By Chris Rose, Managing Director, Marks Baughan

For decades, the tax and accounting software market was the epitome of stability: a handful of entrenched vendors, modest year-over-year changes, and predictable revenue streams. Investors viewed the installed bases of those vendors like moats — reliable, sticky, and recession-resilient. Those days are gone as they’ve been obliterated by the automation wave.

The breaking of that historical model and the onslaught of automation tools aren’t driven by AI hype alone; they are also the consequences of a market that stood still while the work got harder.

Increased Regulatory Complexity; Investments in Enforcement Automation

Over the last decade, compliance burdens have grown more onerous as a result of increasingly complex regulatory demands. Indeed, Wolters Kluwer’s 2025 Future Ready Accountant Report found that 77% of firms expect evolving tax laws to affect operations.¹ For example, the recently enacted One Big Beautiful Bill Act has resulted in sweeping changes to the code mid-year (including many applied retroactively) with varying conformity approaches at the state level. The technology in many legacy suites has not kept pace — opening a crack through which automation vendors are pouring.

At the same time, regulatory bodies such as the IRS have made heavy investments into AI, the majority of which are designed to improve operational efficiencies and tax compliance or combat fraud. According to a Government Accountability Office review, the IRS had 126 active AI use cases in its inventory as of June 2025 (up from only 10 in August 2022) with nearly 81% focused on department efficiency or fraud detection.²

Talent Shortages Are Real

The human supply side of accounting hasn’t kept up with demand. There simply aren’t enough CPAs and experienced staff entering the market — and even fewer willing to endure the long hours and manual grunt work that characterized traditional tasks. The number of new CPA candidates has declined steadily over the last decade from 42,453 in 2015 to only 28,082 in 2024 according to data from the AICPA.³ 

Thomson Reuters’ findings in its 2025 State of Tax Professionals Report underscore this shift.⁴ Forty-five percent of survey respondents felt that recruitment of new employees with necessary skills and experience was going to prove highly challenging in 2025, up from 39% in the prior year. The message is clear: firms are struggling to hire, train, and retain qualified professionals, and the professionals they do retain expect technology to carry more of the operational load.

Enter automation, which allows firms to focus more time on higher-value strategic advisory rather than error-prone, manual processes like reconciliation and data entry. In this context, automation is more about reallocation than innovation. Firms are using technology for repetitive, rules-based work so human staff can focus on tasks that require judgment and credentials. For firms operating under fixed-fee models, creating more capacity using automation allows them to take on more engagements with the same headcount.

Automation Expands Capacity, and Investors Are Noticing

Private equity’s growing presence in accounting firms has further intensified these dynamics. Firms that have received or are looking to attract PE backing are under pressure to scale and operate more efficiently without adding headcount, and automation is the answer. It reduces dependence on a thinning talent pool, helps to standardize processes, and improves efficiency. While firms don’t need to be AI-native to attract investment, they do need a credible automation strategy. According to Wolters Kluwer, 92% of US firms feel that their technology infrastructure contributed to attracting M&A opportunities or PE investment, with 38% saying it did so significantly.¹  

This capacity expansion is one of the core benefits — if not the core benefit — of automation for tax and accounting firms. Completing an audit or tax return faster doesn’t justify charging more for that engagement, but it does allow the firm to scale those engagement types. This distinction is important to investors. Automation isn’t creating new revenue streams so much as it’s unlocking capacity that was previously capped by labor availability. 

How Software Innovators Are Responding to the Automation Imperative

As firms look to solve specific bottlenecks in the accounting workflow with automation, they adopt focused tools — each designed to address a unique problem in that workflow. The result is a market shifting away from monolithic platforms toward a more fragmented landscape of tools that fill targeted gaps. This is the unbundling of the accounting workflow — exactly what you’d expect when legacy systems stop innovating as compliance and workflow pressures rise.

The large installed bases of legacy incumbents remain big assets, but they aren’t enough to stay competitive in today’s accounting market. That’s why we’re sure to see more M&A over the next several years as incumbents increasingly turn to acquisitions to keep pace. As focused vendors get to scale, the big players will buy them up rather than build the same tool internally.

Navigating the New Accounting Landscape

Accounting firms are embracing automation not to chase the latest trend but to address real operational pressures, including talent shortages, growing compliance complexity, and the need to scale engagements efficiently. Private equity interest in accounting firms adds another incentive to adopt automation.

As specialized vendors continue to unbundle the workflow, legacy players will increasingly turn to acquisitions to stay competitive. Marks Baughan tracks these shifts closely — keeping a finger on the pulse of the accounting market and the technologies reshaping it.

 

Sources:

1. Wolters Kluwer. (2025). The intelligence era: Accounting’s shift to AI and insights (Future Ready Accountant report). https://www.wolterskluwer.com/en/know/future-ready-accountant 
2. U.S. Government Accountability Office. (n.d.). Artificial intelligence: IRS actions needed to address skills gaps, information quality, and strategic management (Report No. GAO-26-107522). https://files.gao.gov/reports/GAO-26-107522/index.html 
3. Taylor, J. & Association of International Certified Professional Accountants. (2025). 2025 trends: A report on accounting education, the CPA exam, and public accounting firms’ hiring of recent graduates. https://www.aicpa-cima.com/professional-insights/download/2025-trends-report
4. Thomson Reuters. (2025). 2025 state of tax professionals report. https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2025/05/2025-State-of-Tax-Professionals.pdf