In this 4 part series I’ll be covering in depth the differences between a typical career in accounting starting in (Big 4) public accounting, and a typical career in finance starting in investment banking. First up in the series is a long term look at the career paths of each
Accounting – Career Path
The most common and desired entry level position for an accounting student is in (Big 4) public accounting audit or tax. Public accounting gives great exposure to a wide variety of areas in a business, good training, and management experience early on. You will learn how business work and dig into the nuts and bolts of the businesses you audit. Most of those who enter the field don’t plan on staying but 3-6 years and use it as a springboard for their careers
The progression in Big 4 public accounting is based on an “up or out” model where there is a lot of turnover and some layoffs. About 1/3 of the people within each position never make it to the next promotion because they either quit and left for a better job or were laid off. The hierarchy goes as follows:
Associate: 0-2 years
Seniors Associate:3-5 years
Senior Manager:11 years to Partner
The goal once you’re in is to stick it out as long as you can, as the opportunities available are greater the longer you stay. It can be grueling at times but the experience really adds a lot of value to your resume over the long term. Even a 2 or 3 year period gives you an ex-Big 4 title, however valuable that may be.
The general rule is that those in public accounting advance at about 1.5-2x the rate of those in private industry. So for example, someone staying for 6 years in public accounting and has been a manager for 1 year should be able to fill a management position that may normally take 8-10 years for someone moving through the ranks of the company. The reason for the demand for those with public accounting experience is the broad exposure, assumed hard work ethic, and management training/experience. Also think about the fact that someone sitting at a position at a company will have to wait for their boss to get a promotion or leave before they can get promoted.
Some of the most common exits from public accounting are into a corporation’s functions such as:
Internal Audit: This function handles the internal controls that are in place at a company, including designing, implementing, and testing them. It is responsible for ensuring the financial reporting system is free of fraud or errors. Sounds boring and it is.
Treasury: This function handles the capital and manages liquidity of a business. Duties could include cash forecasting, working capital management, and maintaining credit lines/debt. It could possibly include more strategic areas like capital risk management or fund raising through IPO, bond issuance, or M&A.
Corporate Finance: This function manages the capital structure (source of funding) and allocation of cash. Investment analysis, capital budgeting, valuation, and project management are some of the responsibilities. If the company is involved in M&A, this function will lead the analysis and management of the deal. While ex-public accountants often fill some of these roles, it is more likely someone with valuation/due diligence or investment banking experience will rise through the ranks.
Financial Planning & Analysis: FP&A can mean a lot of things and can be very interesting career path, but many times positions disguised as FP&A are just glorified cost accounting. At best the role involves developing metrics for forecasting cost/revenue drivers and strategic project management planning. At worst it does budget vs. actual calculations and helps close out the monthly financial statements. This role often puts together financial reports for the C-suite and can be a great stepping stone to VP finance and CFO.
Tax: This function puts all of the profits overseas. I’m not really sure what else.
MBA/IB/Valuation/Consulting: For the ambitious accountant, it is quite possible (especially from a Big 4) to make a jump into finance or consulting. Some will go the MBA route and others will network their way straight in. Within the Big 4 firms there are services lines that do valuation, due diligence for M&A deals, and even internal middle market investment banks (called Corporate Finance). These are not as easy to come by as just jumping ship to work for client you’ve audited, but they are still possible.
Of course there are some who stay in PA until Senior Manger, and they either stay until partner or fill similar positions as those at manager level, with a few filling director and CFO roles at small/mid size companies.
Looking longer term, those with public accounting experience serve in management/direct positions within accounting/finance roles in corporations later in their career. It’s also no surprise that most CFOs large corporations have a background in public accounting. Those with public experience are perfectly positioned to become a CFO because they have the best understanding of what drives a business.
The tax professionals (which are underrepresented in this post because I don’t know what would make someone do tax) often rise through the ranks in a corporation’s tax department or break off and start their own CPA firm.
Investment Banking – Career Path
One of the most sought after entry level positions for a finance student is investment banking. Specifically this will focus on the Investment Banking Division (IBD) which is the M&A department of the bank. Investment banking has a much more defined career path building specialized skills in financial modeling and valuation. Standing out in the crowd and getting the job is very difficult, the hours are tough, there could be significant travel, but the compensation is incredible.
