How Xero has impacted year end services

2011

In my view, Xero has kick started a large digital disruption by gaining access to Yodlee bank feeds to enable almost every bank to feed statements into their accountancy and bookkeeping software. The bank feeds were a game changer while they existed as far back as 2008 (and with other providers such as banklink) the introduction, particularly of Yodlee bank feeds, enabled every business owner to be in a position to consider switching to Xero.

Xero was already attractive without the bank feeds because they were cloud based, which limited issues with different software versions and mixups with adjusting entries - but accountants had already developed their own internal systems for solving this issue. Therefore, it was really the bank feeds that added a whole new level of convenience and accuracy to the accounting process.

These feeds allowed for a much greater convenience as the numbers and dates could be automatically pre-filled into the system. For a business owner, this may not seem like a big deal - but it was for bookkeepers and accountants. So much time was spent manually keying in data (remember this isn’t just one or two invoices we are talking hundreds of invoice data entries per day), any time saved on this process meant significant gains in efficiency.

The year end compliance accountant was also happy with this because:

1) There were zero manual transposition errors (i.e. $12 instead of $21). This was important for accountants as many hours were spent reconciling accounts payable or receivable because of this type of error.

2) Date errors were also minmised. Many errors were a result of dates entered in the wrong year (i.e. 03/01/2016 instead 03/01/2017). Keep in mind that if data entry is manual, the bookkeeper has likely wired into her/his brain typed data entries of over a million “2016”’s in the past year. Now when the new year comes about a bit of rewiring needs to occur when manually entering data (thus causing these oversights).

The efficiencies of bank feeds and cloud accounting software meant Xero was “valuable” enough for accountants to start considering investing in change management to become a Xero practice.

Late 2012

A usable Xero payroll system was developed. This meant accountants using the software could now have a genuine discussion with bookkeepers and clients about moving to Xero.

Now there was a stronger alliance between bookkeepers and accountants using Xero. Due to the bank feed and cloud efficiency gains, early technology adopters in the accounting industry were keen on Xero and treasured bookkeepers who used it (which added significant value to their position).

Xero, whether intended or otherwise, perpetuated this relationship by using their branding as a means of a co-marketing strategy for fostering this relationship. Thus followed was referrals were more frequent between Xero branded bookkeeper and Xero branded accountant. This as explained later in this article has lead a trojan horse effect where year end compliance Accountants are using technology changes to build a “fence of secrecy” around the client.

2012 - 2015
A brief golden era occurred for both accountants and bookkeepers using Xero.

The accountants reaped large profits off year end compliance jobs because Xero paved the way for the accounting firm to consider embracing technological changes.

This allowed:

1) Businesses such as 'Business Fitness How Now' to bring their paperless working papers system (i.e. “paperless office”) to the table.

2) Rob Nixon’s 'Proactive Accountants Network' is about changing practice management to be “value based billing” and engaging a “client service administrator” (a new role which sits in between the client and the accountant role, that collects and collates the client information to be inputted in a streamlined document management system).

This led to significant cost savings in year end compliance production but since the year end compliance accountant believed they are “value based billing” the fees didn’t drop. In fact, they still went up each year as per usual as such immense profits were now realised. Many year end compliance accountants took matters to whole new level of extreme price gouging by realising even larger profits by outsourcing the compliance work overseas and not informing the client about it, other than a small line at the bottom of an engagement letter. Your accountant could be charging you $1,000’s for work done in the Philippines or India and you may not know about it. If you don’t believe it, try asking your current accountant to sign a statutory declaration that none of your work will be outsourced and see how they react.

Bookkeepers using Xero also reaped good benefits for similar reasons.

Xero assisted a whole lot of cloud integration apps (such as receipt bank) which further streamlined business administration processes so bookkeepers had their own “paperless office” drive. However, the value based billing profits is nowhere near the extreme levels of the year end compliance accountant. Many were just content with the growth from the additional referred clients, so they did not push the boundaries with price increases for less hours of work. Some outsourced, many didn’t…..

2015 & 2016
Xero releases “Xero Tax” in 2015 and redesigned a more efficient working papers module in 2016. This is the moment the accountant declared war on the bookkeeper. Xero tax, Xero financial reporting and Xero working papers has made compliance over 80% more cost effective. I have been in this industry for over 10 years working on tax workpaper systems. When I say there is 80% cost saving - I mean it.

Accountants working on year end compliance are waking up to this cost saving and many more will over next few years. Whereas before, accountants who adopted Xero were considered “early adopters”. The issue is that when accountants jump on board, they quickly realise their job is redundant because competition has started pick up. The job that they previously charging $5K to $10K for is now only worth $2K - $4k. The masses are coming on board and there is no longer early adopter advantage there. It is simply our natural capitalist forces at work.

