Accounting for a Detoured Economist

Actual conversation I was recently involved in (numbers and names changed in order for privacy to be maintained)…

Me: Your bank reconciliation isn’t done correctly. The error is small, but I thought I would let you know about it.

Them: No it isn’t wrong. This is a revolving account and the imprest value is $10 dollars…we reconcile to $10 dollars.

Me: The bank statement shows $13 dollars and you list $3 dollars in outstanding checks…but when I look at you outstanding checks detail you actually have $8 in outstanding checks. So you should be reconciling to $5, not $10.

Them: Yeah but if I report the extra $5 in outstanding checks the account will not equal the imprest amount of $10…it has to equal $10.

Me: Yes, that’s why the reconciliation is wrong.

Them: ……

Me: Just thought I would tell you.

Them: Well if I include those checks totaling $5 (that she had not included in the reconciliation) I would include an outstanding deposit that covers them as well…and the balance would still be $10, so the reconciliation would be correct.

Me: Oh, so there was a deposit for $5 that was also outstanding?

Them: Yes. It hit the bank in the subsequent month.

Me: That’s interesting; I don’t see a deposit for $5 on the subsequent bank statement. The only deposit that is at or above $5 hits the bank on the 21st, it takes over 21 days for a deposit in transit (that you did not include on your reconciliation) to be recorded at the bank. Show me the support that would indicate it was an outstanding deposit.

Them: Here it is.

Me: You didn’t write this check until the 18th of the subsequent month, that means it isn’t an outstanding deposit.

Them: Really…but if that’s the case then my reconciliation would be out of balance.

Me: Yes, as I said before, your bank reconciliation isn’t done correctly. The error is small, but I thought I would let you know about it.

Them: Oh.

A few days ago a partner at my firm emailed me to ask if I would be interested in working on taxes next tax season. I have mixed feelings about this request. It’s nice to be wanted…the partner could have asked many other people in the office. Additionally, the experience will be valuable. If I ever hang my own shingle on a door, I will need experience in tax to help bring in revenue.

The problem…

By the time tax season rolls around, I will have worked through months of a busy audit season with tons of hours and limited amounts of time-off to enjoy my wife and new child. I will go straight from a busy audit schedule to a busy tax schedule. My question…is this normal? Do people at other large regional firms (or for that matter, any size firm) work in both tax and audit?

I want a life! But I also want the experience…Did I make the correct decision sacrificing my free-time for tax experience? Anyone out there going through the same dilemma?

Related posts here, here, and here.

Dan Meyer over at Tickmarks wrote a post about the recent Forbes article listing the top cities that save their money in the US. Dan notes…

Reading between the lines: education appears to be directly related to good Nest Egg performance while raising children appears to have at least a slight negative relation (my guess is that most of the cities listed above are cities where comparatively low proportions of adults are raising children). I would have liked more detail on how the criteria were applied.

The top cities are places like San Jose, San Francisco, Los Alamos (NM), and Fairfield County (CT). Dan is quite right to think that education level has something to do with who is on this list, but I believe he is skipping an important link. During the acquisition of my degree in statistic I was exposed to the idea of interactions. Interactions are defined (non-technically)…

An effect of interaction occurs when a relation between (at least) two variables is modified by (at least one) other variable. In other words, the strength or the sign (direction) of a relation between (at least) two variables is different depending on the value (level) of some other variable(s). (The term interaction was first used by Fisher, 1926). Note that the term “modified” in this context does not imply causality but represents a simple fact that depending on what subset of observations (regarding the “modifier” variable(s)) you are looking at, the relation between the other variables will be different.

[ Yes I stole that definition…who memorizes statistics definitions ]

In this case the two variables Dan identifies are education and propensity to save, a positive correlation (the more educated you are…the more money you tend to save). I submit that this explanation does not explain the results robustly. Think of all of the social work, english, and (insert your own random major) that are highly educated and utterly broke. A high education level with a low pay scale will never result in a large savings rate. In this case the more obvious reason for the higher savings rate is a higher income. Think about it. All of the areas listed have highly educated, highly compensated, people with large amounts of discretionary income to sock away from their tech, engineering, and government jobs. In this case you could say that education and income are correlated, education and savings rate are correlated, and income and savings rate are correlated. But it seems pretty obvious that income would be more strongly correlated to savings rate then education level (on average).

