Do you feel like you're getting screwed by your accountant?

In the last few months, quite universally, almost every new potential client I have spoken to is not happy with their accounting. On the one hand, there are businesses that have decided to hire bookkeepers. While their $20-30 / hr fee is attractive, they typically do not know how to book complex transactions that require capitalization, foreign exchange, intercompany, etc. They either need someone to explain how to do these transactions or even worse, they book them incorrectly. Many small businesses are not aware their accounting is done incorrectly until they approach investors and it is pointed out during due diligence, which can be an embarrassing experience.

On the other hand, many small businesses have hired medium to large size accounting firms. The reality is that many large accounting firms are set up to do audits for large sophisticated companies with full accounting teams; but due to their cost structure, are unable to provide day to day accounting services including bookkeeping for smaller businesses. Smaller businesses often have CEOs that are not sophisticated in accounting and require more help. Here are some of the horror stories that have been shared with me:

“They quoted me a fee to do my accounting and then surprised me with a bill that was double or triple what they quoted. They explained afterwards that my books were a mess and they needed to do a lot of adjustments.”

Accounting firms are notoriously bad at communication when it comes to fees and generally not able to cap them. They hire the cream of the crop out of school and are paying high salaries to their employees, making it uneconomical for associates to do bookkeeping and adjustments. Therefore, if the accounting becomes more work than expected, the accounting firms either need to pass these costs on to you or take a loss. Unfortunately, they would much prefer to pass these costs on to their clients. Therefore, it often does not make sense for a number of these accounting firms to take on bookkeeping engagements, although they will because they don’t want to turn away business. However, one way to mitigate this is to communicate to the accounting firm upfront that you are only willing to pay the fee that was originally quoted and if there is any chance of the bill going over, it must be communicated to you immediately. Absent this conversation, you will likely be one of those many clients that are surprised by a large bill.

“My accountant is always several months behind on my financials. It’s October now and they’re still catching up on June. I told them I would like to get monthly statements, so I know how my business is doing.”

Accounting firms are typically set up with the mindset to comply with CRA deadlines, so you don’t suffer any penalties for late filings. They do not have the mindset of producing monthly financials 15-20 days after each month. Also, most accounting firms typically do not deploy “management accounting”, which involves setting up your financial statements in a way that is easy to understand and can be used as a tool for business planning. If your expectation is to have monthly financials completed in a timely manner and receiving guidance on how to run your business, you will likely be disappointed.

“I sent my financial statements to an investor and they pointed out to me that they are completely wrong. I am so embarrassed.”

Small business CEOs are often not sophisticated in accounting and assume their financials are accurate. When I start to look at their financials, I find serious errors at first glance. If you are only paying $1,000 per month or less for a notice to reader, your accountant never visits your office to talk to staff, and they don’t ask you questions each month about specific transactions, I can almost guarantee you that your financials are inaccurate. They are likely looking at your bank statements and making educated guesses. This leads to cash-based accounting where transactions are booked based on when payments are made, rather than when the transactions were actually completed and there is a high chance your transactions are not being categorized properly. Most accounting firms do not have the mindset of completing financials accurately for presentation to investors. If you are presenting them for a capital raise, you will need to take extra precaution. Presenting inaccurate financial statements may be a quick way to disqualify you from an investment.

While the majority of my prospects have traditionally been for capital raising services, I have been surprised to hear how many executives are unhappy with their current accounting services. Here are some recommendations to ensure you have a positive engagement:

• Ensure the scope is clearly defined. Never assume any additional services are included like cash flow, monthly financials, cash reconciliations, etc. The basic level of accounting services is producing year end financial statements for CRA and tax filing.
• Make it clear that you must be notified if the scope has changed and fees are likely to come in higher than budgeted.
• Accountants should be willing to come onsite. They do a much better job if they speak to management frequently and fully get to understand your business.
• Accountants should be reviewing documentation and asking questions about transactions and not just rely on bank statements. 
• Ask about continuity. Is it likely you will have the same person on your file, or do they rotate accountants requiring new people to get up to speed each cycle?
• Make sure you understand every line item in your financial statements. If there are any items that are unclear, you should not be afraid to ask. See if your accountant can produce financial statements in a way that is easy to understand. 
• If you are not sophisticated in accounting, ask about management accounting services: cash flow, budgeting, KPIs, business strategy, implementation of expense policies.

A little bit of extra service goes a long way for a small businesses. Our goal is to change the mindset of CEOs from thinking of accounting as an annoying cost center to becoming a primary function that helps CEOs set goals, track their progress and facilitate smart decision making.