White Papers

BY FORD BAKER

Back in the Day

In the 1980s, as the desktop personal computer became mainstream, more and more businesses had a personal computer at their office. Before this time, only large businesses had computers, and they were typically the size of a room, but now the small business and home offices had access to a computer that fits on a desk, and soon on your lap. At first, those machines were typically not much more than word processors, but in 1985 TurboCASH was released and the idea that closing the books without posting everything to manual ledgers began to take hold. By the 1990s every business had a computer at their office and it typically contained an accounting software package like PeachTree. With the advent of Windows, the idea that a graphical interface could help business owners learn to handle their own accounting with packages like QuickBooks. Entrepreneurs added another hat; they were now the accounting department as well as sales, marketing, and customer service. And what's not to love about this? Businesses are able to be more efficient and as the accounting industry moved to the computer they would too! Or so they thought.

Before the personal computer became mainstream, businesses sent their bank statements, check registers and ledgers to their CPA and the accounting information was then summarized into journals and entries were posted to the accounting records. The records were compiled into financial statements on a monthly, quarterly or annual basis. Most accountants that have been in public accounting since that time would tell you that busy season was not as busy “back in their day” and most of us would smile and knod, chalking the mentality up to a "kids these days" attitude while never bothering to ask if this was actually true.

On the surface, it’s hard to understand how that could be true. Besides all of the manual accounting that was done, there was no tax software, so returns are prepared by hand, footed, cross-footed and then turned over to an administrative staff that manually typed the numbers onto the tax forms. Then the forms were proofed and copies were made - all this was done before a package was mailed with the year-end financial statements and a tax return. There was no electronic filing, no spreadsheets, none of the modern automation tools - and 100% of the accounting was done by the CPA firm. So are we really to believe that they did more work, by hand, in less time? That could not be true.

But what if they really did work less hours, it’s easy to blame it on the pace of business, the volume of business or kids these days but in reality, something had to change. We set out to figure out what that was. We started out by asking CPAs one simple question:

Why is Busy Season Busy?

The list of reasons we heard were varied, but when we dug in most of them fell into one of four categories. We ranked them by popularity / emphasis.

• Client issues | Most clients are not accountants, so the balances they send are:
  • Late | The balances are delivered too close to the deadline to do anything with before an extension is filed.
  • Incomplete | The balances themselves don’t contain enough information and accountants frequently need the details to update schedules or detect errors or omissions in the file.
  • Incorrect | They have a lot errors or omissions in the file that have to be adjusted.
  • and, most frequently, a combination of any or all of these items.
• Redundancy | Accountants are seemingly destined to redo everything after the balances are received from a client. 
  • Accountants perform work during the year to project taxes or plan for an annual audit which requires that interim balances are sent to the accountant. The interim balances have nothing to do with the final balances at year end, so any calculations or adjustments made to the interim balances have to be recalculated for the ending balances.
  • Year end balances are input into the accountant’s trial balance software so the adjustments from the calculations can be made as well as other year-end and tax related adjustments, and then must be reposted into the clients softwared.
  • Often those adjustments include entries from the prior year that were never posted to the clients’ records, so those have to posted to the year-end balances again this year.
  • The client ending balance is combined with the CPA’s adjustments and an adjusted trial balance is created. The balances from it are then entered into the tax return.
• No Centralization or Standards | There is not one place or one format to get the balances from clients
  • CPAs receive the balances summarized in different formats from any one of 84 different accounting packages. Even though the reports contain a lot of the same information, they are often formated differently and have differnt names.
  • Clients deliver the reports in a variety of manners. They can be:
    • printed and mailed or hand delivered
    • exported to Excel/pdf and emailed or uploaded to the CPA’s online data transfer portal.
    • backed up and sent to the accountant so the CPA can restore the backup and export the balances to an excel spreadsheet or pdf.
    • Accessed through cloud access or a remote server so CPAs can log in and create the reports needed and then export them to excel or pdf.
  • It’s just not possible to automate anything given those issues
• Work/Time Compression | The year-end balances can’t be calculated until after year-end when the deadline is almost here.

Surprisingly, the last item was not the most popular one. Most accountants thought that was just part of the gig. It was like telling a brain surgeon that the hardest part of brain surgery is the brain. It was obvious, but why would you complain about something that is in the very nature of your profession? But compression is the reason we extend everything that’s difficult. It's the reason we spend the vast majority of the year looking at the prior year, and there is not any time to plan for the current year. You can’t complete any planning and you can not institute any standards.

We see all these problems and have to ask, what happened to all the efficiencys that the personal computer supposedly introduced? Why is there so much work when most accounting is now paperless? After all, back in the day CPAs did all the accounting, by hand, on paper. It would seem like there was no way that job could be more efficient. So we decided to take a deeper look at what actually happened after desktop accounting solutions became mainstream.

What Changed?

