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Archives for March 2024

The Team of Three: How DBA’s Unique Structure Weathered an Unexpected Resignation

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Imagine receiving an email from a team member resigning effective immediately. How would your business cope with such an unexpected challenge?

In a recent episode of “Who’s Really the Boss,” Rachel and Marcus Dillon, the owners of DBA, a leading accounting firm, shared their experience of dealing with a team member’s abrupt resignation and the lessons they learned about building a resilient and adaptable team structure.

The Unexpected Resignation

Rachel and Marcus were caught off guard when they received an email from a team member resigning effective immediately, a first in DBA’s 13-year history.

“Any time you get a notice, like resigning effective immediately, you need to think, ‘Okay, something extreme has happened.’ And as a leader, can you do anything to help?” Rachel recalled.

This experience highlighted the importance of having a team structure that can handle unexpected turnover and the need for clear communication and swift action in such situations.

DBA’s Team of Three Model

One of the key factors that helped DBA navigate this challenge was its unique team structure, consisting of a Client Service Manager, Client Controller, and Client CFO.

Marcus explained, “So with that team of three model, there is always overlap. And that’s why we designed it that way. It’s very unlikely that all three people would leave the team at one time. If two people leave the team at one time, that’s drastic.” This model provides built-in redundancy and ensures smooth service delivery, even in the face of unexpected turnover.

The team of three model allowed DBA to redistribute responsibilities and maintain uninterrupted client service quickly. The Client Controller and Client CFO stepped up to initially cover the departing team member’s duties while the company searched for a replacement. This seamless transition demonstrated the resilience and adaptability of DBA’s team structure.

Capacity Planning and Lessons Learned

Proper capacity planning is another crucial aspect of building a resilient and adaptable team. Rachel and Marcus emphasized the importance of maintaining excess capacity to handle unexpected situations and opportunities.

“We’ve learned it the hard way. Whenever you burn out team members – and thankfully, some of those team members that burned out, they’ve stayed on the team. We’ve restructured their role. We restructured their client list to make it more appropriate for balance,” Marcus shared.

Overworking team members can lead to burnout and turnover, undermining the team’s resilience and adaptability. DBA learned this lesson and made conscious efforts to ensure their team members have a healthy work-life balance. They have removed blocks of annual tax clients and avoided filling up the team’s capacity with seasonal work, prioritizing long-term sustainability over short-term profits.

Navigating the Transition

When faced with the unexpected resignation, DBA took immediate action to ensure a smooth transition. They notified the leadership team, reassigned clients and responsibilities, and communicated with affected clients. The company’s well-defined offboarding and onboarding processes were crucial in navigating this challenge.

DBA’s offboarding process involved disconnecting the departing team member’s access to various systems, reassigning email and communication channels, and ensuring a seamless transition for clients. The company’s onboarding process, which includes training new team members on client-specific information and gradually introducing them to clients, allowed for a smooth integration of the replacement team member.

Having a pipeline of candidates and a structured hiring process also contributed to DBA’s ability to fill the vacancy quickly. Within two weeks of the resignation, the company had identified and onboarded a new Client Service Manager, minimizing disruption to client service.

The Importance of a Resilient and Adaptable Team

DBA’s experience highlights the importance of building a resilient and adaptable team structure in today’s fast-paced business environment. Handling unexpected challenges, such as a team member’s abrupt resignation, is crucial for maintaining client trust and ensuring long-term success and sustainability.

A well-designed team model, like DBA’s team of three, provides built-in redundancy and ensures smooth service delivery. Proper capacity planning and a focus on employee well-being contribute to the team’s resilience and adaptability. Well-defined processes for handling transitions, both offboarding and onboarding, allow businesses to navigate challenges smoothly and maintain client confidence.

Building a resilient and adaptable team requires a proactive approach and a commitment to continuous improvement. By learning from experiences like DBA’s unexpected turnover challenge, business owners can develop strategies to strengthen their teams and prepare for the unexpected.

