Monday, June 29, 2009

Benchmarking: More Similar Between Industries Than I Realized

I attended Restaurant CFO Boot Camp in Las Vegas, sponsored by SS&G Financial Services, last week and learned a lot more about the restaurant industry. Glad I went.

SS&G does an annual benchmarking survey of the restaurant industry, and I was struck by how similar the issues they encountered were to the experiences I had in a past life. Prior to founding Maddox Ungar Silberstein, PLLC, I worked for 4 years in the ready-mixed concrete industry, and I still am a member of the National Ready Mixed Concrete Association. For several years, I was on the committee that did the annual benchmarking survey of concrete producers - financial results and various operating statistics.

The industries are very different, yet the issues were the same:
  • How do you normalize for excess owner compensation in privately held industries?
  • How do you make sure you are looking at apples and apples - in concrete where are the benefits for the loader operator going - variable or fixed costs? And in restaurants, where is all the expense for paper that touches the product going? Same, but different.
  • And more.

Both industries are focused on controlling costs. Restaurants and concrete companies generally have fixed pricing for their products - restaurants sell based on menu price, and concrete generally sells based on fairly standard pricing for the different mixes. Keeping an eye on your costs is critical as improvements in costs essentially drop right to the bottom line.

Intuitively, I knew this, but it took this seminar to make it clear.

Wednesday, June 24, 2009

Audit Reveals 257 Ghosts On Detroit Public Schools Payroll

Robert Bobb, the emergency financial manager for Detroit Public Schools, is doing the job nobody, especially the School Board and its administrators, would do: routing out fraud and corruption.

The Detroit Free Press reports today that a payroll audit revealed 257 ghosts on the payroll. A ghost employee is what it sounds like - they are not a real person. They exist only for someone else to collect the paycheck. This is a routine procedure when payroll fraud is suspected in any business, and it looks like it succeeded spectacularly.

Can't wait to see what else comes out on this one.

Tuesday, June 23, 2009

The Main Reason My Kids Won't Go Into Accounting

I was doing a phone interview today for an accounting magazine. The interviewer was asking a wide variety of questions about the business of accounting - what were the biggest challenges, what would you differently, etc. At one point I stopped him and asked him if I could tell him what my biggest disappointment was. I don't know if he is going to use it, but this is what I told him:

"My kids will never consider going into public accounting. That is my biggest disappointment."

I don't think they would find the subject interesting. But that isn't the reason.

They don't see me from early January to about the middle of April. That's the reason.

I generally blame the U.S. Congress for this, but the accounting profession bears some blame too. I blame Congress because pretty much all S Corporations, Limited Liability Companies and partnerships have to have December 31 as their year end; C Corporations can have any year end but there aren't nearly as many C Corporations out there. This pushes vast amounts of work into a tiny window of time. I always joke that at least it happens during the winter but still.

The balance of the blame goes to the accounting profession. Many CPA Firms fan the flame of the fear of the extension. Or they will say "Why are you going on extension? I can do it on time." Sometimes it doesn't matter how good of a job you have done. They fear the extension raises their audit risk (it doesn't) and they jump ship.

I really enjoy the vast majority of the work I do; I'm aiming to get that percentage to 100%. There is a tremendous amount of mental stimulation in the work. I work with wonderful people, both in my Firm and at our wonderful clients.

It is just unfortunate that we don't get to see our families for about 3 1/2 months. And it is unfortunate to think of the all the people who never consider public accounting because of that.

Friday, June 12, 2009

Sbarro's, Krispy Kreme Among The Most Vulnerable Restaurant Chains

Saw on, of all places, The Huffington Post an article covering restaurant chains especially vulnerable in this economy. I'm not familiar with Mastro's, as they are located in California and Arizona. The others I've eaten at; I've had too many Krispy Kreme donuts in my day.

As I would expect, the chains here are on extremes - Sbarro's, Captain D's, Perkins and Krispy Kreme are definitely in the inexpensive part of the spectrum. Krispy Kreme nearly collapsed a few years ago after over expansion. Mastro's is on the high end. Restaurants in the middle seem to be faring better, especially the fast casual sector.

Thursday, June 11, 2009

GAAP Codification is Coming! You Didn't Know?

The FASB has been working its GAAP codification project for a long time, and it is going effective July 1, 2009.

What? You didn't know about it?

You aren't the only one. I freely admit to only catching on this sometime after April 15. Robert Stewart at found out a bit more recently, and to his credit pokes fun at himself; obviously he and I have something in common!

