Rubbed the wrong way

The new paid tax preparer regulations and competency examinations have caused quite a stir in the tax preparation community, but most agree that some regulation of tax preparers will be beneficial. However, what has some tax professionals fired up is the list of exemptions for who doesn’t have to pass a competency examination, and Robert Flach is no exception:

My strongest objection to the proposed regulations comes from exempting attorneys and CPAs from the competency examination and continuing professional education requirements. This is a big mistake.

I happen to think he makes a valid point.  Being a CPA or attorney does not mean that you are a tax professional proficient in tax law in the same way that passing the medical boards does not make you a brain surgeon.  You may make a better attempt than the average lay person, but you’re not necessarily a tax expert.

However, he starts getting a little aggressive in his anti-CPA stance later on in the same post:

And as far as I know, while CPAs and attorneys are subject to CPE requirements that vary by state, there is no requirement for either to take even 1 CPE in federal 1040 taxation to maintain their license to practice.

and again in a post a week later about choosing a tax professional to prepare your return:

In my 38 years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

Now I’m not out here in professional blog world to call people out and make enemies, but this series of posts from someone who I like to read and learn from just kept bothering me.  I’m a CPA, yes, but the majority of my experience has been in tax. I had 56+ hours of CPE that was taxation CPE last year.

I’m not required to take all my CPE hours in taxation, but since so much of the work I do is tax work, it only makes sense.  I’m required to have 80 hours of CPE every 2 years.  Everything I do from January to April 15 is tax, do you honestly think I’m not going to take any of that CPE on tax topics?

I’ve also seen my fair share of mistakes made by the prior preparer, but I’ve never really sat down and tallied up the number and severity of mistakes by class of preparer.  Is it that he didn’t expect to see some of these errors from CPAs, and so those have stuck in his mind, while an error from the taxpayer himself was more understandable and less noteworthy in long-term memory?

He also seems to have found a tax professional that is preparing tax returns for auditors and attorneys in his comment bag, because I don’t know of any CPAs running a tax practice who would not prepare their own returns:

Truth is many CPAs and attorneys have little tax experience. I should know. I prepare tax returns for them.”

So, I agree that being a CPA does not guarantee that you are a tax professional, but a CPA does have professional standards that demand competence before agreeing to perform professional services.  If a CPA is signing tax returns, but taking no CPE in taxation and making obvious mistakes, perhaps he or she is in violation of professional standards.  Maybe Robert should bring some of his concerns to the AICPA regarding these preparers, rather than indict all CPAs as less than professional tax preparers.

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.

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.

Covey’s Quadrants


During some time management training this week, Covey’s priority matrix was employed as a tool to evaluate where time is spent, and where it should be spent.  It has been consistently noted that time is best spent in quadrant 2, dealing with things that are important but not urgent.  The worst place to spend time is in quadrant 4, on unimportant and non-urgent matters.

During tax season, most staff, managers, and partners spend a good majority of time in quadrant 1 due to a shortage of time.  Now that tax season is over, we want to focus once again on activities that would put us into the quadrant 2 realm of “pro-activity” to avoid getting stuck in quadrant 1 later.  However, I have a couple questions about what qualifies as quadrant 2 activity.

Partner/manager golfing events with clients seem to fit into the realm of recreation and relationship building, a quadrant 2 activity.  Is a staff person that maintains a professional blog, is active in online communities (LinkedIn, Startup Nation, etc.), and communicates with other professionals and potential clients via Twitter engaged in a quadrant 2 or quadrant 4 activity?  It is obvious what I think, but do the partners at most firms and business owners agree?  With the professionals I see standing up to say “Hey, don’t block social media from your staff” it appears that not all business owners see value in social media.

Rather than a few social events throughout the year, I have an opportunity daily to engage other professionals and potential clients in meaningful conversations.  Am I twittering my time away?  Is this activity less legitimate?  Business development is about building relationships and relationships require conversations.  Having more opportunities to engage in conversations with people you may have never run into on the golf course or at a stodgy networking event gives you more opportunities for exposure, recognition, and growth.

Why do we work?

Why do your employees come to work everyday?  What makes them strive for excellence?  What makes them shuffle through the day barely putting forth any effort at all?  What makes them desire to steal and commit fraud, whether they do or not?

Understanding the answers to these questions is an important part of running an efficient, effective, and friendly organization.  After you understand what motivates you employees (as individuals and at the group level), then you can examine the incentives in your organization to see if they are achieving desired outcomes.

For example, Wall Street executives had huge bonuses tied to good performance but little to no risk of loss (aside from firing) for poor performance.  Unlimited upside potential with limited downside for the manager (no risk of loss as firing only puts you to zero, not negative), encourages more risky behavior than what is good for the firm.