As the owners of the business began to utilize other, less expensive, methods of doing the accounting for their businesses, the flow of data to the CPA firm changed. Instead of boxes with bank statements, check registers, and receipts, the owners of small businesses simply printed out the year-end balances and sent them to the CPA in the form of a balance sheet, income statement and trial balance.

The box of paper of statements and receipts was replaced by less than a 5 page printout. This supposedly was going to reduce the work a CPA had to do. Accountants openly worried about their jobs going away, less work meant less billable hours and firms were going to have to start laying off staff. That has not happened. As the world gets more and more automated, the demand for services from accountants keeps going up. In fact, our market has more jobs in public accounting than there are accountants interested in filling them.

What changed?

The workflow changed: Once the balance sheet, income statement and trial balance are printed the CPA then updates their accounting records by manually entering the balances from the client to a trial balance in their system. We call this a Tax Reconciliation Report, or a Book-to-Tax Sheet. However, since the CPA did not always get a complete general ledger, they would need details in accounts like fixed assets. Questions would arise when clients left balances in suspense, or cleared accounts, or made errors in the accounting that caused the accounting records to not flow from one year to the next. More documents would be printed and delivered to the CPA, so questions were answered, and schedules were updated.

The CPA then posts adjustments to the balances provided from their client’s accounting software in the form of journal entries. This records depreciation expense, clears out “suspense” and “clearing” accounts, and creates a proper flow of the accounting records from one year to the next. The result of that was a new document called the “adjusted trial balance”. The balances from the adjusted trial balance were then transferred, by hand, to the tax return. Once the return was reconciled and reviewed, it would be processed and returned to the client, along with the adjusting journal entries, to the client, to be mailed and faxed.

For all practical purposes, let’s assume that was what a CPA firm looked like in 1990. Since that time, clients began to fax the balance sheet, income statement and balance sheet. Soon the email would allow them to send these instantly in the form of an excel sheet or pdf. Valuable time was saved, rather than waiting for the mail, by the turn of the century clients could send their documents as soon as they were ready. These solutions still didn’t solve the issue of having access to the records so CPAs could clear up the problems they encountered or have access to the details in the file to update depreciation schedules or see what changed.

Therefore, clients sent backups of the entire file. More and more businesses used QuickBooks and therefore accountants needed to maintain dozens of versions of QuickBooks on their computer system so files could be opened in the version that their clients utilized. CPAs would open the file and then export the balance sheet, income statement and trial balance so they could start on the process of updating their software, posting the same type of adjustments and producing an adjusted trial balance to use to prepare the tax return. It didn’t save that much time because the process of sending a question was much less time than determining you have a question, accessing the software, finding the answer, and make the adjustments. Then you could return to work on the return only to find another question and start that all over again. All so you could prepare an adjusted trial balance and use those adjusted balances to prepare a tax return that you sent, along with the adjustments, to the client to file.

That process gave way to cloud access, where CPAs could log on to a cloud-based accounting platform or a remote server to access the accounting records without having to receive backups and restore files. Now a CPA could log in, get the balance sheet, income statement and trial balance themselves, export them to excel so they could start down the path of entering, adjusting and posting balances to the various software packages so they could prepare a return ready for electronic filing to send to the client. Now the main focus of the CPA firm is getting the required signatures back in time to file the tax return before the deadline. There is very little time to make sure the adjustments got sent or the file was opened back up so the accountant could make all the adjustments necessary to tie the accountant’s records to the client records and all of that presupposes that we received any indication from the client that we could start working on the return.

With all of the inovations that were made, it only created more probelems for the CPAs. Examining this we realized that one central change happened to the CPAs workflow. This change created the issues that CPAs experience, and all of these innovations that have happend have only put CPAs further from the the actuall solution.

Before the advent of the desktop computer, CPAs worked in a transaction-based workflow. Clients sent them transactions in the form of bank statements, check registers and ledgers. CPAs took those transactions and compiled balance sheets, income statements, and ultimately a tax return. That completed information was then sent to the client. CPAs would work in the clients transactions throughout the year, constantly working on their books in as realtime as was possible in an entirely paper driven workflow.

With the desktop computer clients started doing accounting themselves. CPAs were forced to change their workflow completely. Clients stopped sending transactions and started sending balances (in the form of balance sheets, income statements and trial balances). The CPAs then began breaking apart the balances to go back to transactions, where the answers lied. Then they would complete the return and books and send back to the client.

A Balance-Based Workflow is the Problem

Think about this in terms of the issues CPAs state above.

