathway to membership for CPAs of more than 10 years’ standing.

The fourth lesson for owners of small and medium sized businesses is:

Never take your customer for granted. To do so is to invite disruption — consider what Uber has done to the taxi industry and what fintech operators are doing to banks.

Is there a way out for CPA? I think so, but it relies on the board and the disaffected CPA members putting their differences to one side and working together. There is enormous opportunity for both parties if they do this.

Each party will need to swallow their pride.

Each party needs to ask themselves the question: what is the best course of action that I can take for the members of our organisation?

They need to work together because the CAANZ offer of membership is a game-changer. If the CPA board and the disaffected members can’t work out a course of action quickly then they will lose existing and future members to CAANZ, with all the pain that implies for the future prospects of their organisation.

If I was the chairman of CPA, then I would invite the disaffected members into the fold and work with them to change the organisation for the betterment of all. There is a real opportunity to bring lustre to CPA as a professional body — all it needs is humble but firm leadership.

The final lesson for owners of small and medium sized businesses is:

Every threat is an opportunity. You just need to find the imagination to make it so.

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Michael Stapleton

Michael Stapleton is a founding member of the Association of Virtual CFOs. He operates a Melbourne-based Virtual CFO practice, helping owners of small and mid-size businesses understand the drivers of their cashflow and make financially informed decisions.

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  • Nick

    Interesting article Michael, but there is another key learning – “When your business model is widely questioned – manage it!”. The issues around CPA Australia had been bubbling for two years, but the board and executives refused to engage with it. On the question of disclosing excessive remuneration, the view was “we don’t have to”. For an accounting standards body to display poor governance and disclosure is never going to end well.

    • Michael Stapleton

      Thanks Nick, pleased you found it interesting. I agree with your point, in particular that CPA, by virtue of its position and who it represents, should be world leading in terms of disclosure and governance.

  • John Oxley

    Sorry Michael, but your analysis looks good but is a bit shallow. A member based organisation works to the benefit of its members – you don’t mention its training role (CPD), its advocacy role, its role as educator and examiner of its students and the quality of the professionals that it produces. There is no doubt in my mind that the business model propagated by Alex Malley and CPA’s board was seriously flawed. A new start is required which means a new board and a new model of governance. It is quite clear that there were no contrarian thinkers on the CPA Board who just seemed mesmerised by Malley’s charisma and confidence.

    • Michael Stapleton

      Thanks John.

      I acknowledge all your points about the services CPA provides to its members.

      All of those things can just as readily be provided by ICAANZ as well; and their is a pathway to ICAANZ membership for the majority of CPA members.

      My question back to you would be to ask why are there multiple bodies providing the same services to Accounting professionals.

  • Hottub Errol

    Interesting article. However, not sure how you reach the conclusion that the “disaffected members” assumed CPA members wouldn’t leave. As far as I can tell, (1) CPA bluntly refused to accept member input that was questioning their grand vision , so I’m not sure how else these “few rogue members ” and “sad individuals ” ( to quote Alex Malley) were supposed to drive for change (2) CPA is actively preventing decisive action such as an EGM by withholding the email addresses in the members register , and (3) the disaffected members are acutely aware of the risk to member numbers as they are questioning whether the member growth figures touted by CPA Australia are actually real, sustainable, and a worthy result of the large amounts being spent on marketing. Your suggestion that all parties work together is a sound one, but I am not sure the remaining Board that has presided over this mess can be expected to suddenly become competent. By dragging this out, your worst case scenario becomes very possible.

    • Michael Stapleton

      Thanks Hottub Errol for your comment.

      Just on the disaffected members, I think they didn’t fully consider the ramifications of their agitation. They have clealy “won” but do not seem to have a plan of what to do next. They shouldn’t have started without a clear idea of the change they wanted made to CPA.

      Now, if there is no alternative body CPA members can go to then not having a fully formed plan is (just) ok.

      But, with ICAANZ offering an alternative then why would anyone stay when the brand of CPA has been trashed (mainly by the CEO and the board, but also by the disaffected members).

      Why would they not move to an equivalent body with a better brand.

      I think the disaffected members would have had a more fully formed plan if the option to move to ICAANZ had been more obvious at the start.