BDO USA decided last August to
"The ESOP was the right option because it was the best option for our people, giving them a beneficial stake in BDO," said CEO Wayne Berson. "It gave them meaning and purpose and helped create a sense of vision. But at the same time, it helped build wealth among our employees. We've seen an extremely positive reaction from our people, as well as other executives in the industry."
ESOPs are regulated under the Employee Retirement Income Security Act of 1974, and although they can be complex to set up under the ERISA rules, Berson thinks the ESOP is helping the firm retain employees. "It's not easy to do," he said. "It was really complicated and involved a lot of work. But if you look at the industry, the AICPA said that staff turnover last year among all the firms in America — there's about 44,000 — was 39%. BDO was 18%. We weren't happy about 18%, but when we heard about 39%, we were very happy. And then you look at ESOPs. There are 6,000 ESOPs in America. Turnover is 5.9%. It's a beautiful retention tool. Actually, it's a recruitment tool as well."
ESOPs can become a
"People forget that it takes a village, and it's more than just the partners or the principals in a firm," said Berson. "There's an entire system around them that should benefit, not just the principals. That's how we view it. We've always viewed it that way. It's always been about everyone and putting our money where our mouth is."
BDO looked at other options, including private equity investment, but Berson believes the ESOP will allow BDO to maintain greater control over its future.
"I think private equity is a good solution for some firms," said Berson. "It wasn't the right solution for BDO because our feeling was you had to look after your people first, and the ESOP clearly does that. When you look at the dollars involved on both sides — ESOP and private equity — it's pretty much the same number. The difference here is with an ESOP, we control the company. On the other side, you've got private equity controlling the company. At the end of the day, both those options can work for people. We were just fixated on doing the right thing for our people."
BDO received a $1.3 billion line of credit from Apollo Global Management to aid with the transition, and Apollo does have a private equity business, but the arrangement doesn't require BDO to give up a stake in the firm to Apollo.
"It's Apollo's private credit," Berson explained. "It's not private equity. Private credit is just like working with a bank. We have to pay back the money down the road, but in a way where everyone can benefit."
Some firms have used private equity funding to fuel their mergers and acquisitions, but in BDO's case the PE boom may have had the opposite effect. Berson noted that he has been involved with 85 M&A deals since he took over as CEO of BDO USA in 2012, but in recent years that activity has slowed down at his firm.
"I guess others saw what was going on and tried to get into the game, and private equity saw an opportunity," said Berson. "Private equity was looking for places to deploy all the money that they had built up over the COVID years and beyond, when there weren't enough investments to make, and an accounting firm is a good investment for someone. The way private equity impacted the profession helped us slow down on our deals, but also regroup and look and explore how we could continue at BDO to invest in our sustainable future."
The firm looked at the private equity option, as well as borrowing from commercial banks, or just staying with the status quo. But to retain employees and attract new ones, ESOPs seemed like the best option, giving employees more of a stake in the success of the firm. Berson was an audit partner around 2000 when one of his audit clients was the ESOP Association, and he learned more about the concept at the time. BDO also has some consulting clients where it helped set up ESOPs and has talked with ESOP experts about the model. ESOPs also provide tax advantages for firms.
"The beauty about the ERISA Act of 1974 is the tax benefits," said Berson. "We probably never have to pay tax again at the corporate level. Obviously individuals will pay tax, but the tax benefits will be that any contribution to the plan, to the ESOP, to an employee's account, any payback to Apollo, all that is completely tax deductible."
ESOPs also give employees a way to build up wealth and encourage them to stay with the firm while their shares gradually vest over time. After six years, they are 100% vested. When employees leave the firm, the other employees effectively inherit their shares.
"When we did this, one of our partners said their father was a butcher at Wawa [a convenience store chain] who never earned more than $40,000 a year," said Berson. "He worked there for about 45 years. When he retired, he got a check for $2 million. That's a guy who made $40,000. Amazing. That's the American dream."
BDO's ESOP had to frontload the pensions and buy shares from the partners who haven't retired or weren't close to retirement age, paying them upfront. Retired partners will continue to receive their pensions. Other firms in BDO's international network aren't setting up ESOPs because they don't have laws like ERISA in their countries.
Improving audit quality
ESOPs may help attract more talent to BDO USA as the firm strives to improve audit quality, particularly after the most
"We've invested in more talent," said Berson. "We basically took a leaf out of Albert Einstein's book. It's the definition of insanity. We can't keep doing it the same way if the PCAOB is telling us it's not working so we've got to look at things differently."Technology investment
BDO is also leveraging technology to improve its audits. "As the firm's grown, we've gotten more complex engagements and you need technology to get your arms around everything," said Berson. "We had technology, but it wasn't at the level it needed to be so we've invested a lot. This is another part of the ESOP. Because of the tax benefits, we can invest there instead of paying the tax."
The firm is also starting to leverage artificial intelligence. "Our advisory practice has been instrumental in artificial intelligence for us and working through that," said Berson. "They've been a major player here. Whereas in the past, we'd probably just look at our assurance business line, now we're doing it with our assurance and our advisory business line together so the whole digital nature of the changes is all coming together. We've told the PCAOB what we're doing and so far they seem OK."
ESG and DEI
BDO has been doing more advisory and assurance work on sustainability and environmental, social and governance reporting, even though the Securities and Exchange Commission's new
"At the moment, we don't know, but we've invested in services and we're providing services in assurance, tax and advisory," said Berson. "All of them are getting sustainability work. We started to do some work in that area, and we'll just play the hand we get dealt."
Also facing a backlash in today's polarized political environment are diversity efforts, but BDO remains committed to pursuing diversity, equity and inclusion at the firm.
"The profession as a whole has not been very good in terms of attracting diverse candidates," said Berson. "It's not a discrimination issue. Candidates don't have a role model within the profession. We are trying hard to get more diverse candidates."
He noted that BDO audits a number of historically Black colleges and universities, and that has helped BDO recruit students from HBCUs.
Berson, who hails from South Africa, once met Nelson Mandela, and his
"My dad was a professional pilot," said Berson. "He flew in South Africa. When Mandela was released, he flew Mandela from Cape Town to Johannesburg, and I have a picture of the two of them next to the airplane. Then about 10 years later, I was on a multibillion-dollar nonprofit board that Bill Gates supports. I was the chair of the audit committee and Mandela was the chairman of the board, and I showed him the picture."
Overall, he believes the ESOP will help BDO with its recruiting and retention efforts, helping employees build up their assets. "From our side, we're very happy with the ESOP, so for us it's been a winner," said Berson. "It's helped people. Seeing the reaction from some of the less fortunate employees made it all worth it."