As Robert's post says, GAAP shouldn't change. But whatever isn't in the codification won't be considered GAAP. This will be effective for year ends after September 15, 2009 - all of you calendar year-end entities will be affected.

I think I better learn more about it too.

Follow up: GAAP Depreciation and Paying Higher Taxes Makes You More Bankable?

My immediate previous post discussed how the bank of one of my clients was asking to know what accumulated depreciation would be on a GAAP basis. The Company reports using income tax basis depreciation, and the bank was especially confused because of a huge increase in depreciation resulting from the results of a cost segregation study.

Just when I thought I was done, the bank calls again, and says the number provided by the Company wasn't what they wanted. Ultimately, the bank asked to speak with the accounting firm that performs the monthly bookkeeping work and maintains the depreciation records to resolve this.

So what did the bank ultimately request? They had to know what accumulated depreciation would be on a straight-line basis in order to properly analyze the Company! I've been in accounting for almost 25 years and this is a first for me.

Let's think about what is wrong with this:
  1. The bank is now dictating accounting methods to their customer. And they appear to be doing this because all of their loans must fit into a nice neat box, otherwise their analysts get confused.
  2. Why straight-line?? In case you don't know, straight-line means depreciation is recognized evenly (or on a straight-line basis) over the life of the asset; a $6,000 asset with a 5 year estimate life would be depreciated at the rate of $100 a month over 5 years. But the collateral on this loan doesn't depreciate on a straight-line basis. Most of the value is gone from the equipment and other assets in the early years of their life. The Company is using double-declining balance methods, which assigns greater depreciation in the early years of the asset's life. Which should be more meaningful to the bank!
  3. This is a waste of time and money. The Company and I have had to revise and reissue the financial statements because of this request. I'm not getting paid extra for this. Neither is the accounting firm that keeps the depreciation records. We've all had to waste time on the phone and through email resolving this. Time that especially for the Company could have been put to better use building their business so they can repay the bank.

I hope this is the last time I ever get this request from a bank.

Tuesday, June 9, 2009

GAAP Depreciation and Paying Higher Taxes Makes You More Bankable?

I just completed a review of a client's financial statements. Or so I thought because the bank then had an unusual request.

The financial statements were issued on the income tax basis of accounting as opposed to generally accepted accounting principles ("GAAP"). The only real difference here was depreciation - the Company does not keep a separate, GAAP set of depreciation records. The Company has in excess of 750 individually tracked assets. They use an outstanding depreciation software program (the same one we use in our practice) and could do it, but they prefer not to. The big difference is that they record bonus depreciation and basis reductions for financial reporting purposes.

Then they complicated things a bit further. During 2008, the Company engaged consultants to perform a cost segregation study. Essentially, engineers examined their buildings and said something like 40% of the costs are of the type that can be depreciated over 7 years instead of over 39 years, and 25% can be depreciated over 15 years, and so on.

The result is a dramatic acceleration of depreciation charges. The pick up in depreciation in 2008 included depreciation adjustments for prior years as well. The Company reported a loss purely as a result of this non cash charge. From an operating standpoint, they generated plenty of cash from operations.

Their bank, however, totally could not understand this. They had to know what depreciation would have been under GAAP. Because otherwise their analysts couldn't compute their typical ratios on the Company!

Let's see: the Company had significant depreciation charges. Those became a deduction against taxable income. Which in turn means the Company had lower taxable income and therefore could retain more cash that otherwise would have gone to the government. And retaining more cash means they had more money to repay the bank!

But no, the analysts said "please tell us what GAAP depreciation would have been so the Company can be more bankable."

They apparently don't get it.

Are there any bankers out there reading this who would have handled this differently? Because this just doesn't make sense to me.

Monday, June 8, 2009

Is The Audit a Commodity?

I've been in public accounting most of the last 25 years, and for at least that long I've been hearing that audits are a commodity.


Paraphrasing Ron Baker of Verasage "If bottled water companies can differentiate themselves, why can’t auditors differentiate an audit?"

He's right. At the end of the day, water is water, yet there are how many different brands of water on the shelf.

And the audit is not a commodity either. Each CPA Firm approaches it differently. Find the one that works for you.

Study Predicts Little Benefits to Adopting IFRS in the US

This is the first contrary opinion I've seen on this topic. Everyone else seems to think the International Financial Reporting Standards ("IFRS") are the greatest thing since sliced bread.

There is general agreement that US GAAP is pretty good but could stand to be improved. Lately it seems that "improvement" takes the form of very complex new standards that are designed to conform to IFRS principles.