Listen to the full episode of “Who’s Really the Boss” to learn more about how Rachel and Marcus Dillon, with the help of their team, navigated this challenge and the valuable lessons they learned along the way.

Mastering QuickBooks Lists: Tips from the Unofficial QuickBooks Accountants Podcast

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If you’re a QuickBooks user, you know how important it is to keep your lists organized and up-to-date. In a recent Unofficial QuickBooks Accountants Podcast episode, hosts Hector Garcia and Alicia Katz Pollack shared their expert insights on mastering list management in QuickBooks Online, particularly after converting from QuickBooks Desktop. Let’s dive into their top tips.

Chart of Accounts

First up: the Chart of Accounts. Hector and Alicia recommend using account numbers strategically to ensure optimal reporting layout rather than relying on alphabetical order. They also advise merging duplicate accounts and inactivating unused ones to keep your COA lean and clean. Be cautious when deleting accounts with balances, as this can impact your financial statements. Lastly, sub-accounts should be employed effectively to maintain an organized hierarchy.

Products and Services

Next, let’s talk about Products and Services. After completing your data cleanup, inactivate any unused products to streamline your list. Utilize product categories for better organization, and leverage custom fields like “Income Account” for precise mapping to your COA. These steps will make your bookkeeping more efficient and your reports more accurate.

Locations and Classes

Hector and Alicia have some great advice regarding location and class tracking. Use Locations to track performance by store, department, or other relevant segmentation. Understand the differences between Locations, Classes, and Projects in QBO, and recognize that QBO has some limitations on Classes compared to Desktop. Choose the right tracking tool to get the most meaningful insights.

For more QuickBooks tips, listen to the full episode

Other list management tips from the podcast include streamlining recurring transactions (and considering bank rules as an alternative), customizing invoice terms and payment methods to match client needs, optimizing custom form styles for a professional look, and managing attachments effectively within QBO.

The benefits of list cleanup are numerous. You’ll enjoy improved reporting accuracy and efficiency, time savings for your bookkeeping team and clients, and enhanced customization and scalability of QBO. A little bit of list maintenance goes a long way!

Mastering your QBO lists is key to making the most of this powerful accounting platform. By following the expert advice from Hector and Alicia, you’ll be well on your way to a cleaner, more organized QuickBooks Online company file. For even more insights, listen to the full podcast episode.

Alicia Katz Pollock’s Royalwise OWLS (On-Demand Web-based Learning Solutions) is the industry’s premier portal for top-notch QuickBooks Online training with CPE for accounting firms, bookkeepers, and small business owners. Visit Royalwise OWLS, where learning QBO is a HOOT!

Why Withum Got Slapped with a $2 Million PCAOB Fine

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The PCAOB’s recent $2 million fine against WithumSmith+Brown, PC has sent shockwaves through the audit profession, and for good reason. A prominent audit firm is in hot water due to severe audit quality issues.

In a recent episode of The Accounting Podcast, I discussed this alarming development with Chris Vanover, a former Big 4 firm chief auditor who now leads CPAClub. Our conversation highlighted the root causes behind Withum’s missteps and the broader implications for the audit profession.

As Chris Vanover pointed out, “I think this is the PCAOB’s shot across the bow, where they’re starting to hammer firms with respect to whether they actually have the resources to execute the audits… The crux of the issue is they didn’t have enough people to get through the significant number of audits they decided to take on.”

SPAC Audits: A Lucrative but Risky Opportunity

Chris highlighted a startling fact from the PCAOB disciplinary order: Withum’s issuer audits skyrocketed from a mere 76 in 2020 to a staggering 445 in 2021 – a nearly 500% increase in just one year! This explosive growth can be attributed to the rise of SPACs, which have become a lucrative opportunity for audit firms as the market for these investment vehicles has soared.

However, the allure of SPAC audits has come with a heavy price for Withum, which failed to properly assess the resources needed to handle such a massive uptick in engagements.

