Accounting Firms

The sector at a glance

Public accounting is the licensed profession that audits, reviews and compiles financial statements, prepares and plans taxes, and increasingly runs the accounting function itself for clients. A CPA firm sells three different things to three different buyers: attest work (audits, reviews, SOC reports) bought because a lender, investor, regulator or enterprise customer demands it; tax compliance and planning bought annually and judged on both accuracy and the tax it saves; and client accounting and advisory services (CAS) — outsourced bookkeeping, controller and CFO work — bought as a replacement for hiring. The market is stratified: the Big Four and national firms serve public companies and large private groups, super-regionals such as Weaver, CLA, Baker Tilly, Forvis Mazars and Cherry Bekaert serve the middle market, and independent local firms serve closely held businesses, professional practices, real estate partnerships and high-net-worth families. Buyers are owners, CFOs, controllers, boards and audit committees who choose on industry fluency, partner access, responsiveness and price certainty far more than on technical credentials, which they assume. Austin is the anchor market here: a venture-backed and tech-heavy client base with SOC 2, R&D credit, equity-compensation and Section 174 problems, layered on top of Texas real estate, construction, healthcare and nonprofit clients, in a state with no personal income tax but a franchise (margin) tax and aggressive sales-and-use tax nexus enforcement.

Topic guides

Concepts

Attest vs non-attest services

Attest work (audits, reviews, examinations, agreed-upon procedures) results in a report expressing or disclaiming assurance and requires independence from the client. Non-attest work — tax, bookkeeping, consulting — does not, but performing too much of it for an attest client can destroy independence.

Audit

The highest level of assurance on financial statements: the auditor gathers evidence, tests controls and balances, and issues an opinion on whether the statements are fairly presented in all material respects. Reasonable, not absolute, assurance — an audit is not a fraud guarantee.

Review engagement

Limited assurance based mainly on analytical procedures and inquiry, with no requirement to test internal control or verify balances. The accountant states that they are not aware of material modifications needed. Common when a lender wants comfort without paying for an audit.

Compilation and preparation engagements

A compilation presents management's information in financial-statement form with no assurance expressed; a preparation engagement produces statements as a bookkeeping service, with each page marked to say no assurance is provided. Independence may be lacking in a compilation if disclosed.

Agreed-upon procedures (AUP)

The accountant performs specific procedures the parties define and reports the findings without an opinion or conclusion. Used for royalty audits, grant compliance, closing statements and covenant checks where a full audit is unnecessary.

SOC 1

A report on a service organization's controls relevant to its clients' internal control over financial reporting — payroll processors, claims administrators, loan servicers. Demanded by the client's auditors, not by its customers.

SOC 2

A report on controls against the Trust Services Criteria — security, availability, processing integrity, confidentiality and privacy. Type I tests design at a point in time; Type II tests operating effectiveness over a period, usually three to twelve months. Now a routine enterprise-sales prerequisite for software companies.

Peer review

Mandatory external inspection of a firm's accounting and auditing practice, generally every three years, administered through the AICPA Peer Review Program and required for firm licensing in most states including Texas. Reports and ratings are publicly checkable and a legitimate selection criterion.

Independence and the self-review threat

An attest firm must be independent in fact and appearance. The self-review threat arises when the firm audits the output of its own non-attest work — for example auditing statements it also prepared — and is managed through client acceptance of management responsibility, safeguards, or declining one of the two engagements.

AICPA Code of Professional Conduct

The profession's ethics framework: integrity, objectivity, independence, due care, confidentiality, and the conceptual framework for evaluating threats and safeguards. It governs advertising, solicitation, firm names and fee arrangements, and state boards including Texas incorporate equivalent rules into enforceable law.

Commissions and contingent fees

A CPA generally may not accept a commission or a contingent fee from a client for whom the firm performs an audit, a review, or a compilation expected to be used by third parties, and may not charge a contingent fee for preparing an original tax return. Disclosure rules apply where commissions are permitted.

CPA mobility / practice privilege

A CPA licensed in one state may generally practice across state lines without a second license under substantial-equivalency rules. The privilege carries consent to the other state's jurisdiction, and firm registration may still be required — a live issue as states adopt differing licensure pathways.