One way or the other, the US will adopt IFRS. Will it happen during Obama's first term in office (this isn't a prediction on whether there will be a second) - no. But the following term of office is very likely.

Sunday, June 7, 2009

I have an empty Outlook Inbox - Do you?

I think everyone I know has well over 100 emails in their inbox. I've seen people with over 1,500 emails there.

Mine has zero. It rarely has more than 6.

One Saturday night about 18 months ago my daughter was at a Bar Mitzvah party. We were hanging out at a nearby Barnes & Noble passing time until the party was over. About 11:00 pm that night I wandered into the Microsoft Office section and saw a book called Total Workday Control Using Microsoft Outlook by Michael Linenberger. As my typical workday never seems to be in control I took it off the shelf, looked at it and then bought it. I bought the second edition when it came out during 2008.

Linenberger makes a very good point early in the book about the purpose of the Inbox. He uses a story about how people, in the days before computers, used to have 3 stacked trays on their desk. The top one was usually for receiving items - the Inbox. Once you looked at something there it never went back to the Inbox. You either put it in the Outbox, filed it or put it in an in process tray. Microsoft deliberately named it the Inbox - the intent was never to keep 1,000 emails there. You would read something, act on it, and keep it out of the Inbox.

Most people keep emails in their Inbox so as to not lose track of tasks that have come in with those emails. Others don't have an effective filing system. For some it is both.

At the time I first read the book, I only had about 30 emails in my Inbox. Using the tools Linenberger provides, it now is generally empty. Read it, decide what to do with it, then file or delete it. Simple.

The strength of the system is properly configuring the Tasks module of Outlook. I don't think many people use the Tasks module, but after making some common sense changes it becomes quite powerful. All you do is drag the email from the Inbox to the Tasks button in Outlook and boom it becomes a Task with the text of the original email intact. You can also create Tasks with any attachments - nifty.

Linenberger is an advocate of topic based email filing. I have always created specific folders for filing email, but I see the beauty of this part of his system and am preparing to implement it. All email will be in one folder.

I am not saying my workday is always in control. But using Linenberger's ideas, I am not losing track of nearly as many things I need to do, and my Inbox is usually empty.

Strongly recommended.

Saturday, June 6, 2009

5 Reasons Your Accountant Bills By The Hour..None Good For You

It is fair to say that over 97% of the accountants bill by the hour. Then it is reasonable to presume it works for them. Why?
  1. It's easy for them. An accountant who bills by the hour essentially treats all of his clients the same - he is going to bill you how long it took and multiply it by an hourly rate. This doesn't mean it's good for you. Do you care how long it takes? You want to know how much it is going to cost you.
  2. It's less risky...for the accountant. When you agree to pay the accountant by the hour, you take on all the risk. The accountant has to research an accounting or tax issue, so he bills you the hours. Next time the question comes up, he already knows the answer. And you've paid for it for the next client. By paying by the hour, the accountant has no incentive to be efficient.
  3. They don't know any better. Accounting firms (and law firms too) didn't always keep track of time. They priced each engagement individually. Someone then had the idea to track time to get an understanding of how long different engagements took to complete. Then one day, someone had the idea that the hours accumulated were the inventory - multiply by billing rates and price it that way. This doesn't provide any value to the customer - you. Accountants have been billing this way for so long they just don't know any better. I've heard countless accountants say this is the only they can justify their billings. They think they are selling time; you are buying a solution to a problem not their time.
  4. It is an easy way to raise fees over time, and their income. Everyone knows inflation is a fact of life. So far we've addressed the hours side of this equation. The other side is the billing rate, an artificially set number. How do many accountants a billing rate? One way is to compare what other accountants are billing at, which again means the accountant doesn't have to do any thinking. The other way is to think about how much money they want to make and divide that number by the number of hours they plan to bill. Again, this works to the benefit of the accountant. And not to you.
  5. They are scared of billing by a fixed fee. This one is a no brainer. Say you are looking to hire a new accounting firm. Ask them what it will cost. Odds are they will say something like "Well it depends on the hours we incur and the relative billing rates of our staff that we assign to the engagement." Notice how this puts the risk back on you - they won't tell you what it will cost because they are scared to commit to a number. Because pricing is hard. But this isn't your problem, except they just punted it back to you.

I don't bill by the hour because it does not create a win-win situation for both parties, and because it is wrong. Future posts will address the benefits of fixed fee billings for you.