All posts by Rob Farrow

About Rob Farrow

accountant, entrepreneur, former chef, occasional artist, angel investor, business advisor, corporate tax specialist

AGILE IT for CPAs

Many “experts” still recommend server-based systems…

Server Efficiency
from a statistical survey of public practice accounting firms by K2E Enterprises

From our perspective, for most small businesses the idea of using a server-based network seems ludicrous today – unless you’re in the business of installing and supporting networks. 

In fact, small businesses relying on local server-based networks are likely more vulnerable to attacks like the ones that many Canadian municipalities are faced with. Hackers exploit vulnerabilities in your systems and hold your data for ransom threatening either to destroy it – or sell it if it contains confidential information. 

 

It used to be that even 2 or 3 person accounting firms used a client server architecture or some sort of “peer-to-peer” network that added a layer of complexity. In fact it usually meant getting IT support from a local IT specialist.

In the 1990s I set up a peer-to-peer network myself. When I had some issues I called in a local IT specialist. He showed up in my office, removed all the network cards from our 3 workstations…and disappeared for 3 days.

I quickly got frustrated, put the old (supposedly “non-working”) network cards back, re-configured the network and got it back up in a day or so.

Fast forward to 2019 and the internet has become everyone’s “peer-to-peer” network – but GOOGLE – MICROSOFT or DROPBOX do all of the heavy lifting when it comes to IT support…

 

Case of the Missing Bookkeeper

…a cautionary tale for would-be bookkeepers and their employers…

As small businesses and CPA firms try to meet tax and regulatory requirements, we all understand the need to provide quality accounting and tax compliance services for small business. Too often this has meant trying to “professionalize” bookkeeping, as though it was a necessary precursor to accounting.

This approach brings with it a couple of questions:

 

  1. Where does bookkeeping end and accounting begin?
  2. Who should perform these functions and what training do they need?

Certainly all of us would like to avail ourselves of well-trained and experienced bookkeepers that eliminate the need for entry-level accountants and accounting technicians – and cost less to hire.

Eric Matthews’ understanding of the bookkeeping function is quite common in our experience. However we’d suggest that changes in technology have made the distinction between bookkeeping and accounting almost irrelevant. Bookkeepers today use accounting software to perform accounting functions.

Bookkeeping as we used to define it, doesn’t really exist. Today bookkeeping is really the accounting function performed by someone without any accounting certification and often little or no training. With the advent of online accounting software, with electronic and digital records, and particularly with online banking, it is actually good recordkeeping that has become the critical precursor to accounting.

In our Records Management Workshop we’ll show how our smallest businesses can substitute good recordkeeping for what we used to call “bookkeeping”, without sacrificing anything in terms of the quality of information. What’s more professional accountants – if properly aligned with these new realities – can actually achieve greater efficiencies – and hence be more profitable, while reducing costs to their clients.

Hiring a bookkeeper is what small businesses often do when they need accounting done and they don’t want to pay for an accountant. Of course the “education industry” is pleased to provide courses that purport to train prospective bookkeepers for a career in accounting and tax preparation.

The graphic below is an advertisement clipped from a website, by a private college that offers training in bookkeeping. According to them bookkeepers…

  • Perform full cycle accounting for small and medium-sized businesses
  • Prepare simple income tax returns

 

Most CPA firms wouldn’t allow a university graduate with a business degree to perform full cycle accounting for small and medium-sized businesses, at least not without a significant amount of supervision by a CPA.

What’s more, if they did they could be subject to professional discipline.

When it comes to taxation, it needs to be said that the entire Income Tax Act is in play when someone files a tax return.

A simple tax return could be simple merely because the practitioner doesn’t know what questions to ask.

BOOKKEEPING WORKFLOWS 1980 vs 2020…

I began training as an accountant just as the IBM PC was introduced in 1981. For about 3 years I worked as an accounting technician for 3 small firms in central Vancouver Island. The modus operandi was the same in each of these small fiirms. In terms of tehnology we used electronic calculators with a paper tape and columnar journals.

Somehow, without computer technology we managed to efficiently “write up” a year’s worth of transactions and produce financial statements. The statements were drafted on paper and then reviewed by the partner. Once approved by the partner they were sent to the typing pool and proofed for distribution to the client.

As an accounting technician I either did the “write up” (aka “bookkeeping”) myself, or reviewed it and “posted” to a paper ‘working trial balance’ on pads of columnar paper, designed for that purpose.

In the early 1980s the workflow looked like the diagram shown above.

We almost invariably wrote up the transactions on a “cash basis” and then adjusted to the “accrual basis” which was required both for the financials and the tax return.

The reason we took this approach was to “keep it simple” for the bookkeepers, who often doubled as “receptionists” and had little or no accounting training.

There was an advantage to this approach for the CPA reviewing the file. By having a detailed view of cash transactions, there was a great deal more visibility into what was actually happening in the business.

The introduction of the personal computer and affordable accounting software, meant that bookkeepers needed to make the transition from simple “cash basis” write up to full accrual accounting. As a result the CPA or accounting technician reviewing the file, needed to discover the idiosyncracies of the bookkeeper who did the work.

