Age of Indulgence or Flawed System?

A reader of the blog encouraged me to read Age of Indulgence by Ron Thomas and Chad Munson, both pen names for sake of anonymity, and offer my thoughts on the book.  The book is a compilation of horror stories in which the client generally gets screwed by firms and firm employees that view the client as a piggy bank.  After each set of stories, the authors interject their ideas for ways to mitigate these abuses.

While I agree that these are issues that need to be brought to light and that these types of abuses should not exist, I disagree with almost every recommendation that the authors make about controlling these abuses.  The authors generally take the position that the client needs to be a more vigilant baby-sitter for the firm as a way to control their own audit costs or the firm needs to be a more vigilant baby-sitter of its employees.

In my opinion, the client would be better to get the firm to control its own costs by demanding an arrangement where the fees for the engagement are fixed, so long as the scope of the engagement does not change significantly from beginning to end of the project.  If the contractor remodelling your kitchen finds asbestos, I doubt that you will expect the asbestos remediation to be within the scope of his initial price quote.  If the auditor finds financial cancer, they should be able to amend the arrangement letter and ask for a higher price.

If your accounting firm can’t figure their numbers well enough to set a price on an engagement, how well do you think they understand your numbers?

The client and the audit firm also view the billable hour/cost plus expenses pricing model in an entirely different light.  The client sees the costs figured from the budgeted hours and expected expenses as either a close proxy or upper limit to the actual expenses to be incurred.  While the audit firm may see this as the baseline if everything goes very smoothly with nearly any inconvenience justifying an opportunity to bill more time.  Thus the problem of selling time rather than solutions.

With regard to expenses, being able to pass these right along in the client billings gives serious problem about playing with OPM (other people’s money).  If you want to stay at a $200/night hotel while you’re on an engagement, you should be able to do so, but it should be part of your cost structure that limits YOUR profit, not increased expenses for the client.

Overall, the book is good and brings up very relevant issues, but the authors miss the root of the problem and give you solutions for the symptoms without addressing the illness.

Health care reform that will work

I agree that health care reform is desperately needed.  I also agree that prices have spiraled out of control and we need to stop it.  I don’t think that the government running the health care system or being a larger player than they already are will help anything.  According to the Kaiser Foundation in 2004 there were 42 million people covered by Medicare and 52 million people covered by Medicaid. There are about 87 million total covered between the two programs as 7 million are dual eligible.  So with our population of 300 million people, almost a third already have access to an existing public option.

Another public option is not the solution, but systematic reforms could change the way consumers consume health care, reducing costs for us all.

  1. Front the money. If individuals had to front the money for their own health insurance, it’s more likely that they would consider the price of a procedure, and actually demand this information before moving forward.  Not that it will change their mind on the necessity of the procedure, but the awareness of price may lead to competition on price, delivering lower costs for us all.
  2. Extend tax benefits to individuals. Keeping the benefits of providing health insurance on the employer side has kept the policy in the employer’s hands.  Extend tax benefits to individuals the same way you would to the self-employed so that opting out of your employer’s group option can make cents.  This is especially true for young employees in aging organizations where the young may pay higher premiums than they would in the private insurance market to subsidize the older participants in their group.
  3. Encourage competition in insurance. This issue is so complicated that it’s hard to know where to start, but some common sets of regulations that allow competition to flow more freely from state to state would be a great place to start.  This should not come as a federal mandate, but as a cooperative of the states utilizing what is already working best in various parts of the country to make some uniform guidance and grounds for competition.

These reforms would help to put market pressure downward on prices for both care and insurance as well as upward pressure on quality of care.  There are efficiencies under development in the health care market that are not being exploited because of the regulatory state of affairs and third-party payer system.  Telemedicine holds great promise to deliver care more efficiently, but may be held back if insurance companies do not give doctors a code to be paid for this service.

However, innovations such as this would take hold more quickly if the perception of health insurance were to change drastically in the marketplace.  Currently, health insurance is viewed as a way to avoid paying anything for medical care, so that the consumer can consume health care freely and let someone else pay for it, so long as they can ante up with the monthly premiums.

If health insurance were perceived more like homeowners insurance, where you take care of maintenance yourself and use the policy for major damages, doctors and patients would have more control over care than the insurance companies.  This would also drive down the cost of health insurance as much more of the health care spending would be cash from the patient to the doctor instead of from the insurance company to the doctor.

