Why Automating Compliance Begins with Tasks
The accounting world seems obsessed with technology's impact on compliance work, to the degree that practitioners are regularly told they need a host of new skills and software to move their firms in a new direction or they will be extinct!
Technology has given accounting firms a wonderful opportunity to provide business clients with compliance services in a far more efficient and profitable way. As I connect with practices around the globe, I can clearly see the USA following the exact path Australia did 3-5 years ago.
The complexity of the taxation system (especially sales taxes) mixed with thousands of small financial institutions, creates a compliance burden that needs human solutions. Because of the experience I was having in my firm, I wanted to understand how my compliance firm wasn’t suffering from the career ending disruption that so many were saying is happening. So, being an accountant, I ran the numbers.
Compliance is So Much More
Compliance is a generic term that, at least for the people not working in the profession, seems limited to data entry. Let’s be clear, compliance is so much more.
I started by breaking down a standard compliance job in to the tasks, or at least segmented tasks, that are involved. Let’s look at whether all compliance is data entry and/or if tech will disrupt all compliance tasks.
Here are the segmented tasks associated with a standard compliance job:
Collating and Entering Client Data. This includes all of the work associated with (under the traditional desktop system) chasing the client’s accounting file and/or manually transposing the bank statements and coding raw transactions. Considered by many (naively) to be the sole role of a compliance accountant.
For this example, I am not including core bookkeeping services. This role is more of the assisted bookkeeping function that an accountant has. Being available to assist with transactional support and ensuring all transactions have been fully taken up.
Fixing Data Entry and Re-coding. With complexities around tax deductibility of transactions and consumption taxes (GST, VAT, etc), often re-coding of transactions is necessary to ensure compliance. So too are the constant errors that exist with a manual bookkeeping process (especially where the client has tried to assist).
Compliance Advisory. This part is fun because it’s what we were trained for. Most of us live and breathe tax and damned if our clients are going to pay one cent more than they are legally obligated. Here is the application of years of training, understanding the nuances of the tax code, the interpretations and the substantiation that will ensure our tax minimization strategies will stay on the right side of the law.
Preparing Financial Reports. Preparing the financials, the layouts, the notes, ensuring the look and feel accurately reflect the taxation and business outcomes. Sometimes it’s the client’s only look at the financials for the year, so it’s nice for them to look good.
Preparing Tax Forms. Preparing the tax forms correctly is important and is the true output of the compliance process. Attention is taken as this form is often the source of triggering any tax authorities’ queries.
Client Meeting to Deliver Annual Results. Clients love a chat. Unfortunately, as I said, sometimes the annual tax is the client’s only look at the financials for the year. This meeting is where the early shoots of business advisory sprout and offer the best chance to confirm and build on the client relationship.
Why Segment the Job?
People who don’t do this job everyday need to see that there is more to compliance than data entry. But there is another, more important, reason (which I’ll be explaining later).
First I needed to build an important profitability model of this new, segmented, compliance job. To do that I needed some key information so I assigned the following:
1. Client value. for each of the segments I have allocated an amount that reflected the weighting of value that the client places on those tasks. For the simpler data entry I obviously placed little value, however for the tasks requiring greater skills and training there was a lot of value. I have obviously ignored a standard cost per hour for every task as that method is not widely used in small practice.
2. Automation percentage. Automation is here and has had a big impact, but has automation affected all of the compliance tasks equally? The answer is no. Based on a true representation of the way technology has impacted the 2,500 tax returns I have personally lodged over eight years, I have assigned the relevant automation to each segment with some astonishing results.
3. Internal staff hours. For each segment I allocated staff hours across three staff levels. An Accountant, a Manager and a Partner. The hours reflected the weighting of the typical involvement of staff levels (simpler tasks done by lower level staff and higher task done by higher level staff).
4. Internal costs. Based on the staff hours and using the acceptable calculation of ⅓ wages, ⅓ overheads and ⅓ profit, I used ⅔’s of standard charge out rates to assign an internal cost. This cost covers the staff wages and firm overheads. The charge out rates I have used are:
- Accountant - $140 p/hr ($93.33 as 2/3rd cost)
- Manager - $200 p/hr ($133.33 as 2/3rd cost)
- Partner - $350 p/hr ($233.33 as 2/3rd cost)
I’ll leave it there for now and let you, review, digest and debate the views in the comments (I know you want to).
Stay tuned for part 2 of Automating compliance – identify the drivers.
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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...