Public accounting and the problems it causes for small businesses
I was only in public practice for a year before I began to realize how broken the model was. It was ridiculously stressful on employees, partners and even clients. And the root causes: busy season and annual accounting.
In this post, I’m going to summarize why I think public accounting is making life hard for small businesses. But first, some background on what happens in a public accounting firm.
In Canada, ‘busy season’ is the period from February to April when most tax returns are due. If it were just personal tax returns, that would be OK. However, it’s also all the corporate and trust returns with December year ends, which is most of them.
This causes a large spike in the workload for accountants. The rest of the year, it’s pretty quiet. This spike in labour demand leads to much higher labour costs. Because decent accountants are in fairly short supply, public accounting firms need to hire them for the entire year even if they are operating at about 50% for 6 months, 80% for four months, and 150% for the last two.
The second cause, annual accounting, is related. It’s the transfer of accounting records from the business to the public accountant so that financial statements and taxes can be prepared. For most small businesses, this is the only time their bookkeeping is reviewed in an entire year. As a consequence, the public accountant usually finds the records are riddled with errors, or are incomplete, or major events have occurred that require significant tax planning. And all of this takes more time.
This means that public accountants are trying to fix all the accounting errors in their client’s books at the same time as they prepare the taxes. While this sounds like a problem just for the accountants, it really is not. Those labour costs are pushed straight back to the client, and it can take months to have your financial statements completed.
Other than just the expense, there are other problems caused with only having the books looked at once per year:
1. Your accountant is waaaaay out of date by the time the records arrive. This means any advice is also out of date, or will be so generic as to be practically useless. Try asking your accountant in September for assistance with cash flow planning. After you spend two weeks getting the records straight and over to their office, they’ll spend two weeks figuring out what you have recorded, and only then can they start work on the actual problem. Hmmm. That’s going to be expensive. Also, not particularly useful as the question is four weeks old.
2. Your totally crap bookkeeping only gets fixed once a year. Yes, I said it. Your bookkeeping probably sucks. You hated doing it, and we public accountants are just going to have to fix most of it, anyway. I promise, it’s not your fault. It’s not like you could call your accountant and get them to do it. That would take months and cost a fortune!
So whose fault is it? Is it the business owners? Surely, it’s their fault for doing their bookkeeping so badly? How about the tax office? They make us do all the taxes in a 90 day window. It must be their fault!
Well, I think it’s our fault. That’s right, I blame public accountants like me. We’re the ones that try to do all the work in a three month window. We’re the ones who accept flawed records on any old software platform. I’m convinced it’s our fault, and I’m as equally convinced that we can fix it.
So what do we do? This problem is literally replicated in every public accounting firm across Canada, and it passes on to all their clients. There are 1.6 million privately held corporations in Canada working under this model. Throw in the trusts and partnerships, and you have a pretty big problem.
Here’s my solution. It’s probably not perfect, but it is working well for us, and for our clients. It’s founded in the principles of lean manufacturing. The three main principles my solution drew upon are:
1. Level workload
3. Don’t accept quality defects
And to be clear, we’re applying these in our firm. This is not just hypothetical posturing. This is what we actually do.
Tax happens annually, but business happens every day. If we know the business’ financial transactions are correct to start with, then the tax is typically quick to prepare. But the transactions have to be correct.
As such, we can level our workload by processing or reviewing those transactions as they occur. To do this, we need access to our client’s records throughout the year. With cloud based accounting platforms this access is exceptionally easy to obtain.
In our firm, we log into our client’s records as often as daily to ensure the accounting is being done correctly. At year end, we only perform a global review, and not a transactional review, of the records. We already know the transactions have been coded correctly, because we already checked.
The tradition in accounting firms is to accept client records in any format. It could be in MS Excel, paper ledgers, or any of 20 different accounting programs.
There are two major issues with this:
First, accountants have to be experts on every platform, which is extremely time consuming. In addition to being experts on the platform, they must also be experts on your particular accounting records. Every bookkeeper seems to do it a little differently. As a consequence, we spend an inordinate amount of time just figuring out how most of our clients have prepared their records.
Second, the cost of transmitting the information is expensive. There are major compatibility issues even between different years of the same desktop software platform. Throw in a few passwords or a bungled back-up, and it’s not uncommon to spend the 25% of the total allocated file time just opening the software and extracting the necessary records. Sheesh. What a waste.
Our solution is to use one cloud-based software platform (Xero – it’s beautiful) for every client. I know: this sounds draconian. In some ways, it’s only feasible because we’re a new firm and have made it a policy choice from the start. However, because we’re so much more efficient at our work, and can provide much better support, the investment in changing software makes it worthwhile for our clients (also, we do the changeover for free at the first year end).
Don’t accept quality defects
From an accounting perspective, ‘quality defects’ means incorrectly coded transactions. In a manufacturing business, it’s easy to push the problem back on your supplier, “Hey! You sent me defective goods. Fix the problem”.
But in public accounting? Well, your client is also your supplier. They supply you with records, which you then fix and give back to them (along with the bill). The whole purpose is for the public accountant to fix the records! Imagine rejecting your client records and telling them to fix them. ROFL. That’s not going to work!
However, the cost of defects is still large. About 40% of the annual accounting bill goes to seeking out, and correcting, transactional defects. That’s too big to ignore.
However, because we use the same software platform, we can start to work on this problem. Our approach has been three-fold: (A) spend plenty of time training clients to correctly process routine transactions, (B) provide free support for processing non-routine transactions, and (C) insisting we take over if it just can’t be done correctly.
Surprisingly, (C) doesn’t come up very often. Most of our clients are exceedingly competent and want to do a good job – we just give them the extra tools they need to get it right.
Now, we still have C’s. However, they all know that they suck at accounting. They don’t care about software, or clicking their mouse buttons all day long. But the thing is: they know who they are. They’re totally OK with saying, “Hell yeah. You do it all. Please, make this stuff go away”. It’s a win-win because they don’t have to do it, and we can do it fast. We actually make money on bookkeeping.
That’s it: level the load, standardize, and reject defects.
Now, if you’re a sharp cookie and were adding up those percentages, you would have noticed that I just estimated I can spend about 65% less time preparing year end records this way over old way. Does that mean the fees are 65% less, as well?
Well, no. Maybe a little less, but definitely not 65%. That’s because we’re checking our client records monthly, quarterly, and yearly and we’re providing a huge amount of technical support. Our time commitment is fairly similar; however our service level is substantially better.
Remember that example of the cash flow planning in September? I bring that up, because it just happened – sort of. Our client didn’t actually bring it up because we saw a major cash shortage happening in real time. We notified the client of the imminent danger and could immediately provide advice to our client on how to manage the situation. That’s the moment when we stop being ‘tax preparers’ and start earning our keep as CPA’s.
Cloud accounting isn’t just a better mouse trap. It completely changes the way service can be delivered by public accountants. I love being totally immersed in my client’s businesses. It’s amazing to watch the transformation when we can deliver perfect clarity into their financial affairs.
So, as a call to action, I encourage my fellow public accountants to have a good look at how you could completely rebuild your accounting practices around the cloud.
And, whilst your thinking about whether you can implement the above, I’d like to encourage small business owners to find an accountant who already works with this model (hint: us). We’re the accountant’s you’ve been looking for ;)
Ian Stanley-Maddocks, CPA