the-importance-of-client-knowledge-and-time-budgets

Last week, I talked about the first steps you need to take in order to become successful during your first years at an accounting firm. Now that you have the consultant mindset and you are off on your way to becoming a CPA, prepare yourself for the next steps of how to survive and thrive in a public accounting setting: time management and learning as much as you possibly can about your client and their business.

 

Know Your Client

Before starting any engagement, learn as much as you possibly can about the client (company, officers and directors), their business regulatory environment, and competitors. Client knowledge is critical as you will be able to make sure that the transactions evaluated for the audit/tax engagement do not conflict with your externally gained knowledge.

As a new staff, client knowledge expectations are relatively minimal and grow as you progress with the firm. There are many resources to obtain client information. For example, if the company is publicly traded (www.sec.gov), you can use the following platforms to learn more about them: Yelp, Glassdoor, a secretary of state website (for corporate/business filings), Facebook, LinkedIn and using a general google/bing search. Using names / phrases with “Google Alerts” will also let you know if your client is coming up in the news or in other places on the web. 

The firm, prior to entering into an engagement with a client, should have made complete background checks on the officers, directors and company. Therefore, you should not find anything nefarious as a result of your research; however, I would still go through the process of performing a full review to enhance your knowledge of the client. 

If your client is public, understand the filings: 10-Q (quarterly report, filed 3 times per year), 10-K (annual report), 8-K (used to file with press releases and other material events), DEF 14A (proxy statements used for shareholder elections), ownership filings (Forms 3, 4, 5, 13G, among others). Additionally, understand the roles of other professionals involved with publicly traded companies including, but not limited to, the transfer agent, investor relations, public relations, annual meeting/proxy coordinators, exchanges (NASDAQ, NYSE, OTC), client attorneys as well as the parties involved for fundraising (investment bankers, brokers). 

If you have not done this research or have a basic understanding as to the client’s business environment and ask the client a question that recently made front-page headlines, your client impression will not be good. Furthermore, the client may relay that information back to the partner that the firm’s staff have no idea about their business. 

 

Keep Track of Your Time and Expenses

Daily, with your to do list, keep track of your time and expenses (mileage to and from the client as well as other reimbursable costs). Also, I would suggest keeping track of your time by individual task. If a partner or manager is preparing a progressive billing for a client and asks for your hours, instead of stumbling, you will be able to go to your sheet and give him the exact hours. I would suggest also using the time reporting form used by your firm.  

 

Engagement Budgets

Potential clients generally go “out for bid” prior to obtaining audit/tax services, unless a pre-existing relationship exists with no requirement for multiple bidding. When accounting firms create client proposals, the client business is assessed and an estimate is prepared with the time needed to complete an engagement: partner hours (main, technical, concurring), manager, supervisor, and staff. Similar to a project, each part of the financial statement will be broken down and hours assigned to each financial statement area dependent upon the relative complexity/activity. After winning an engagement, the proposal will be the starting point for the budgeted number of hours for each area and the firm staff hours to be spent on each level (staff, senior, manager, partner). 

Most firms may not be as profitable on first year engagements compared to subsequent years due to the initial learning curve. However, as the firm continues to audit the client the profitability will increase over time. Some accounting firms will intentionally underbid clients to obtain the business. Underbidding is tricky: if an accounting firm develops a reputation for low bidding and then making up for the difference by “additional billings” the bids become devalued by prospective clients (the other firms will be sure to let them know of this) as well as feedback from third party websites. 

 

Working With the Time Budget

Prior to starting any engagement or performing any task, review the budgeted hours for the areas/tasks assigned to you. 

If you are assigned to a first-year engagement, you are entering into a challenging situation: there are no firm work papers to review (rather the firm reviews the work papers of the predecessor auditor) or this may represent the first year the client is having an audit. If the audit is in its second year, review the prior year work papers considering your externally gained client knowledge to see if the budgeted areas are adequate. 

The engagement budget is a guideline. The first year engagement provides specific challenges: the firm may have underestimated the number of hours to complete an engagement and/or the client may not provide the supporting documentation stated in the engagement letter. 

Based on your client knowledge and preliminary financial statements, plan out a strategy for your assigned areas. Then, sit down with your supervisor and walk through the audit/tax approach keeping the budget in mind. Communication as to time spent is critical. If you spend 10 hours on an area when only 1 hour was budgeted and you failed to communicate (I would suggest verbal and/or written documentation) the extra time spent, you may be blamed for the overage. Budgets, as with any business, are critical as they ultimately determine engagement profitability.

 

Firm and Engagement Profitability- The Importance of Time Tracking

Combined, an accounting firm’s income statement reflects total revenues less expenses equaling net income. Ultimately, each partner is evaluated on their engagement profitability: partner client revenue/billings less actual hours spent by firm personnel. Although there are other factors involved, engagement profitability tends to be the greatest driver. 

Firms generate internal reports reflecting the amount of actual hours administrators, staff, seniors, managers, and partners that are billing hours to client engagements. From these reports partners evaluate the “utilization rates” and “realization rates”. Understanding this process immediately is not critical, however, over time, your efficiency and billable hours to total hours worked will become a factor in your promotion. 

Here are some discussions relating to billing/utilization:

Realization rate vs. profitability - what's the better metric at the matter level? 

Pricing, billing, and collecting fees 

 

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