How It Works
Jul 18 3:04 PM

How It Works

Jul 18 3:04 PM
Jul 18 3:04 PM

How It Works

The popular notion prevalent today is that the idea you could automate workflow is lost because every client is unique in what software, what version, what platform their accounting is on. You have to get their file and by the time you get it in, you are in tax season, so there is not a way to do it. The Journal of Accountancy discussed the problem in the April 2010 issue of their magazine. They cited the experts at the Project Management Institute (PMI) when describing the process ...

“every accounting job is a ‘project’ because it is a temporary effort to create a single, specified, unique result. For CPA's, a ‘unique’ project is one focused on client-specified deliverables, such as a tax return, company audit, or balance sheet. And, because those deliverables are unique to each client, every project is one-of-a-kind, relevant only to that client for their particular purpose. The accounting processes developed to complete any one project are almost always different, even if only slightly, from every other accounting project, so each requires an equally unique approach and process from all other projects, as well.” Journal of Accountancy, April, 2010

BaCoSoft addresses that by looking at the what, the when, and the how we gather the necessary information to assist a client with the preparation of their financial statements, tax returns and projections of taxable income throughout the year.

Every year the typical CPA goes through the same thing for every client. They get emailed excel sheets or pdfs of client trial balances, income statements and balance sheets. Some clients include agings of payables and receivables and the detailed transactions in accounts like fixed assets. Some clients send QuickBooks backups or give us the ability to log in to their online accounting solution or remote access into their server to open their software and export those same reports. Information is typically transferred into excel and that is uploaded to our audit and tax prep software. All of this requires a myriad of different user names, and logins to access the data which differs for every client. Even clients on a platform like QuickBooks all operate on different versions of the software, so a firm must maintain up to a dozen, if not more, versions of QuickBooks so entries can be posted and returned, if a client sends an accountant’s copy of their file. Opening a client file takes time and some clients have dozens of files that need to be opened, exported, and evaluated for prep. All of this takes place in the months of February and March, causing accountants to open, close, update, assess and determine income all in time for the preparation of the tax return. It’s the same thing every year and there is not an end in sight.

Each year every CPA says the same thing, I am going to get ahead of it this year, I am going to be better but then life happens, things we can’t control enter into the flow of data and the annual chaos ensues. We are stunned that clients are always going out of town on deadlines and can’t believe someone would have the gall to have a wedding, the birth of a child during busy season, an illness or heaven forbid, a death in the family during tax season. We have things that pull us away for a couple of days and never catch up. Then normal things like an IRS audit or inquiry, tax notices, disruptions or changes in business plans all come to light during those same couple of months so that promise to get ahead, never happens.

It is often said that insanity is doing the same thing over and over again while expecting different results. That saying is often used when describing someone fighting an addiction or the consequences of a lifetime of crime. We don’t often think of it when it comes to accounting and tax returns, but maybe it’s time to start.

The notion that you can’t automate workflow stems from focusing on the things that are different for every client, not the things that are consistent. It also assumes you can’t do anything about the timing and what you have to do to get this information. Technology has changed those things, clients have applications online and using things like SDKs or APIs, we can access client data without opening accounting software or maintaining dozens of different credentials to get into files.  

That is where BaCoSoft steps in, it changes the what, the when and the how for gathering the information needed to prepare financial statements and tax returns.

The What

BaCo soft changes the “what” from a balance sheet, income statement or trial balance prepared by a variety of different accounting packages to the individual transactions that make up those reports. Journal entries or the entries posted by the different accounting modules are all very consistent. Debits entered increase assets and expenses while decreasing liabilities, equity and revenues. Credits decrease assets and expenses while increasing liabilities, equity and income. The individual transactions are very consistent, the same things happen in every transaction for every client.

The same can be said for where those transactions end up or get summarized, on a client’s audited, reviewed or compiled financial statements and their tax returns. For financial statements, CPAs aggregate their client’s record into lead schedules that tie to the financial statements at year end. The items in the current asset section of financial statements are determined and defined by GAAP, how the balances are displayed or identified on the year end balance sheet may be unique, but by in large, Cash, AR, Prepaids, and Inventory are all current assets on a balance sheet. There are unique circumstances where they may be long term, but that only needs to be identified one time for a client. The same goes for the other major sections of most client’s financial statements, fixed assets, long term assets, current liabilities, long-term liabilities, equity, revenues, expenses and other income and expense.  How clients identify and aggregate the transactions in that section are unique, but once they are identified as belonging to that section, they, typically remain in that section and are consistently identified from year to year. GAAP exists for one reason, to make sure the results of operations are consistently reported, so the users of financial statements are operating from one level playing field. The idea the Journal of Accountancy said each set of financial statements is unique, when they are the group that defines what is and isn’t an accepted accounting principal, challenges their core value and quite simply isn’t true.

From a tax standpoint, certain accounts may include activity that has to be reversed for tax purposes. Reserve for bad debt, prepaids, accrued expenses, accumulated depreciation, accounts receivable, and accounts payable all may include activity that needs to be handled differently at tax time, but the individual transactions inside each of those are the same and once it is determined how a balance in an account impacts taxable income, it is handled the same way every single time.