Another Excel Income Statement

In a previous post I shared an Excel based income statement (profit and loss) that was based on a data register using sumifs and sum arrays to integrate multiple conditions in both Excel 2007 and earlier versions. However, I originally overlooked another very powerful way to summarize data along multiple conditions that are relatively defined. The worksheets here present the same income statement using a “Getpivotdata” function to pull the information based on relative information.

Once again I had to make two versions (one for Excel 2007 and one for earlier versions) as the pivot table functionality is different and the “iferror” function does not exist in the earlier versions. The only caveat to this worksheet that is a downside from using the others is that you must refresh the pivot table after entering the data before the income statement will update, otherwise this seems to be a very powerful way to summarize the data among a multitude of criteria.

Let me know if you have any thoughts, comments or suggestions on these!

Multiple activities in one account using Getpivotdata (for Excel 2007)

Multiple activities in one account using Getpivotdata (ealier versions)

Government health care, learning from Medicare and Medicaid


What’s the real problem with health care?  Can HSA’s really help?  Will government intervention fix all of our problems so we can sing Kumbaya by the campfire?  The chart above may help us to uncover some of the problems by comparing some cases and seeing why differences exist.

Here I have indexed to 1996 as 100, the price of breast augmentation, liposuction, hip replacement, arthroscopy, and the overall CPI as a benchmark.  I consider the breast augmentation and liposuction in one group, and the hip replacement and arthroscopy in the other.  I know from the data that in 2006 67% of charges for hip replacement were paid by Medicare or Medicaid and the same was true for 74% of arthroscopy charges in 2006.

I don’t know these breakouts for certain in the breast augmentation and liposuction realms, but I do know that significant numbers of these procedures are for cosmetic purposes only and are not even covered by insurance, let alone Medicare or Medicaid.  I also know that there are open markets where consumers can shop by price and quality ( rather than find a good doctor and get surprised by a mammoth bill.

However, a large portion of consumers are only concerned with the first part of my last statement “find a good doctor” because they are not paying firsthand the costs of many of the procedures performed and medicines prescribed.  When considering all hospital discharges, a little over 61% of charges were paid by either Medicare or Medicaid in 2006, so the examples I have are slightly higher than the total, but not significantly.

Some within the 30% of charges paid by private insurance may have little or significantly reduced exposure to firsthand payment for medical care as they sport the platinum plated Blue Cross/Blue Shield plan that is significantly subsidized, if not entirely paid for by the employer.  Some are heavily exposed to firsthand cost under an High Deductible Health Plan (HDHP) that is being marketed in conjunction with Health Savings Accounts (HSAs) as a cheaper alternative for small to medium sized businesses.

Now both the uninsured and those with HDHPs suffer from escalating prices for medical care in a market where significant numbers of consumers have little or no price sensitivity because they do not pay for their own care!  A significant portion of this lack of price sensitivity is from those on the Medicare/Medicaid rolls who may not even have the possibility of future cost exposure either.  Thus, a significant portion of the rising costs in medical care are generated by the government, not solved by the government.

HSAs don’t really help to solve the problem when so much of the consumer market has little to no price sensitivity and the only ones hurt are the ones that have the HDHP/HSA and have to pay the cost of care that others are receiving for free.  This may drive down demand for consumers on HDHP/HSA plans, but they are such a small portion of the market that the impact on price is not significant.  In the cosmetic surgery cases, price sensitivity rations care and controls prices because the majority of participants in that market pay the full cost first hand.  Even if all those covered by private insurance were on the HDHP/HSA plan, over 60% of hospital charges in 2006 would have been incurred by patients on the government plans, making up the majority of consumers in that market.

Data used was compiled from the Agency for Healthcare Research and Quality.

Sheridan WY Speech from Tom Hoenig

Although the Jr. Deputy Accountant was rather unimpressed with this speech from the Kansas City Federal Reserve President, I thought there were some excellent observations from the speech that I would like to call further attention to.  The first observation as an update to the often quoted John Maynard Keynes, “In the long run, we are all dead but our children will be left to pick up the tab.”

Unfortunately the overall political apathy among the youth will have them taking on this burden without much of a fight as it is assumed nothing can be done about it.  Alternatively the next generation may be assuming that the actions of today will not cause catastrophic consequences tomorrow and all will be worked out with some political wizardry.

