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Do you know what you’re Paying Your CPA for?

It’s after year end and you’re patiently waiting for the most anticipated email of the year; the email from your CPA asking if your books are closed so he can start the compilation, review, or audit engagement (“attest engagements”). You receive the email and immediately upload the requested documents, answer a few questions, and poof the report appears! It’s magic! Not really.

There’s a lot of work that goes into the final deliverable from your CPA and now’s the time understand what that work is because it could be costing you more than you think. You’re probably familiar with the term “non-attest” services but are unfamiliar with the process. Non-attest services include work performed by your CPA that is outside the scope of the attest engagement. For most of you, that includes calculating and adjusting your work in progress, calculating depreciation expense, and most notably preparing your financial statements. Your CPA typically spends a lot of time upfront and throughout the engagement on non-attest services, as they can’t perform their attest engagement on balances they know are misstated.

So what’s it to you? “That’s what I pay him for!,” you may be thinking. It’s true that you are paying him to provide non-attest services but is there any real value in doing so? Take for instance calculating and recording work in progress at year end which is a common non-attest service. I've performed this service for companies ranging from $2 million to over $100 million in gross revenues. No matter what accounting system you use, the process is the same; generate job ledgers to identify costs and billings to date on open and closed jobs and reconcile them to the trial balance. The process is very mechanical and can be performed by just about anyone regardless of their experience. So why pay your CPA to do it? You can drop the numbers in a spreadsheet with the relevant formulas and calculate it yourself and record the journal entry.

There's nothing special about the spreadsheet your CPA uses to calculate work in progress. However, what typically happens is that these adjustments are postponed until months after your year end after the engagement is completed. That's a long time to wait for something that can be done throughout the year. At no point other than your fiscal year end do you have reliable financial information. I want to highlight the different ways this practice could be costing you and what you can do to remedy the situation.

You’ve heard it a thousand times before, but working with bad data could be costly. Unchanging work in progress every month of the year except December 31st, sounds fine to me… not! If you have a history of significant adjustments at year end, it could hurt your reputation with underwriters during the year and ultimately affect your ability to obtain new projects without having to jump through additional hoops like undergoing an interim review by your CPA. If the users of the financial statements expect radically different numbers at year end, they may be cautious in how much business they'll underwrite during the year. Another example of how working with unadjusted balances could be costing you involves paying out performance-based bonuses or distributions. I worked on a client one year that accrued year end distributions based on their internal unadjusted financials. They had accrued distributions as usual but didn't take into consideration a non-attest adjustment that was new for the year, which reduced their net income by a noticeable amount. They weren't happy about the error but fortunately for them, they were able to reduce the distribution prior to paying it, saving them the from a hit to equity and their cash flows. There was a significant amount of rework involved to calculate and adjust the amounts to be distributed after year end that could've been avoided.

Maintaining unadjusted books may cause you to overpay for year-end services as well. Having a reputation of providing consistent financial statements during the year can help build a case to downgrade services, such as moving from an audit to a review or review to a compilation. The same client I mentioned earlier had their financial statements audited for over a decade until we decided to revisit and discuss the services we were providing. Based on their solid reputation of generating reliable data, we believed that a review would be more appropriate, thus saving them money and time retrieving all the support that would normally be requested during an audit. With that in mind we advised the client to reach out to the users of the financial statements to see if they could get by with a review instead of an audit and it turned out they could. Now I'm not going to act like the only reason why they were able to downgrade services was because of their ability to provide good internal financial statements, but it certainly helped build a case for it. There's no reason to pay for services you don't need or see value in.

It's worth mentioning here that limiting the amount of non-attest services your CPA provides could result in savings no matter what attest services they provide. Even if you're charged a fixed rate for the engagement, you may be able to renegotiate the fees. Now you may be thinking that it's in your CPA's best interest to keep providing non-attest services because it would result in a loss in revenues. That's not necessarily the case as every year provides a different set of challenges such as new accounting pronouncements, that may or may not require additional focus and time. Also, the time saved on non-attest services could open the door for obtaining more attest clients down the road. But enough about them!