This has caused fear in the year end compliance accountant and they have projected this fear to the bookkeeping industry. If you speak to an accountant about the future of bookkeeping they will likely say “It is dead”. This very attitude is the reason why the year end compliance accountant will soon be dead as well - because they failed to adapt and instead cash in on temporary profits without investing in technology education. My claim is any business who sides with a year end compliance accountant over a modern bookkeeper will also be dead. Here's why:

The Rabbit Hole
Let’s tell a story, you are sitting down at your accountant’s office and the following conversation occurs:

Accountant: “Let’s talk about your bookkeeper.”

Client: “What about my bookkeeper? I have been using him/her for some years now.”

Accountant: “Technology has changed things, and we feel that the bookkeeper is no longer required. With cloud technology such as Xero, we can do this ourselves much cheaper and better. In fact we can do this for no extra charge because by having control of the bookkeeping work we can ensure better quality as it will be put through our tax system so everything is quicker and better. We can even offer quarterly management reporting this way for no extra charge but we can’t offer this if we don’t do the bookkeeping and we would have to increase the price in your end tax work.”

Client: “OK, well I’d rather pay less for more than pay more for less! So how do we transition?”

If the above sounds familiar, then welcome to the rabbit hole of the accounting industry, where black means white, up means down, and wrong means right!

Let’s dissect what really has happened here now that we have some background history about how this conversation arose. Remember:

1. Bookkeeper embraced technology and is aware of a whole suite of great business productivity apps. The year end compliance accountant didn’t, but instead sat back and reaped temporary profits and continually chase such growth (hence why outsourcing route has become so popular) without any investment in technology education.
2. The bookkeeper embraced technology and used this efficiency to become more productive themselves and pass a portion of this efficiency gain to the client. The year end compliance accountant didn’t and actually kept annual price increases and even went further to jeopardise your privacy by outsourcing the bookkeeping work.
3. The bookkeeping industry as a whole has greatly evolved in the last few years with the adaption of technology and the bookkeepers who have grown are likely the best example of how to manage digital disruption for your own industry, as they are among the digital disruption pioneering leaders. The year end compliance accountant’s response to the digital disruption threat is to poach clients from bookkeepers using a false pretense of trust as I will demonstrate below. They can’t and won’t deliver on the promises they mentioned to you in the above conversation. This is a well devised strategy they use to build a fence of secrecy so that you as the business owner do not know how much advice you are losing out on especially in terms of how to adapt to technology and massively boost profitability as well as obscuring how much you are paying for services delivered.

Year End Accountant Claim #1:  “We can do this much cheaper and better”

FALSE: The year end compliance accountant cannot do this cheaper and better. They have fallen behind in technology adoption in comparison to the bookkeeper. The bookkeeper understands your business well and has many years of experience in business administration.

With technology, year end compliance and tax returns are now no more than business administration jobs (information gathering and systemising). Bookkeepers have decades of experience in business administration whereas these accountants do not.

A position where the bookkeeper is a communicator on behalf of the client to a tax advisor (not the same as an accountant, explained below) is the most cost effective arrangement the client can have and still maintains the highest route of quality advisory a client can receive. This methodology of delivering a service is far superior to any other.

Year End Accountant Claim #2: "We can do this for no extra charge because by having control of the bookkeeping work we can ensure better quality as it will be put through our tax system”  

FALSE: The reason they won’t charge you extra is because they already are doing this cheaper and they just don’t want to lose you to someone else via a price war. They disguise their fee into a bundled up “full accounting service” delivery so it becomes impossible to dissect how much you are paying in year end compliance vs administration vs advisory work. It becomes least transparent way of billing and thus the “fence of secrecy” becomes higher.

Additionally the majority of year end compliance accountants which adopt this approach tend to use unqualified or outsourced bookkeepers (because they are still chasing those maximum profits so quality). As a result, the quality of the overall service declines.Rare to find an  accounting firm employed bookkeeper that is willing to talk to the owner about their business each week in a meaningful way.

Year End Accounting Claim #3: "We can even offer quarterly management reporting this way for no extra charge  but we can’t offer this if we don’t do the bookkeeping"

FALSE: They should be offering this report for free regardless of who is doing the bookkeeping. There are reporting tools such as Fathom, Spotlight and Futrli which allow CFO level reporting analysis to be done and sent automatically. It is easy to set up and cost roughly $10 per month for each type of report. Again, this is part of the complex web of deceit to continue to justify charging you, the client, “value based billing fees” in other words, it is simply another way for year end compliance accountants (different to tax advisors, explained below) export hundreds of dollars per hour off of you while doing no extra work.

Now let's have a look at what the bookkeepers are saying:

Modern Bookkeeper Claim #1: “We can do this much cheaper and better”

TRUE: The bookkeeper has years of experience handling information at the source. Since they handle information at the source, they are best placed with a little of bit training from a tax expert to know where and how to handle this information for ease of the tax advisor’s use. They are also aware of the latest business administration cloud apps (far more advanced than rest of the year end compliance accounting industry) so they know the best method of communication delivery.

Many accountants have recently begun offering “bookkeeper friendly accounting services” where the bookkeeper maintains client communication, but work with the tax advisor to streamline the tax lodgement process. The bookkeeper handles most of the information collection and collating (because they are most familiar with this) and the tax advisor simply focuses on what they are good at (providing tax advice) rather than preparing working papers.