PTIN and preparer credentials

Anyone paid to prepare federal returns must hold a Preparer Tax Identification Number, renewed annually. Unlimited representation rights before the IRS belong to CPAs, attorneys and enrolled agents; other preparers have limited rights. Credential, not software, determines who can argue an audit.

Enrolled Agent (EA)

A federally licensed tax practitioner credentialed by the IRS through examination or qualifying service, with unlimited practice rights before the agency. EAs specialize in tax and representation but cannot perform attest work, which requires a CPA license.

Engagement letter

The contract defining scope, deliverables, responsibilities, fees, deadlines and limitations for each engagement. The single most effective malpractice defense in the profession and the document that decides who owns the consequences of missing information.

Management representation letter

A letter signed by management at the end of an audit or review confirming responsibility for the statements, completeness of information, disclosure of fraud and litigation, and subsequent events. The auditor cannot issue the report without it.

Materiality

The threshold above which a misstatement or omission could change a reasonable user's decision. It is set by judgment at planning, drives sample sizes and testing scope, and explains why an audit does not examine every transaction.

Internal control

The processes and segregation of duties that make financial reporting reliable and safeguard assets — commonly framed by the COSO components. Small organizations rarely achieve full segregation, so compensating owner-level review controls are the practical answer.

Significant deficiency vs material weakness

A significant deficiency is a control shortcoming important enough to merit the attention of those charged with governance; a material weakness creates a reasonable possibility that a material misstatement would not be prevented or detected in time. Both are communicated in writing; only the second is normally disclosed publicly in a single audit or SEC context.

GAAP vs IFRS

US Generally Accepted Accounting Principles, set by the FASB and codified in the ASC, is rule-rich and required for SEC filers; IFRS, set by the IASB, is more principle-based and used by most of the rest of the world. Differences in inventory, development costs, leases and impairment matter to any company with a foreign parent or buyer.

Accrual vs cash basis and special-purpose frameworks

Accrual records revenue when earned and expenses when incurred and is what GAAP requires; cash basis records them when money moves and is permitted for tax purposes below gross-receipts thresholds that are indexed for inflation. Statements can also be issued on the income-tax basis, cash basis, modified cash basis or a contractual basis — cheaper and often sufficient for lenders and owners, provided the report and statement titles make the framework explicit.

ASC 606 revenue recognition

The five-step model — identify the contract, identify performance obligations, determine the transaction price, allocate it, recognize revenue as obligations are satisfied. It is what forces software, services and construction companies to defer revenue, split bundles and document their contract analysis.

ASC 842 leases

Requires lessees to put nearly all leases on the balance sheet as a right-of-use asset and a lease liability, with operating and finance leases still expensed differently. Adoption reshaped private-company balance sheets and can trip debt covenants that were written before it.

CECL

Current Expected Credit Losses (ASC 326) — reserves are recorded for expected lifetime losses at origination rather than only when a loss is probable. Chiefly a bank and lender issue but it also applies to trade receivables and contract assets at ordinary companies.

Going concern

Management must evaluate whether there is substantial doubt about the entity's ability to continue for one year after the statements are issued, and disclose it. The auditor evaluates that conclusion and may add an emphasis paragraph — an event with immediate consequences for lenders and investors.

Deferred revenue

Cash collected before the performance obligation is satisfied, carried as a liability until earned. The core working-capital metric for subscription businesses and a standard diligence adjustment in an acquisition.

Work in process (WIP)

Costs incurred on unfinished jobs, and for contractors the schedule reconciling costs, billings and estimated profit. Over- and under-billings on the WIP schedule are what sureties and lenders read first in a construction audit.

Percentage of completion / over-time recognition

Recognizing contract revenue as work progresses, usually measured by cost-to-cost input methods, rather than at completion. Under ASC 606 it applies where control transfers over time, and it makes estimate accuracy a direct driver of reported profit.

Cost segregation

An engineering-based study that reclassifies parts of a building into shorter-lived asset classes so depreciation is accelerated. It creates a large early deduction — subject to passive-activity limits, depreciation recapture on sale, and whatever bonus-depreciation percentage current law allows.

R&D tax credit (Section 41)

A credit for qualified research expenses meeting the four-part test, claimed on Form 6765 with contemporaneous documentation. Qualified small businesses may elect to apply a portion against payroll taxes, which is why pre-revenue startups can still monetize it. Claim-substantiation requirements have tightened.