Similarly, you may want to put incentives and systems in place that encourage your employees to think and act more like they would if they were owners or at least had some skin in the game.  Also designing the system to limit the amount of “negative incentive” is important as well.

As much as you want your organization to be an engaging place to work, it shouldn’t be so great that you retain people you wish would leave or get applications from a lot of people you don’t want to hire.  Your organization should be a great place for the achievers in your business to grow and develop, not a place for underachievers to “hang out”.

Maintaining your organization in a relatively “flat” fashion where everyone has at least some access to top management and is encouraged to offer suggestions for improvement will make you more appealing to achievers.  When some of these suggestions are acted upon, give credit where it is due and remind everyone of the importance of their ideas.  A flatter organization also has less places to hang out as middle management can often become such a place where you are not on the bottom of the pile, but you have no real decision making authority either.

At the end of the day, building incentives isn’t something to just delegate to touchy feely HR hoping they will come up with ideas to satisfy the employees, but an opportunity to build and add value with the most important andvaluable part of your organization – your people.

Recognition for innovation

Over at Mark Bailey and Company, something must be going right with the don’t keep track of time and let your team members pick their own engagements idea pool.  These are just two of my favorite ideas from a firm management perspective that are giving Mark Bailey and Company a waiting list of talented professionals waiting to join their team, while other firms are scrambling to attract and retain top talent.

Mark Bailey and Company has been mentioned as a “Firm of the Future” in a recent article in the Journal of Accountancy (thank you Michelle Golden for bringing this to my attention).  The company has also been noted as one of the “Best Accounting Firms to Work for” according to a listing compiled by Source Media.

It pleases me to see a firm willing to take a chance, develop new management models, and succeed as a result.  It appears that being a firm of the future and being one of the best accounting firms to work for may have a few things in common to consider as your firm grows and develops.

Treat your professionals like professionals and not like a highly paid virtual assembly line, and give them freedom to do more of what they like most and do best.

Charting Value

One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.

Score one for value based pricing

A post on CPA Trendlines has really hit the nail on the head with regards to some of the most compelling arguments to abandon an hourly billing rate in favor of a value pricing model.  The key to maximizing your take from what the market place will bear for your services is to walk away from the cost plus model of hourly billing and decide what work you are willing to do at what price.  After that decision is made, you just need to find the clients who see the same value in your services that you do and have the willingness and capacity to pay for those services.

One of the comments on this article outlined several client ‘reactions’ to bills.  The only time reactions to bills are even an issue is when hourly billing is used and the amount of time required is a bit ambiguous, at least to the client.  The professional may have had a good estimate as to total cost up front, or at least sometime in the middle of the engagement (especially if special problems have arisen that cause more work on the project). 

Had cost been discussed in total up front and been set so long as all goes as planned, these reactions would never take place, because the client and the professional would be on the same page in the beginning, instead of finding out there are differences at the end.  Value based, fixed up front pricing can save a lot of headaches, heartaches, and wallet aches for both the client and the professional as engagements with clients who don’t understand your value will not begin in the first place.

Client management, staff management, and sales

It’s not billable and it’s not CPE, so if there is a burner behind the back one, thatis where this issue resides.  It is a training and development issue, but it is not technical training and development, it is the training and development of soft skills.  The skills that CPAs infrequently tout, but frequently utilize are among the most important but most neglected skills for any professional. 

The lifeblood of the firm is the client base and the engine that keeps that work flowing is the firm’s staff.  However, firm managers are just expected to ‘know’ how to attract and retain good clients.  They are just expected to ‘know’ how to attract and retain good staff.  These skills come quite naturally to some, and they are seen as the ‘naturals’ but others can acquire many of these skills as well with the right training and some work at it. 

Especially considering that accountants tend to be introverts much more than the general population, these skills might be more difficult to come by naturally when your entire group is made up of accountants in the first place.  Not that introverts don’t have good soft skills, but sometimes they need to warm up to you before you see these skills.

The point is that firms train the skills that get the work done as CPE is required to maintain licensing, but don’t pay nearly as much attention to training the skills that bring the work in the door and help keep good staff happy.  To have a healthy growing practice, both must be trained at all levels of the organization so that all client and staff interactions are as positive as possible.

A tip to micro-managers

My experience is in a public accounting firm, where the staff are considered to be professional employees. As such, I would think we should be beyond the point of severe micromanagement, but apparently we are not. I have recently been reminded of this as I have had a couple large projects on which I am not allowed to use all of the resources at my disposal.

The tool I wish to use is a certain software program that has been recently acquired by the firm, and in my opinion, its usage would increase efficiency and reduce errors.  I guess when you bill clients by the hour efficiency isn’t everything.