So BaCoSoft gathers these consistent items from a client file, the individual transactions, and it does the summarizing and reporting for GAAP and tax purposes. Entries are entries and the entries in these accounts are what we need to focus on for proper disposition at the financial statement and tax return.

The How

Instead of waiting on clients to run reports that don’t have the details, BaCoSoft uses SDKs and APIs to gather all the transactions for a client. No longer do we have to rely on multiple logins and versions of software to see the results, but all of our client’s information is aggregated into one platform and the transactions in a client’s file are aggregated and reported inside that platform. The client also has access to the platform, so we are working in synergy with our clients. The same transactions important to us are important to them.

When individual transactions are included in one of these accounts, an alert is created that notifies the preparer that there are transactions in an account that may or may not need his attention. The balance sheet accounts as well things like entertainment, penalties, insurance, gifts, that the expense section of income statement may not be eligible to include as an expense that is deductible for tax purposes. Classification in those categories needs to be examined so both a client and the preparer can learn together what should be recorded where. If a gift is limited to $25, what constitutes a gift? If a client calls it a gift, when we get to an audit, so will an auditor, so teaching a client what a gift is and then notifying them when they use it in a memo or create an entry in that account can be a good thing, so they don’t make incorrect assessments in the future.

Many of you are now saying, that’s great, except now my work has gone up during tax season a ton. I am no longer looking at 50 to 100 account balances, but perhaps thousands of individual transactions that make up those balances and I still have to do it all during February and March. That gets to the final change with BaCoSoft

The When

BaCoSoft gathers the transactions every day, so the day after they are created, the issue is identified and can be resolved.

How can that possibly be effective? That part is the genius behind BaCoSoft, one it gives the accountant one platform to operate under, no longer does he need to log into twenty different packages or websites to get client data that he can’t identify the status for, it’s all on one website. Each client group is represented by a tile and the tile changes colors and bubbles to the top when new transactions are created that need to be addressed. The CPA can dispose of the notification by updating the file with a journal entry, updating depreciation schedules, communicate with the client, update plans and prepare future adjustments, all from that platform, track their time, prepare engagement letters and let you know when a client has not engaged you for the work being performed. Fees can be collected; past due clients can be identified and services can be cut off. You can text, or send an email, from that platform.

The other thing is that the software can be trained, so that transactions that create unique needs for a tax return, can be disposed of during the year and once it is done, the software remembers what was done last time and automatically repeats it going forward. The adjustments are aggregated together for a CPA to review as needed, but not every entry needs to be addressed. Other things like a client put a $10 trash can in fixed assets and their capitalization policy is only assets over $1,000 can be identified and assigned to the client to move, so they learn how to avoid the mistake in the future. If you want to move it yourself, you can post the journal entry from the platform, without opening the client’s accounting file. Your files are aggregated for client approval or can be emailed for them to upload themselves. However, most clients want CPAs to fix the problem.

BaCoSoft then aggregates those transactions to get included on the proper lead schedule or routed to the right line item on a standard tax trial balance, which is set to post directly to a tax return.

An Example

How does that all work, well let’s take prepaid expenses, a current asset on most company books and on audits but for tax purposes those transactions should be expensed when paid if the taxpayer is a cash basis taxpayer. When the first transaction shows up, the software flags the transaction and an interview is conducted to determine what kind of activity makes up that transaction. For financial statement preparation purposes, it can be determined if the balance is material or the transaction is individually significant and then an entry is proposed that would amortize the prepaid over the period in question, automatically. This can be set up and performed from the client side or the CPA side depending on the independence constraints for the engagement or the level of accounting expertise that a client has. The accounting machine asks if the entry should be automated, automates the process and updates the prepaid schedule. These items are transparent to the CPA firm so it can be flagged if the balance is material at year end, or the transaction that created it is individually significant. Inquiries can be made and the prepaid expense section can have a “projected year end balance” that is managed, and able to be audited in the interim section of the audit.

For tax purposes, if the expense side of the entry will be reversed when the tax return is prepared and then, depending on whether the balance sheet is a cash basis balance sheet or an accrual basis balance sheet, the asset is either removed or an entry is made in a special M-1/M-3 section set up in the
equity section of the tax trial balance. So when a prepaid is created, the expense is increased and the asset is disposed of the day after the transaction is reported.

The last question asked is “would you like to repeat this procedure for each transaction in this account going forward?” Clicking “yes” creates a path that will replicate the above procedure each time an entry is made in the future, automatically. So as the entry is amortized, the reversing entry is made each month, exactly like the original entry was handled. The expense increases on the books are decreased for tax purposes and an alert is created if a prepaid expense has a balance or a basis of anything other than zero for a tax basis taxpayer. If the prepaid is recurring, the following year BaCoSoft will set off an alert if a new “insurance prepaid” is not in place or it will look for unusually high numbers in an expense.

« back