Section 174 research capitalization

The 2017 tax act required specified research and experimental expenditures to be capitalized and amortized starting in 2022 — five years domestic, fifteen years foreign — which created large phantom taxable income for software companies. Legislation enacted in 2025 restored immediate expensing for domestic research with transition relief; treatment of foreign research and the mechanics of catching up prior years are guidance-dependent, so confirm the current rule before advising.

Bonus depreciation and Section 179

Two ways to accelerate the deduction for equipment and qualifying property. Bonus depreciation applies automatically by class with no income limit; Section 179 is elective, capped in dollars and phased out above a spending threshold, and cannot create a loss. Both percentages and caps have changed repeatedly — check the current year.

QBI deduction (Section 199A)

A deduction of up to 20% of qualified business income for owners of pass-through entities, limited above income thresholds by W-2 wages and property, and restricted for specified service trades and businesses including accounting, law and health. Its interaction with reasonable compensation drives real planning decisions.

S corp reasonable compensation

A shareholder-employee must be paid reasonable wages for services before distributions, because wages carry employment tax and distributions do not. The IRS challenges low salaries; defensible positions rest on comparable market data and documented duties, not a formulaic percentage.

Entity selection

Choosing among sole proprietorship, partnership, LLC, S corp and C corp based on employment tax, QBI eligibility, state franchise tax, investor expectations, fringe benefits, basis rules and exit plans. Venture investors typically require a Delaware C corp regardless of the tax math.

Schedule K-1

The statement reporting each partner's or shareholder's share of income, deductions, credits and distributions from a pass-through entity. Late K-1s are the most common reason owners extend their personal returns.

Estimated payments and safe harbor

Taxes are pay-as-you-go through quarterly estimates or withholding. Underpayment penalties are generally avoided by paying a set percentage of the current year's tax or of the prior year's tax, with a higher prior-year percentage for taxpayers above an income threshold. An extension extends time to file, never time to pay.

Texas franchise (margin) tax

Texas has no personal income tax but levies a franchise tax on taxable entities computed on margin — total revenue less the greatest of cost of goods sold, compensation, 30% of revenue, or a fixed dollar amount — apportioned to Texas and taxed at a rate that differs for retail and wholesale. Entities below the no-tax-due threshold owe nothing, and the threshold is adjusted periodically, so verify the current figure and the current report requirements with the Comptroller.

Sales and use tax nexus (Wayfair)

Since South Dakota v. Wayfair (2018), a state may require sales-tax collection based on economic activity alone, with each state setting its own dollar or transaction thresholds. Texas taxes many services and data-processing and information services at a partial exemption, so SaaS taxability is a live and easily mishandled question.

Transfer pricing

Pricing of transactions between related entities across tax jurisdictions, which must meet the arm's-length standard and be supported by contemporaneous documentation to avoid penalties. Relevant to any Austin company with a development subsidiary abroad or a foreign parent.

BOI reporting / Corporate Transparency Act

The CTA required many companies to report beneficial-ownership information to FinCEN. After litigation and rulemaking in 2025 the scope was narrowed substantially, with domestic entities exempted under an interim final rule and reporting focused on foreign entities registered to do business in the US. Deadlines and scope have moved repeatedly — check FinCEN before relying on any statement about who must file.

1099 reporting and worker classification

Payments to non-corporate service providers are reported on Form 1099-NEC and other 1099 series, with dollar thresholds subject to legislative change and e-filing required above a low return count. Misclassifying an employee as a contractor exposes the payer to back employment taxes and penalties under both IRS and Texas Workforce Commission tests.

Employee Retention Credit (ERC)

A pandemic-era refundable payroll credit that generated widespread aggressive and fraudulent claims. The IRS imposed a processing moratorium, opened withdrawal and settlement routes, and moved to disallowances, examinations and preparer penalties. Any claim now requires eligibility documentation on suspension or gross-receipts grounds and an amended income-tax return for the wage-deduction offset.

IRS notice and audit representation

Handling correspondence audits, CP-series notices, field examinations, appeals and collection matters under a Form 2848 power of attorney, with Circular 230 governing practitioner conduct. Response deadlines are strict and missing one converts a negotiable issue into an assessment.