• Client issues | Some clients are not accountants, so the balances they send are late, incomplete and/or incorrect.
  • What else would we expect? They send us reports they do not know how to prepare, read, or interpret so we can complete a tax return and an accounting task they don’t know how to perform.
• Redundancy | Accountants are seemingly destined to redo everything after the balances are received from a client.
  • In the old transaction-based workflow, the adjustments and calculations made during the year were in the workflow, so they need not be repeated at year-end. The workflow produced the workpapers that went to the tax return, so there was no need to reenter them into trial balances and make additional adjustments, adjustments were made in the workflow.
• No Centralization or Standards | There is not one place or one format to get the balances from clients
  • CPAs received transactions and the firm used one platform to do their accounting. They implemented standards for things like a chart of accounts, so even though things may have been manually prepared, they were far more streamlined. Credits were on the right, and debits were on the left.
• Work/Time Compression | The year-end balances can’t be calculated until after year-end when the deadline is almost here.
  • CPAs received monthly and quarterly packages so they could prepare financial statements and work on returns. Questions that came up were addressed during the year, not after year-end. Depreciation schedules could be updated during the year, not after year-end. Even clients that only received one set of financial statements at year-end could periodically send in their transactions, during the year but even if they sent them in after the fact, all of the transactions and updates occurred inside the workflow.

How Do We Fix It?

Clearly there is no going back to the olden days, accounting is far more robust than it was back in the day and the idea of sending in check registers and receipts is not going to be a solution, if for no other reason than there would be one year where you would have to do all of the current year accounting while preparing all the prior year tax returns. Doubling up the work is not much of a solution.

But what if clients just sent us their transactions from their software? After all, the real power of online banking is not that the bank sends a pdf with the balance on it at the end of the month, the real power is so the accounting software can access the banks records and download them directly, where the transactions can be memorized based on common characteristics. It can also access your credit card and download and create those transactions. It now can access activity from a smart phone and determine miles and expenses to create transactions to record those. All of those innovations are based on importing transactions, not balances.

All of the automation, all of the new capabilities in accounting software is all captured in robust routines that create transactions and those transactions are used to calculate balances. The only change in the balances produced in an accounting package is that you can double click on them and the software generates a report that shows the transactions that makes it up. But if the balances are sent in a PDF or Excel file drill down detail is not possible, plus it is not ready to go to the accountant until after year-end.

Given the choice of only balances or the transactions that make up those balances, most accountants would say "give me the balances, I don’t have time to mess with the transactions."

Most accountants would be wrong. If we gathered transactions, we would be able to address every issue we described as the potential problem before:

• Client issues | Some clients are not accountants, so the balances they send are late, incomplete and/or incorrect.
  • Clients do learn how to create most transactions, they print checks, pay bills, invoice clients and some even reconcile accounts. Those transactions are simple and we could create routines and alerts based on the characteristics it contains.
• Redundancy | Accountants are seemingly destined to redo everything after the balances are received from a client.
  • CPAs would return to a transaction based workflow, where their adjustments could be made in their workflow and the return of those adjustments could be returned directly to the client’s accounting records utilizing the same import export utility.
• No Centralization or Standards | There is not one place to go to get the balances from clients and there is not a consistent standard for how those balances are reported.
  • Transactions are not formatted like a report, and they have not changed in over 40 years. Debits on the left and credits on the right. Before anything was posted you made sure the total of your debits equaled the total of your credits. When computers started processing them, they streamlined the process so that debits were recorded as a positive number and credits as a negative number and you just have to make sure they add up to zero. Transactions are more agile and powerful if they aren't bunched up into journals. If adjustements are made to the transaction, they could be posted in realtime, directly to the accounting software.
• Work/Time Compression | The year-end balances can’t be calculated until after year-end when the deadline is almost here.
  • Transactions are completed every day, throughout the year, so they can be obtained throughout the year, so accounting records and tax returns can be prepared real time.

This seems nice, but the idea of converting our balance-based workflow back to a transaction-based workflow sounds daunting at best.

You would be right, it was daunting. It took six years to complete and it cost us thousands of hours as we worked through the process and designed the workflow. We spent hundreds of thousands of dollars making the idea work for a couple of clients. We spent more to scale it. It is called BaCo Tech and we are excited to report that this patent pending technology not only solved these problems but it delivered so much more than we could expect. Working in BacoTech's Transaction Based Workflow delivers:

• AUTOMATED TAX PREP: one click or click free tax processing
• CENTRALIZED LOCATION: a single login for every client file
• SEAMLESS SYNC: between all accounting & tax prep platforms
• REAL-TIME: online consolidated financials with drill down details
• A BENCHMARK CENTER: that reports to owners and compares them to prior years, budgets and other companies in their industry
• REAL TIME TAX PROJECTIONS: Reported in a user specific manner, where their percentage of ownership is used to show the amount of the income that will be reported on their return

So CPAs can…

• Communicate with clients without opening Outlook
• Update returns and fixed assets without opening tax prep software
• Make or suggest adjustments without opening client accounting
• Automate and post tax adjustments, real-time / one-time
• Project taxable income without opening a prior return
• GET THEIR LIVES BACK