Most investment banks have a 2 year analyst position after which the new hire is expected to move on to another firm or business school. Analysts spend time preparing pitch books which will be presented to potential clients and updating financial models. The 2 year period is associated with very long hours including potential all nighters. The analyst program is a rite of passage in banking and completion of the program propels ones resume to the top of the stacks of other banks, “buy side” firms, and MBA admissions (along with a fat bonus). There are a few main areas of focus in finance including investment banking, sales and trading, private equity, and hedge funds.
Investment banking (IBD): Investment bankers act as advisors for companies who want to raise capital through debt or IPO; or buy, sell, or merge their company (M&A). You will typically be preparing to present a deal, presenting a deal, or finding people to present a deal to. There is a lot of modeling, (although much of it is updating current models), and attention to detail is critical. You’ll learn how to value companies using a variety of valuation methods that will serve will in a career in finance. You’ll also learn how to work on 4 hours of sleep.
Sales & Trading (S&T): These are the traders that you see shouting on a trading floor. They’re constantly on the phones talking to clients and making quick decisions. You’ll need an aptitude for the markets and a natural sales ability but the lifestyle is hard to beat in the finance world.
Private Equity: Similar to IBD but instead of acting as an advisor you’re putting your own money (or bonus) at stake and buying entire companies. They buy companies they think can be better, fix them up and make them profitable and then sell them to public markets or other buyers. This also encompasses venture capital and angel investors, though typical “private equity” firm buy more developed companies.
Hedge Fund: Similar to S&T but they make trades on the market using a lot of leverage to reap in profits. They invest money for institutions and individuals and take a management fee as well as a percentage of the profits (but none of any loss).
Buy Side vs. Sell Side
Investment banking and sales and trading are on the “sell side” because they are acting only as an advisor and not putting their own capital at risk. You can remember that sell side sells services while the buy side buys assets.
Private equity firms and hedge funds are known as on the “buy side” because they actually buy companies, whether they buy the whole company or just some of its stock.
Doing a stint as an analyst in investment banking (IBD) sets you up best stay in IBD or work in private equity. There are other options like working at a company in their corporate development, investor relations department, and their corporate finance department.
In finance, the buy side is usually preferred over the sell side because the hours are lower and compensation is usually higher. A career path many bankers have for their career is 2 years as an analyst, 2 years as a “pre MBA” private equity associate, MBA, then either back to the investment bank or private equity. For a great overview of the Investment banking > private equity career path see: Streetofwalls.com PE overview
Another option is to switching from M&A to sales and trading within an investment bank, or joining a hedge fund. Others have done banking and then used an MBA to make a switch into consulting as well.
I think it is worth noting that these areas of finance are extremely competitive and usually require a combination of an Ivy League degree, incredible networking, and a killer resume. Within finance you will find success is of course dependent on individual merit, but a big focus is on pedigree. Where did you go to school, who did you work for after that ect. With thousands of applicants and few spots they can hand select the smartest and hardest working individuals from the top schools and firms. If you have dreams and aspirations of one day working at a top private equity firm while you went to a state school and joined a no name boutique investment bank out of school, you have an uphill battle. You’ll be competing against the Harvard and Wharton grads with Goldman Sachs on their resume. Many aspiring finance majors who don’t go to “target” schools and don’t have their networking down don’t even break into banking and are left with wealth management or accounting jobs. Hard work trumps all and there will always stories of people landing the most competitive jobs from the lowest background through networking.
Career Path Summary:
Accounting careers lead can to varied positions in corporations and are generally pretty stable. The options available are broad and with a start in public accounting one can explore to careers in both accounting and financial roles. There are a good deal of c-suite employees who followed this path as well.
Finance careers can lead to somewhat narrower but incredibly successful positions making huge sums of money. The skill set is valuable and the experience gained is viewed as top notch. Barriers to entry and fierce competition can pump the brakes for some but when it’s good, it’s great.
Continue below for the next part in the series – Compensation
Accounting vs Finance: Part 1 – Career Path (You are here)