Overworked and Overwhelmed Partners & Staff

Chris pointed out that the firm’s partner headcount only increased from 15 to 23 despite the nearly 500% increase in issuer audits. A mere eight additional partners were expected to handle an extra 369 engagements – an equation that doesn’t balance.

Partners found themselves drowning in an overwhelming number of audits. Chris revealed that according to the PCAOB, just five partners were responsible for a staggering 62% of the firm’s issuer audits, with one partner reported working an astonishing 200 hours in a mere two-week period.

The Consequences: Audit Deficiencies Galore

But the pain didn’t stop at the partner level. Chris said, “Imagine what the ripple effect is for the senior managers, the managers, the seniors, and the associates on the engagement.”

The strain on Withum’s people greatly affected the firm’s audit quality. The PCAOB’s investigation revealed a litany of deficiencies, including inadequate consultation with external resources when faced with complex accounting issues and improper auditing of estimates. These are just a few examples of how Withum’s audit quality suffered due to the firm’s overstretched resources.

Partner Incentives: The Elephant in the Room

As we dig deeper into the root causes of Withum’s audit quality issues, it’s impossible to ignore the role that partner incentives may have played. In many audit firms, partner compensation is heavily tied to revenue growth and client acquisition. This incentivizes partners to prioritize short-term profits over long-term quality and sustainability.

In Withum’s case, the explosion of SPAC audits presented an irresistible opportunity for partners to boost their bottom lines at the risk of creating a toxic work environment. This contributes to staff burnout and turnover and increases the risk of errors and oversights.

As Chris told me, “This is the fundamental issue with audit quality. People are overworked, and they’re missing things that are critically important to executing a qualified audit.”

Was the PCAOB Fine Enough to Deter Future Misconduct?

The PCAOB’s decision to slap Withum with a $2 million fine signals that the regulatory body is taking a harder line on audit firms that fail to prioritize quality, especially considering that the PCAOB also levied a $3 million fine on Marcum in June 2023 for similar problems.

But are these penalties enough to change behavior and deter future misconduct?

On one hand, a multi-million dollar fine like this represents a serious reputational blow. No one wants to be the next firm in the headlines for all the wrong reasons, and the threat of public embarrassment may be enough to spur some much-needed introspection and reform.

However, there are also reasons to be skeptical about the deterrent effect of this fine. Chris argues, “At the end of the day, you need a higher penalty for what they did wrong.”

While it sounds like a lot, a one-time $2 million fine may not be enough to change the calculus for large audit firms, which generate hundreds of millions or even billions of dollars in revenue. Withum brings in $550 million per year. For firms that prioritize profits via their partner compensation model, a fine of this size may be seen as simply a cost of doing business.

How to Build A Stronger, More Resilient Audit Profession

The Withum case is a stark cautionary tale for the entire audit profession, highlighting the dangers of taking on too many engagements without adequate resources.

Only time will tell whether Withum learns from its mistake. We cannot rely on fines to drive meaningful, lasting change. To address these issues, the profession must examine the incentive structures and cultural norms prioritizing short-term revenue growth over long-term quality and sustainability. This may require a significant overhaul of partner compensation models and a renewed focus on talent development, work-life balance, and technological innovation.

For insights from industry experts like Chris Vanover, subscribe to The Accounting Podcast. We aim to spark meaningful conversations and drive positive change in the accounting profession. By coming together as a profession and facing these challenges head-on, we can build a stronger, more trusted, and more valuable audit function for the future. Will you join me?

Lights, Camera, Deception: How CPAs Protect Entertainment Clients

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Imagine a blockbuster film that grosses hundreds of millions of dollars at the box office, yet the actors and creators are told they won’t receive any profits because the film didn’t make a profit. Sounds unbelievable, right? This scenario is all too common in the entertainment industry thanks to a practice called “Hollywood accounting.”

Kendale King is a CPA who specializes in entertainment accounting. In a recent episode of the Earmark podcast, Kendale shared his insights and experiences navigating the accounting tricks of Hollywood and highlighted strategies CPAs can use to protect their entertainment clients’ financial interests.