In our efforts to fix the oversight process for our financial system, we should not misdiagnose the patient. Unfortunately, I’m afraid we are witnessing some regulatory malpractice now. The emphasis on reform at this moment is to change the structure of the regulatory system rather than address the fundamental weakness of that system.  Leading to this crisis were a series of steps that eliminated or compromised financial standards that had served to support sound financial practices for generations.  For the most part, these rules were simple in form, understandable and enforceable.  They served to constrain excessive leverage and undisciplined growth using simple leverage ratios, and focused on fundamental underwriting standards such as limits on loan-to-value.

It seems that he’s saying we are taking a sledgehammer to a thumbtack.  Essentially the problems that got us into this mess were not gaping regulatory loopholes, but rather small cracks that were widely exploited.  Whether he is right or wrong about this, a proper understanding of the problem is necessary before a solution can be appropriately prescribed. We have huge symptoms to treat, but the underlying problem may not be so large as the symptoms imply.

Capitalism is a process of success, failure and renewal, and for it to work properly, institutions must be allowed to fail, no matter their size or political influence. [emphasis added]

Amen.  This has been stated before, but it’s nice to see it coming from the inside rather than the outside.  He goes on to talk about the “implied subsidy” of institutions that are too big to fail and how they will suffer “moral hazard” from this implication.  Going on to talk about the problems with our trade imbalance there is another learning point for the country.

At it’s peak [the annual trade deficit], this equates to almost $900 billion that the U.S. has borrowed from the rest of the world on an annual basis.  If this were being used to finance productive investment, I would not be overly concerned because the returns we earn could finance the cost of borrowing.  Unfortunately, however, a large share of U.S. imports is for consumption.

So here we draw the good debt/bad debt distinction.  Do we have anything to show for all this money we spend or is it frittered away on cheap trinkets and improved national distractions?  This combined with a nearly nonexistent savings level shows that for the most part we have run up huge debts to fund an expensive lifestyle, not debts to fund entrepreneurial activities or innovative endeavors.

We’re funding safety nets and busy work while the less developed world invests heavily to catch and overtake our position.  If we continue to kick this can down the road there will be a tipping point where our national credit dries up and there won’t be enough cash flows to tax it out.

MACRS Half-year convention Depreciation Schedule

This Excel spreadsheet uses lookup functionality to pull in the proper MACRS Half-year convention rate from a table to use in the depreciation schedule.  The lookup that is functionally used is the VLookup as I felt this was the simpler method of accomplishing this functionality, but in column H it has also been demonstrated using the Index function just to drive home the point that there is more than one way to get the job done.

I don’t know if this has a lot of practical application as it will certainly not replace any type of tax depreciation software, but it is a fun exercise to gain additional familiarity with the uses of lookup and index functions.  It may be useful to do some quick entry of a few items to see what the impact may be on some planning issues or for clients to track some of their purchases throughout the year.  This spreadsheet will also function rather well within Google documents for those that do work in the cloud.

MACRS Half-year convention depreciation schedule

Excel based Profit and Loss for multiple activities in one account

Another tool that I have created and would like to share for use, comment, and improvement is a spreadsheet that allows you to track multiple activities running through one bank account for purposes of generating separate profit and loss statements for each activity.  I think it is much quicker and simpler than trying to teach someone to properly use an accounting software and can be a great alternative to the dreaded “green sheets”.

I have noticed others replicate the “green sheet” thinking into Excel spreadsheets used to track profit and loss for light accounting in small business entities.  I think this becomes cumbersome unless you have a monitor 20 miles wide and there is a lot of rework when you want to add an account, thus accounts are often not added and more stuff gets lumped into miscellaneous.

My workbook is set up like a check register where you assign account numbers and activity codes to each transaction.  Then using the power of the “sumifs” function (available in Excel 2007 and newer), Excel can pull the desired information from the activity register into the profit and loss statement.  The version that I made for Excel 2003 and earlier uses the sum function as an array to accomplish the same functionality but runs considerably slower than the version based on the sumifs function.

Also included is a pivot table that summarizes information by account, allowing you to drill down to the detail on an account by account basis.  The 2003 and older version of the PL works with Google Documents rather well, with the exception of the pivot table.

Questions, comments, or suggestions, feel free to let me know what you “really” think.

