How to Identify the Drivers in Automating Compliance

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Following on from Part 1 where we identified the segmented tasks of a compliance job and outlined key information we need to build a profitability model, we will now look at the drivers that need to be examined in order to discuss the impact of technology on compliance.

In my view, there are three real drivers when automating compliance:

1. How were internal resources split between the different segments prior to automation?

2. How might the client assign value between the different task segments prior to automation?

3. To what extent will automation impact each segment?

For these drivers, I have used my personal experience as guide and have peer reviewed and adjusted based on over 25 interviews with other small firms around the world. This isn’t an exact science, but myself and those I interviewed have all had 20+ years of dealing with SME’s, talking about tax lodgements and negotiating invoices, I think we all have a fair idea.

Let’s examine the drivers:

How Would Internal Resources Be Assigned to Each Segment

When looking at internal resources, I have split the resources in to three levels: accountant, manager and partner. Then, I need to assign a general number of hours per level for each segment. These hours reflect the weighting of lower staff completing lower level work and I haven’t included the additional hours that invariably occur in the lower level work with staff training or other inefficiency that cannot be charged to clients.

  1. Data entry - 8 hours (5 - Accountant, 3 manager & 0 partner) which represents 31 percent of the total hours spent -  Traditional desktop accounting methods, including compiling data and entering it in to a separate system is the most time consuming part of a compliance job. This includes wasted time chasing raw information.
  2. Fixing data entry and re-coding - 7 hours (4 - Accountant, 3 manager & 0 partner) which represents 27 percent of the total hours spent - Fixing coding errors, re-coding transactions and initial client queries also form a large part of a compliance job. 
  3. Compliance Advisory - 5 hours (1 - Accountant, 2 manager & 2 partner) which represents 19 percent of the total hours spent, an important part of any compliance job.
  4. Preparing financial reports - 2.5 hours (1 - Accountant, 1 manager & 0.5 partner) which represents 9.5 percent of the total hours spent - While creating the report seems simple, this time involves ensuring the correct layout, removing incorrect negative figures or other issues that stand out as incorrect.
  5. Preparing tax forms - 2.5 hours (1 - Accountant, 1 manager & 0.5 partner) which represents 9.5 percent of the total hours spent - While completing the form seems simple, this time involves ensuring the labels are completed correctly. As it’s the document lodged with authorities, ensuring correctness is important to avoid future audit.
  6. Client meeting to deliver annual result - 1 hour (0 - Accountant, 0 manager & 1 partner) which represents 4 percent of the total hours spent - Many firms still strive for this to be a face-to-face meeting (which I feel is important), but these days this is often conducted via email, phone or online.

How Might Clients Value Each Segment

When looking at the assigned client value, I have taken a standard annual compliance fee (in this case $5,000) and for each task segment I have tried to assign what amount of the total fee the client would pay for that segment.

  1. Data entry - 0 percent, $0 of the $5,000 - “Value? Are you serious, any idiot can code bank statements, can’t they” we all hear the clients say. There is no value perceived by the client for these tasks. This is simply what an accountant must do to ensure the data is good enough to complete the rest of the compliance job.
  2. Fixing data entry and re-coding - 20 percent, $1,000 of the $5,000 - Fixing coding errors and re-coding transactions shares some of the “I’m not paying you to do that” vibe, but there is also the risk mitigation around the tax authorities having penalties for errors of this nature. It has some value though.
  3. Compliance Advisory - 60 percent, $3,000 of the $5,000 - Here is where the money is. Clients expect, demand and will pay a lot to ensure compliance, especially at the lowest amount of tax legally allowed.
  4. Preparing financial reports - 5 percent, $250 of the $5,000 - It’s one of the 2 documents that you present to the client, so it has some value, but there is a little bit of that begrudging vibe around it being ‘tax time’.
  5. Preparing tax forms - 5 percent, $250 of the $5,000 - Again, it’s the main result of the job, which is both good, has some value, and bad, begrudging vibe around it being ‘tax time’.
  6. Client meeting to deliver annual result - 10 percent, $500 of the $5,000 - Clients love a chat and for the time spent, this segment certainly has some value.

How Has Technology Automation Affected Each Segment

When looking at the impact of automation, having used cloud based accounting software exclusively for my clients for over 8 years, and having been part of countless software beta testing groups, I think I have a fair idea of the impact technology has had on the different areas of my compliance work.

  1. Data entry - 95 percent automated - We now have bank statements that code themselves ‘ninja style’ and of course “no code accounting”, we are apparently living in a nirvana where accountants don’t have to code transactions anymore. Well not quite, but this has certainly been a major area of efficiency for accountants.
  2. Fixing data entry and re-coding - 95 percent automated - In the same way as data entry, fixing the errors and re-coding have been greatly reduced by matching data from tax authorities and bulk update functionality in cloud accounting software.
  3. Compliance Advisory - 0 percent automated - With the complexity, interpretation and interrelated nature of the tax rules, there is no currently available technology solution to the years of practical experience.
  4. Preparing financial reports - 50 percent automated - Sure some of the physical time has been saved in actually producing the document has been saved, it’s the review time due to the importance that remains.
  5. Preparing tax forms - 50 percent automated - Sure some of the physical time has been saved in actually producing the document has been saved, it’s the review time due to the importance that remains.
  6. Client meeting to deliver annual result - 0 percent automated - At this stage, client relationships are hard to automate.

Conclusion

Did you notice anything interesting about the correlation between the perceived client value and the automation? Segments that have greater automation percentages have high internal resources but low client value.

So what does that mean? Well, basically it means that large benefits in internal resources have less of an impact on client value. This creates internal efficiency and profitability rather than a negative impact on firm profitability.

Ok, now that we have set some important parameters, let’s get down to business. What are the actual results of using technology in a compliance-focused accounting firm? Well stay tuned… I’ll leave it there for now and let you review, digest and debate the views in the comments (I know you want to).

Coming up in Part 3 of this series, what the data says about automating my practice/ How to push profits past 60 percent.

About Paul Meissner FCA

Paul Meissner

Paul is an Australia-based practitioner, podcaster and pragmatist. Director - 5ways Group Chartered Accountants, Founder - Freedom Accounting System, Presenter - From the Trenches Podcast. To learn more about the practical ways Paul, through his Freedom Mentoring, assists accounting firms navigate technology, feel free to reach out.

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