With Yergen & Meyer’s merger into Moss Adams nearing completion, it was time to evaluate my options. I could decide to try my hand internally, running an accounting department or becoming a controller, but I was still loving the audit and review side of public accounting. I still had not gotten into income taxes – both my previous employers were large enough that I could continue my focus on attesting to financial statements. But that was likely to change.
So, I took a few interviews with private employers and a few public accounting firms. The one I selected was ideally suited for me. It was in Vancouver so my commute into Portland would disappear and it was run by a CPA who was transactional – very good at doing what he did but supervising staff and organizing work were not strengths.
When I started, there were 7 employees, including his wife during tax season. There were two employees who focused on the business-side, an office manager, and 3 tax preparers – one of which was part-time between January 15 and April 15. I began documenting the work flow; who did what and how it impacted the work produced.
One of the first things identified was that one of his “star” employees did not seem to improve over time. I went back through three years of time reporting and noticed that every other employee saw gains of 3-15 percent productivity improvement year over year. But this one employee was consistently at the same number of hours for each job. I mean consistently.
As an auditor, you look for odd patterns. In various audits, I identified inaccuracies by looking for patterns. Advertising in month one would show an increase in revenues in month 4. Regression analysis, common sense, and a heavy dose of professional skepticism allows an effective auditor to identify interesting activity. In this case, this employee’s time was exactly the same on the same engagement each year she worked on it.
Bookkeeping time – 12 hours in year 1, 12 hours in year 2, 12 hours in year 3.
Tax preparation time – 12 hours in year 1, 12 hours in year 2, 12 hours in year 3.
Regardless of the client, the pattern was the same. New clients fell into this pattern as well.
So I ran an experiment. I gave the job to another employee to do. I didn’t explain that the work was already done and I told them to not ask the employee if there were questions. I also did the work.
The results were startling but not unsurprising. Bookkeeping time was about 5 hours, tax preparation time was 4. I discussed this with the owner and we agreed to terminate the employee.
What we found next was amazing. I honestly thought that the issue was she was sandbagging us – but in reality she was running her own separate bookkeeping and tax business out of the office! She knew what the firm would bill, knew what her rate worked out to be and backed into the hours to record.
After that, we tightened up software access but also agreed to implement project budgets on all business engagements. This budget was initially set by me, based upon my understanding of the client’s complexity, the skillset of the client’s accounting staff and the financial statements and tax return forms required. It was a monster spreadsheet set up as a database. By entering what was required to be produced, we knew what we would bill, how much employee time was required and what staff level was most appropriate.
The end result? Better engagement control and an increase in employee billing by over 50% in the next three years. Work turned around faster and we had fewer client complaints.
As my role steadily progressed I was soon responsible for engagement planning for not only financial statements but individual tax returns. This required me to interview clients, ensure we gathered the right information and that the right person prepared the work.
Sadly, I was the only person reviewing which meant that worked backed up and led to many 18 hour days. And, the problem with 18 hour days? You get tired and overlook things.
So we implemented an internal review process. We classified returns on a scale of 1-4, with 4 being the most complex and subject to error. Out of almost 800 returns, only 20 were rated a 4 with almost 700 rated a 1 or 2.
Work rated a 1 or 2 were reviewed by another staff person. The only rule was that you could not review work you prepared. Work rated a 3 had to be reviewed by a senior staff person and 4’s were reviewed by me. The senior staff person and I randomly selected about 40 of the simpler returns to ensure that the reviews were working effectively.
The result? No more 18 hour days. Work was completed even faster and with fewer errors slipping through. What used to take 7 to 10 days was now getting out the door in 3. Client satisfaction increased and staff productivity grew as well.
In 2005 I decided that it was time to start growing my own book of business. I joined the Chamber of Commerce and the Building Industry Association. Both organizations asked me to join the executive committee and serve as treasurer. I got to interact with my target clients on a business-casual basis in an environment they enjoyed.
We continued to grow and we were more and more focused on contractors and sub-contracting companies. These businesses needed good accounting, solid understanding of project accounting and someone who could explain what it all meant. Between 2005 and 2008 we added about 100 small contractors and developers and grew staff to almost 12.
In 2008, all this changed. Suddenly our clients were no longer working. Most could not pay their bills. Cash flow dried up for them. I remember vividly the day we really knew there was a systemic problem.
I was sitting with a client in his lawyer’s office reviewing the purchase and sale agreement for his purchasing a competitor. We performed the due diligence and were pleased to be part of the process in negotiating the purchase price. I had worked with the bank to get the right deal structure in place including the equipment financing and a new $5.0 Million line of credit. In total, the deal was about $10.0 Million and the bank was financing about 70%.
The phone call came. The bank was pulling out. They felt that the deal was suddenly too risky. Come to find out that the bank was soon to be taken over and forced to be bought out by another regional bank. We went back and evaluated what was happening and started to hear about bank liquidity issues. And then construction financing came to a screeching halt as home foreclosures mounted and financing evaporated.
We all know the story. I decided shortly after that I needed a break from public accounting and took a position with a business owner who wanted to try and break into cloud computing.