PL Worksheet with Sumifs, for Excel 2007 or newer

PL Worksheet with Sum array, for Excel 2003 and older

Nebraska Personal Property Tax Template

I have a template that I use for putting together Nebraska Personal Property Tax schedules that I would like to share.  The template is populated with data just as an example of how the template works to pull and update information.

Changing the year in A3 will change the depreciation factor pulled (colum F), making it easy to roll forward from one year to the next.  The depreciation factor pulls based on the input of the current year in A3, acquisition year in column B, and the life in column E.  If you have any questions, comments, improvements, or updates, please let me know!

Personal Property Tax Worksheet

Big Omaha – Keep Business Flexible

The biggest takeaway that I had from the Big Omaha Conference was to keep your business flexible regardless of pressure to bureaucratize, measure, and manage every detail.  Having a vision is a positive way to know you’re making progress and working to a common end, but having a “plan” as used by Jason Fried, implies that you have left yourself no room to be flexible.

The best information you will have is the information available right now and for that reason, a discussed and written plan is always out of date.  If you must have a detailed plan, give yourself the freedom to deviate and create as inspiration is fleeting and must be acted upon quickly.  Don’t let the plan stop you from responding to inspiration.

For instance, a plan that involves long-term commitments to newspaper advertising might best be changed in light of current problems in that industry.  A plan to mow your grass gets changed on a rainy day.  No matter what the original idea, being adaptable is the name of the game and that is where David gets his advantage over Goliath.

There are many others who have been inspired by the Big Omaha Conference and I would like to recap some of their thoughts as well:

George Brooks’ seems surprised that the trip from Kansas City to Omaha was overwhelmingly worthwhile.  It’s cool to see an event like this exceeding expectations across the board.

Chris Rikli was inspired by Gary Vaynerchuk’s passion for people and business and the possibilities of development with YQL (Yahoo Query Language) and impressed by the organization, planning and venue.

Jeff Slobotski reflects on how a humble idea only a few months ago turned into an overwhelming hit with the community and a showcase for the creative and innovative atmosphere that is present in Omaha.

John Meyer recaps the conference and his experience after asking Gary if Wine Library was hiring.

Jenn Bailey recaps some of the best quotes and moments from the speakers at the conference.

Jason Fried took note of Jeffrey’s message about being sincere and accessible.  If you are transparent to your community, you can make big mistakes and be forgiven when you apologize.

Micah Laaker talks up Omaha and how it has been a great place to be, but is now getting some of the recognition it deserves.

Jolie O’Dell gives a very nice conference wrap up.

This is by no means a comprehensive list of what has been written in the wake of the event, but it makes up a good sample of what Big Omaha has meant to participants and oberveres.

Difficult conversations

Many of us avoid conflict when possible, because it is uncomfortable. Conflict is associated with feeling upset, angry, disappointed, or anxious. However, letting conflict go unsettled results in growing feelings of resentment that can eventually explode uncontrollably.

Sometimes we engage conflict with the righteous indignation that our way is right and all others are wrong.  This may address the conflict, but it will not resolve the conflict.  The result of this action will be a fight with no winners, regardless of how you feel afterward.

Sometimes we mediate conflict with compromise where each gives up something to come to common ground.  This seems like a reasonable solution, but in the end, no one is really happy with the resolution agreed to and each feels as if he/she has lost.

A more effective approach to conflict resolution is collaboration.  During the collaborative process, we seek a win-win situation (or as close as possible) by being honest with and vulnerable to one another. To begin effective collaboration, we must identify our self-interests and communicate them with one another.  Common self interests include: looking good/not looking bad, get more time/take less of our time, make more money/lose less money, and experiencing pleasure or good feelings.  Being open and honest about these interests helps us to identify solutions that would constitute a win-win situation.

Next we need to take responsibility for our role in the conflict. Looking at different interpretations of the same problem may help us to see our responsibility more clearly. The fact may be that your report is 2 days past deadline.  Some interpretations may be that you’re lazy, you don’t care about the client, you don’t care about your teammates, or you don’t care about the firm.  Alternative interpretations could be that you’ve been sick with the swine flu, you’re kids are undergoing strenuous cancer treatment, or your spouse is having a breakdown, requiring more attention from you at home.

Either set of interpretations could be true. The only way to find out what is true is to discuss the issue with the person you’re having conflict with.  Putting the problem in the proper perspective mitigates unwarranted blaming and puts you on the road to a viable solution. This helps us get to the root cause of the problem and may even help to mitigate future issues that are similar in nature.