What is “Hollywood Accounting?”

At its core, Hollywood accounting refers to the accounting practices used by studios to manipulate financial statements and make it appear that a successful film or TV show has not generated a profit. This is done to avoid paying profit shares to actors, writers, directors, and other participants entitled to a share of the net profits.

As Kendale explained in the podcast, “Hollywood accounting is a term that is generally used in a deceptive light, where studio accountants or studio execs are trying to make a successful film look like it’s not profitable on paper, so they don’t have to pay out certain participations or residuals to individuals, which are all based on the accounting.”

When actors, writers, and directors are deprived of their fair share of profits, it can take a significant emotional and financial toll. Many high-profile cases and lawsuits have been filed by individuals who feel cheated of their rightful earnings.

Harry Potter and the Questionable Cost

One of the most famous examples of Hollywood accounting in action is the case of Harry Potter films. Despite the franchise’s enormous success, many actors have claimed they never received their fair share of the profits. Kendale noted, “It was a huge success, but the actors were left wondering where their piece of the pie was.”

So, how do studios get away with this? A big part of the problem lies in the complex contract language and how profits are calculated.

“The profit calculations can be complex, and it depends on who’s in charge of determining what’s included in those calculations. The actors weren’t getting their fair share because the executives and accountants were including costs that were borderline questionable.” Kendale explained.

These questionable costs include overhead, marketing expenses, distribution fees, or even interest charges that might not directly relate to the production. This practice can lead to a significant reduction in net profits, which affects the amount of money available for distribution to the talent and creators entitled to a share of those profits.

Best Practices for Protecting Clients’ Financial Interests

As CPAs, we promote transparency and protect our clients’ financial interests. This means being vigilant in identifying and addressing potential Hollywood accounting issues and collaborating with legal teams to ensure fair profit participation.

So, what can CPAs do to protect their clients from falling victim to Hollywood accounting? Here are some best practices to keep in mind:

Thorough contract review and negotiation: I suggested that actors negotiate their share based on top-line revenue rather than profit participation to avoid the impact of studios inflating expenses to reduce profits. However, Kendale cautioned that this is easier said than done: “Negotiating for top-line revenue is unlikely, as it’s not standard practice. Depending on the deal, you might not have much negotiating power.”

Defining clear terms for revenue sharing and profit calculation: Because most industry participants will have no choice but to take a share of the profits, Kendale advised that it’s critical to have clear, unambiguous language in contracts that spell out precisely how profits are calculated.

Ongoing monitoring and auditing of financial statements: CPAs should regularly review and audit their clients’ financial statements to identify potential issues. Kendale advises, “The main thing I advise is to get another accountant or financial manager to audit the financials because they’re open for audits. More often than not, you can have your representative, your own ‘creative accountant,’ go in there and question why certain things are included and push to remove them if they don’t fit the definition.”

For a Deeper Dive, Listen to the Full Episode

This is just the tip of the iceberg regarding the fascinating world of entertainment accounting. We dive deeper into various topics in the full podcast episode with Kendale King.

From Big Four to Entertainment: For example, Kendale shares his journey from working at a Big Four accounting firm to launching his practice specializing in entertainment accounting. He discusses the unique challenges and opportunities of serving clients in the entertainment industry and offers valuable advice for CPAs looking to make a similar transition.

How Netflix Changed the Game: We also explore the evolving landscape of entertainment accounting in the era of streaming services like Netflix and how these platforms have changed how content is produced, distributed, and accounted for. Kendale provides insights into the complexities of revenue recognition and cost amortization in this new environment and discusses the potential implications for talent compensation.

How Blockchain Could Revolutionize Royalties: We visit the intersection of entertainment and emerging technologies like blockchain and cryptocurrency. Kendale shares his experiences working with clients in this space and discusses how these technologies can revolutionize tracking and distributing royalties and residuals.

If you’re a CPA looking to expand your knowledge and stay ahead of the curve in the rapidly changing world of entertainment accounting, listen to the full Earmark Podcast episode.