Realization and utilization

Realization is the percentage of standard fees actually collected; utilization is the share of available hours that are chargeable. Together they are how traditional firms measure profitability — and the reason a fixed-fee or subscription model requires a completely different scorecard.

Billable hour vs value pricing

Hourly billing prices inputs and penalizes efficiency; value or fixed pricing quotes an agreed scope in advance and lets automation improve margin. Value pricing demands disciplined scoping, change orders and clear engagement letters, which is why many firms adopt it partially.

Busy season capacity

The structural bottleneck of a tax and audit practice: fixed statutory deadlines concentrating work into a few months. Capacity is managed with extensions, client-readiness deadlines, staggered year-ends, offshore and seasonal staffing, and declining or repricing marginal work.

Client accounting services (CAS)

Outsourced bookkeeping, close, payables, payroll coordination, controller review and fractional CFO work delivered on a recurring monthly fee. It replaces a client's internal accounting hires, produces predictable non-seasonal revenue, and now often out-grows compliance work inside a firm.

Watch

A video primer on Accounting Firms.

▶What is the Difference between an Audit, Review and Compilation? Patrick Bray CPA▶Financial Reporting 101: Compilations, Reviews, and Audits Explained SVA Certified Public Accountants▶Audit vs Review vs Compilation: What Nonprofits Need Ironwood Registrations▶SOC 2 Explained by Someone Who's Done 1,000+ Audits BizBuddy▶SOC 2 for Startups: Quick Guide Delve Technologies▶How to Get SOC 2 Compliance FAST (Every Startup Needs This!) Techbible - GHITA El Haitmy▶SOC 1 and SOC 2 Explained #cybersecurity #SOC1 #SOC2 #securitycompliance #tech #ittips Wil A. Villaran▶SOC 2 Compliance In a Nut Shell Optro▶2025 Texas Annual Franchise Tax Report (Update for LLCs) Ronald Rohde Law▶Texas Franchise Tax Filing Guide: 2024 UPDATE LedgerGurus: Ecommerce Accounting Experts▶Filing Franchise Taxes in Texas - 2024 Updated Guidelines The Super Entrepreneur ▶Texas Franchise Tax - Public Information Report - How to fill out this section... - Full video on YT Loma Risper▶Franchise Tax in Texas is Complex And You May Be Paying Too Much #FranchiseTax #TexasTaxes #Tax Silberman Law Firm▶Banks Reject Your Financials: Compilation vs. Review vs. Audit AJ Singh, CPA, EA▶Starting the SOC 2 Type 2 Audit Journey: What You Need to Know Trustero▶What Actually Happens During a SOC 2 Audit Docupile▶4 Methods of calculating Texas Franchise Tax on your business - Ansari Tax Law Firm Mansoor Ansari▶Quick Franchise Tax Hack – File in Under 15 Minutes or Risk Forfeiture! Loma Risper▶S-Corp Reasonable Salary Explained (Avoid IRS Trouble!) Corporate Direct▶S Corp Reasonable Compensation Explained Karlton Dennis▶Reasonable Salary for S-Corps Explained Jasmine DiLucci, Tax Attorney, CPA, EA▶SOC 2 Compliance: Everything You Need to Know in 2026 Christian Khoury▶Why do you need a SOC2 Type 2 Report? Christian Khoury▶How to Pay Yourself A "Reasonable Salary" In An S-Corp, Explained Keeper - For Self-Employed Taxes▶S-Corp Owners: How Much to Pay Yourself? Mastering Reasonable Compensation Accountants for Creatives®▶The Reasonable Salary Rule That S Corp Owners Get Wrong IRS FBAR Tax Attorney | Offshore Reporting Defense▶R&D Tax Credit – Who Qualifies? CPA Cafe▶Biotech Firms: How to Leverage R&D Credits and Section 174 for Tax Savings | iFindTaxpro IFindTaxpro▶Startup Tax Hacks Section 179 and RD Credits LegalEase USA▶One Big Beautiful Bill: This Is The Last Time You Prepare A 174 Capitalization Study Jacob Welp▶Why Not Every “Rich Person Car Write-Off” Actually Works Jasmine DiLucci, Tax Attorney, CPA, EA▶The One Big Beautiful Bill and Your Taxes: Section 174 (R&D) Warren Averett