Strangely it can actually be more difficult to discover errors buried in reports generated by accounting software, since it all appears correct on the surface. Entry-level accounting software enforces ‘double entry accounting’ whether the bookkeeper understands what that means or not.

Certainly many bookkeepers made the transition to using accounting software and did an excellent job. Others tried to use it as a cash basis system, like the paper systems they were used to.

We would argue that most very small businesses should focus their energy on implementing a simple and effective recordkeeping system as a better pre-cursor to accounting functions.

Of course that means that CPA firms must re-shape the “bookkeeping workflow” to take advantage of technological changes in the intervening years:

  1. Online banking
  2. Cloud-based file storage and sharing
  3. Powerful computer-based spreadsheets
  4. Online accounting software

By re-designing the workflow, as CPAs we accomplish 2 things:

 

  1. We virtually eliminate the need for “bookkeepers”
  2. We gain better visibility into the underlying cash transactions of a given business

WHY BOOKKEEPING IS A DYING TRADE

The statistics shown above were compiled by WORKBC. They show that bookkeepers actually earn less per hour than either professional accountants (blue bars above) or administrative assistants (grey bars above).

Note that the definition of “Financial Auditors and Accountants” is not restricted to CPAs, but includes university graduates and others without any professional certification. It’s no surprise that bookkeepers earn less than accountants. However consider the fact that a bookkeeper earns less than an “administrative assistant” who has no particular training. That says to us that the market discounts the value of bookkeeping.

As a career choice it would seem pretty much a dead end.

Instead would-be bookkeepers should consider coupling simple training in what we call “records management” – with other, more highly valued skills.

 

 

 

 

Online Accounting Software Is Great – But It Won’t Make You An Accountant

KASHOO is Vancouver-based startup located on Railway Street, just outside of Gastown.

They began life as an accounting app for the iPAD – and I really wanted to like them.

However when I first tried to use the software a few years ago, I found I had to re-enter the entire year’s worth of transactions. There was no way to enter a trial balance as at a point I time, and then work from there.

A few days ago I received an email from KASHOO software (see inset). Clearly they are trying to position themselves as business advisors to small business.

There is a fundamental problem with ALL accounting software.

Presumably they’ve improved their product since then – but I don’t have time to continuously review accounting software. There is a fundamental problem with ALL accounting software. The publishers are trying to sell as many licences as possible. They sell directly to small business owners, they sell to bookkeepers and they sell to accountants.

When selling directly to small business owners they trade on the fact that accountants are perceived as expensive. So their sales pitch focuses on the amount of time that it will save your accountant when doing the year end. Presumably the accountant will reduce his fee because he or she will do the year end more quickly.

As a professional accountant I have only rarely seen a set of financial statements that is even close to accurate when prepared by the business owner. In fact it usually ADDS time to my file as I typically need to reclassify, reallocate, reconcile and generally re-do many of the transactions. Starting with a set of accounting records that has been improperly put together is actually harder – and more time-consuming – than starting from scratch.

Starting with a set of accounting records that has been improperly put together is actually harder – and more time-consuming – than starting from scratch.

Ideally software vendors want accountants to recommend their accounting software. Failing that they want bookkeepers to recommend their product.

When selling to bookkeepers they recognize that the greatest problem most bookkeepers face is the lack of credibility. CPAs undergo rigorous training which is actually recognized. By contrast bookkeepers are trying to ‘professionalize’ bookkeeping. The Certified Professional Bookkeeper designation (“CPB”) is a valiant attempt to do this. However the CPB designation is not an accounting designation and isn’t widely recognized.

As a result software publishers offer a variety of certifications in specific software packages. So the bookkeeper adds CPB and Quickbooks Professional Advisor behind their name. Voila – instant credibility. Except it isn’t.

Generally financial statements prepared by CPBs are better than statements put together by small business owners. The problem is that too many bookkeepers don’t stop there. In a 2019 study by K2E Enterprises found that 73% of bookkeeping firms prepare corporate tax returns.

In the 1980s when mass market accounting software was first introduced, the role of the bookkeeper changed. I would argue that the bookkeeper effectively disappeared. Bookkeepers were using accounting software and performing the accounting function. The only difference between them and accountants was that they had little or no formal training – or supervision.

While I actually think that QUICKBOOKS ONLINE (and XERO) are great products, they are designed to be used by accountants. CPBs – if they stop at doing the accounting – can be an important part of the accounting team.

Unfortunately software companies like INTUIT are perpetrating a myth that being an accountant is ‘Quick and Simple’ if you use the right software. Since INTUIT also publishes (PROFILE) tax software, they are further pushing this nonsense into the world of tax – which CPBs are categorically NOT qualified to do.

So who is Mike Widdis, ICA, CPB?

It is probably telling that INTUIT got it wrong. He isn’t an “ICA”, he is an “ICIA” Has anyone ever heard of the Industrial, Commercial and Institutional Accounts?