This means there is a better quality for a cheaper price i.e. when you use cloud technology to streamline communications between your experienced bookkeeper and your experienced tax advisor. Therefore you can get the best of both worlds at no extra cost.

Modern Bookkeeper Claim #2: "We can do this for no extra charge because by having control of the bookkeeping work we can ensure better quality as it will be put through our tax system”  

TRUE: The modern bookkeeper is abreast on all the business administration and cloud apps, as a result they will constantly be involved within your business assisting in streamlining communication and administration via cloud integration. They have the most control over the bookkeeping work as their service extends “beyond the books” to the actual processes which feed into the books. The year end compliance Accountant has no clue. Go ahead and test me, I challenge you to, ask your Accountant for the good of your business “What do you think is the best cloud app for project management?” if it takes more than a few seconds for them to say Basecamp,Trello, ActiveCollab, Asana etc then you have lost the game. Having someone who can keep you updated about business technology is very important for the well being of your business. The bookkeeper has embraced this trend, and the Accountant has not. (see: https://www.linkedin.com/pulse/accountants-v-bookkeepers-i-think-might-have-just-had-paul-dunn)

Modern Bookkeeper Claim #3: "We can even offer quarterly management reporting this way for no extra charge but we can’t offer this if we don’t do the bookkeeping"

True: With some quick training the Bookkeeper is just as well equipped to run through these Fathom, Spotlight or Futrli reports and you don’t need to spend thousands of dollars to have an Accountant do this.

Additionally, using the Xero report builder you can prepare customised detailed analytical reports fairly easily.

In Conclusion:
It Sounds like everything your accountant told you was wrong? Right?

Now you know, now you can recognise before you get too far into the rabbit hole to stop before making such a decision to dismiss your bookkeeper so quickly

Why every business needs a modern bookkeeper:

Because they are best placed to:

• Assist with conversion and change management of cloud technology
• Keep you updated about the latest changes and app availability for your business
• Be more active in promoting networks and fostering relationships between their clients by helping connect clients to clients for mutual business.
• Be a better source of access to solve a high level problem. Have you ever sat inside a lawyer’s office or an accountant’s office, trusted everything they said but didn’t understand a word of it? When you have a bookkeeper who is intimate about your business and personal finances they can help bridge communication because they understand “both languages”. They are a “harmonious communicator” that can transfer knowledge from the industry expert to you. They are more extended and full service form of the client service administrator the year end compliance accountant is using.

In summary, a business by using the services of a modern bookkeeper will receive better advice and personal understanding of expert’s advice, an increase in quality of the work at more affordable prices (experts focus on what they do best nothing gets muddled up) and you will be on top of the disruptive wave of cloud technology. Riding this wave of technology is among the most important reasons as every single modern bookkeeper has successfully rode this wave.

So before you replace your bookkeeper with a year end compliance accountant please consider all of the above. Receiving regular and accurate advice could be making or breaking of your business.

How do you know if the bookkeeper is connected to a high quality tax advisor? The following are good indicators:

• They are a Chartered Tax Advisor with the Taxation Institute of Australia
• They can confidently talk about all complexities and not just the usual CGT and  small businesses concessions but also R&D, employee share trusts, asset protection strategies, FOREX and other international transactions, structuring for rapid expansion, fair & equitable partnership arrangements and etc.  

It is often difficult for someone without much tax knowledge to distinguish between a year end accountant and a tax advisor, but this distinction is very important to know!

I have found that even though I am a Chartered Accountant with the Institute of Chartered Accountants Australia and New Zealand it is really the Chartered Tax Advisor status with the Taxation Institute of Australia that is the easiest way to confirm the level of tax expertise for your accountant. I have been through the TIA program & CA program. The TIA program is very tax intensive  and it is not easy and there is a large amount of tax research and work involved to complete it.Only someone who has a real interest in tax would put themselves through a program such as that!

Of course this is not the only criteria as many great tax accountants are not TIA members. If your accountant is not a member of the TIA I would be suggested they have a membership with the ICAANZ or CPA. However the easiest way to distinguish between an expert, and a placeholder is to find whether you are willing to sit down and read ATO tax rulings on end until they start seeing blurring lines as opposed to an accountant who just wants an “easy way” to make money by doing the same thing over and over again by completing year end tax returns without much thought.

Another clear telling sign is whether the accountant is willing to take on bookkeeping work. Tax experts do not want to take on bookkeeping work, with no disrespect they simply have no desire to be involved or associated with a bookkeeper's’ job. They like their tax rulings and tax legislations, as working through debits and credits isn’t really their thing.

A Warning for Small Business Owners
Be cautious of a generalist accountant when you can get so much more value of using a modern bookkeeper who has a harmonious communication link with a proper tax expert and other experts. This value could be a groundbreaking competitive advantage for your business.

Now that you have decoded the rabbit hole are you still using a generalist accountant for your business or is it time to reassess your accountant relationship?

For more information about accountants and bookkeepers, please contact the expert contributor.