Getting you set up with the right level of service can ultimately determine if you're making the most of your resources. It's been mentioned numerous times by construction financial professionals, "find yourself a CPA that understands construction." I agree wholeheartedly but I interpret that as saying, "find yourself a CPA that can do more than just copy one set of numbers from one spreadsheet to another." A CPA knowledgeable in construction can be a rich resource for information. It's up to your CPA to initiate conversations about the ways they can add value to your business but spending less time on non-attest services is one way to drive that conversation. Spending less time on calculating and recording work in progress could mean spending more time on advisory services that could potentially identify issues in estimating and future job performance. Your CPA more than likely sees multiple financial statements a week from general contractors to subs, so chances are he's got a good pulse on the market overall and sees what's working and what's not. There's always a story to tell that can help educate and prevent others from going down the wrong path without disclosing confidential information. Instead of providing the traditional non-attest services, he could provide insights into the following areas;

  1. Software consulting

  2. Identifying inefficiencies in daily transaction cycles

  3. Evaluation of internal controls

These services will cater more towards your construction business and require additional knowledge beyond standard journal entries. Chances are that your CPA has clients that use a wide variety of software packages and could provide valuable insight into what is and isn't working for their clients. In some cases, they may have experience using the software and can help you navigate through the various internal reports you may have been overlooking in the past.

Audit engagements require a thorough understanding of transaction cycles and internal controls over those processes that help assess risk of material misstatement. Such a thorough understanding typically identifies breaks in processes that could lead to many issues down the line. If your financial statements are reviewed, you may consider asking your CPA to perform similar procedures. I'm not endorsing an audit when it's not necessary, but to consider services that utilize resources more appropriately. This shouldn't entail spending countless hours documenting every little detail but focusing on a few key areas such as small tool management. The "I know how we do things already" can often turn into "Is that really what we're doing?" after further discussions regarding processes and controls.

Another approach is to ask your CPA what the common weak spots in his clients' internal controls are and ways to mitigate loss. These types of procedures can really pay off. I remember performing a walkthrough on deferred service revenues for a client one year and discovering that no one was monitoring how their customers were added to the subledger. What could happen and did happen was that the accounting staff were setting up balances for contracts that were never executed, thus inflating the deferred balance without ever receiving money. The company was recognizing revenue on those balances according to the contract terms that were initially set up. Not only is that an issue for generally accepted accounting principles but also their taxes. They were going to be taxed on revenue that should've never been recorded, potentially costing them tens of thousands of dollars in taxes and it only took a few hours to identify this!

Going from conversations about calculating and preparing WIP schedules to more advisory services may seem like a tall task. But a journey of a thousand miles begins with one step, and the first step involves a face-to-face meeting with your CPA. The first thing I would ask for in the meeting is an explanation of the services they provide and what the process looks like from beginning to end. It's one thing to read it on the engagement letter and it's another to hear your CPA put it into his own words. Identify all the non-attest services he's providing and ask how you can help reduce them. You can technically eliminate all non-attest services by making all the adjusting entries and preparing the footnotes, but you may decide that it's too much work upfront. A good way to determine the time and technical commitment is to go over the financial statement grouping schedules from the past three years that includes your unadjusted balances, adjusting and reclassifying entries and final balances. I call it the financial statement grouping schedule here, but you may know it by a different name. It essentially groups your adjusted trial balance accounts according to how they're presented in the financial statements and will provide you with a good basis for discussion. What you're looking for here is a pattern in journal entries that you could be making prior to the handoff to your CPA. Go over each entry and ask for a tutorial on the process of determining the entry amounts and any templates that were used in the process of determining the adjustments. Don't forget to ask why they're doing what they're doing in terms of the reports they use and how they come together. You're really looking for the answers to the why questions as they will help you navigate through the different scenarios you'll come across in the future. This should lead to a lot of "a-ha" moments of realizing why they ask all the questions they ask every year.

The next step is practice. You'll want to make the adjustments yourself during the interim and send them to your CPA for review. I would start with the most important ones like your work in progress calculation and the preparation of your job schedules, assuming it's been recorded and prepared for you in the past. Once you get the hang of it, you can move on to other manageable non-attest services like preparing your financial statements. Eventually, you can hand down the work to your junior staff while you tackle the higher-level work that's been piling up on your desk.

Taking on additional work may seem daunting, but it's likely to pay off down the road as described above. This shift should change your relationship with your CPA from a transaction to an advocate assisting you in ways that could improve your business. I can already hear you typing up an email to your CPA to begin!

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