And if you like what you hear, subscribe to Kendale’s podcast, Hollywood Accounting, for a wild ride through the finances of film, music, gaming, and sports.

A ProAdvisor’s Guide to the New Era of QuickBooks

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QuickBooks has consistently led the charge in the accounting tech world, evolving to cater to the diverse needs of small businesses and accounting professionals. On a recent episode of the Earmark Podcast, I had the opportunity to delve into the latest changes with Hector Garcia, a top QuickBooks ProAdvisor and educator. 

Our conversation highlighted the impact of Intuit’s QuickBooks Live Bookkeeping and Tax services on our community. Hector and I delved into whether Intuit is now competing with its ProAdvisors or is fostering a collaborative future. We also explored the challenges and opportunities for accounting firm owners.

Keep reading for the highlights of our discussion, or watch the full episode here:

Want to listen on the go? Find the link to the podcast version at the bottom of this article.

A Closer Look at Intuit’s Live Services

Intuit launched QuickBooks Live Bookkeeping in 2019. This year, they’re adding Live Tax, meaning that QuickBooks customers can now discover and purchase basic bookkeeping and business tax services directly from inside the product. Intuit is targeting these services to businesses that are not yet ready to hire a full-time accountant or bookkeeper but require professional help. Sounds a lot like our clients, doesn’t it?

The Accounting Community Reacts

The announcement was met with unease – to say the least – across the ProAdvisor community, sparking concerns about direct competition from Intuit’s vast resources. Hector put it bluntly, saying, “When this first thing launched, it was something that mostly accountants just hated.”

A Nuanced Impact: Analyzing the Effect on ProAdvisors

Many accountants feared Intuit’s “Live” services would compete directly with ProAdvisors, but the impact has been more positive than anticipated. Hector believes that the new services have increased awareness of professional bookkeeping and tax services among small businesses, resulting in a surge in demand for tailored and advanced advisory services that only ProAdvisors can provide. QuickBooks Live doesn’t compete with this.

Carving Out Opportunities for ProAdvisors

Intuit’s move has highlighted ProAdvisors’ value to their clients. Here are some ways Hector says ProAdvisors can distinguish themselves and expand their offerings:

  • Specialization: Develop expertise in niche markets or complex accounting needs, delivering a level of specialization that transcends Intuit’s offerings.
  • Advisory Services: Capitalize on the increasing demand for strategic financial guidance, budgeting, forecasting, and business planning—where your impact can be profound.
  • Technology Integration: Employ your deep understanding of the QuickBooks ecosystem to provide bespoke technology solutions, enhancing your clients’ operational efficiency.

Adapt and Thrive: Embracing the New Landscape

Hector says adapting to these changes involves embracing innovation and identifying ways to enhance Intuit’s services. Here are his suggestions for how to adapt and thrive:

  • Market Your Unique Value: Communicate the advantages of your services, emphasizing the personalized touch you offer beyond Intuit’s scope.
  • Embrace Technology: Harness the full potential of QuickBooks features and third-party apps to deliver state-of-the-art solutions.
  • Invest in Continuous Learning: Stay abreast of industry shifts and technological advances to offer forward-thinking services.

Transforming Challenges into Opportunities

Intuit’s introduction of Live Bookkeeping and Live Tax has undoubtedly prompted concerns about competition. Yet, it has also acted as a stimulus for innovation within our field.

“The essential lesson for ProAdvisors is to recognize the necessity of adapting and discovering new ways to distinguish their services,” Hector says. By focusing on areas where their expertise can outperform automated services, ProAdvisors can continue to deliver unparalleled value to their clients. Specialization, strategic advisory services, and advanced technological integration within the QuickBooks ecosystem are paths to enhancing your offerings and making yourself indispensable to clients.

Are you prepared to navigate these changes and seize the opportunities they present? To explore these topics more in-depth, tune into my conversation with Hector Garcia on the Earmark Podcast.