Malcolm over at McLelland-On the interdisciplinary science of accounting wrote an interesting follow-up to my Why Auditing = Appalling Hours and Tremendous Turnover post last week.

In his response, Why Do Accountants Have To Work Longer Hours, Dr. McLelland wonders…

…for the past several years whether the inability of accountants to make (what they consider) a decent living working 40 hours per week doesn’t have more to do with accountants’ inability to optimally self-regulate from the public’s perspective.

he continues… 

In the end, I think it would be relatively straightforward to put together an equilibrium model explaining why accountants (1) are working longer and harder (… albeit for more money), and (2) not really using the breadth and depth of knowledge and skills they have (or should have).  More on this later …

I have trouble arguing his logic.  From my limited knowledge of the profession I have come to similar conclusions.  I often wondered if this was just a function of the firm I work for, or a more general industry problem.  I think the answer is the latter.

I almost concluded my last post with a hypothesis that the accountants don’t seem to be efficiently earning higher salaries…they are just earning more through overtime.  I believe that the marginal dollar earned per hour is actually staying stagnant while the hours work are increasing…which leads to the appearance of a larger paycheck…but in real terms this is not an increase in earning power…just an increase in work.

It never fails.  At my firm the end of August means two things; the beginning of the busy audit season (we specialize in government audits) and a massive race for staff to resign.  With twelve to fifteen staff level accountants at our office, when three or four people quit, that means a massive workload increase for those that stay behind.  The fear of being the one left to do all of the work actually perpetuates the rush to look for a new job before the long hours of busy season.  As I understand it, most audit firms have extremely high turnover rates.  With long work-hours, mountains of mundane paperwork, combined with long hours of brainless ticking and tying it isn’t hard to understand why the turnover can be 25% per year.   As an outsider, not trained in the accounting field, it appears that experience as a public auditor is used as a stepping stone to building a desirable resume.

My question: Why does it have to be this way?  Why can’t external audit hours be closer to 40 hours a week?  Why must managers, partners, and staff work so much?  As an economist my knee-jerk reaction is to look at the supply-and-demand analysis.  It turns out that this analysis leads me to some obvious answers.

Supply: As we all know, the supply of qualified accountants is low and trending downward. CFO magazine notes… 

Even though enrollment in accounting programs has risen over the past few years, the demand for CPAs currently outstrips supply by as much as 20 percent, and relief appears to be a long way off. “We’ll have an incredible shortage of accountants for the next 10 to 15 years,” predicts Allan D. Koltin, president and CEO of PDI Global Inc., a Chicago-based consultancy for accounting and other professional firms.

I attempted to attend an intermediate accounting class at a large local state college.  There are only six 30 seat classes available and every business major needs to take the class.  The class fills up before the end of the first week of registration.  Since I have a couple of bachelors degrees already (economics and statistics if you must know) I am placed at the end of the line for enrollment.  I will probably never be able to take classes at this university for accounting because of this.  The school would like to offer more classes in accounting they are just extremely limited in the amount of qualified instructors (How many Accounting Phd’s are there?)  If people can’t take accounting classes…they can’t practice accounting in any meaningful long-term way.

Demand: The demand for accounting professionals is skyrocketing.  With Sarbanes-Oxley (SOX) in America, International Financial Reporting Standards (IFRS) in countries like China, India, and the EU, and the increasing use of audits as a qualifying step for the financing deals of private and public entities there is a marked upward trend in demand for accountants. The Bureau of Labor Statistics notes…

Employment of accountants and auditors is expected to grow faster than average for all occupations through the year 2014. As the economy grows, the number of business establishments will increase, requiring more accountants and auditors to set up books, prepare taxes, and provide management advice. As these businesses grow, the volume and complexity of information developed by accountants and auditors regarding costs, expenditures, and taxes will increase as well. An increased need for accountants and auditors will arise from changes in legislation related to taxes, financial reporting standards, business investments, mergers, and other financial events. The growth of international business also has led to more demand for accounting expertise and services related to international trade and accounting rules, as well as to international mergers and acquisitions. These trends should create more jobs for accountants and auditors.

Another stealth demand augmenter is the constant increase of workload year to year for the same job.  It seems that every year the audit programs cover more areas and require more testing.  Even with the mitigating effects of increased technology escalating efficiency, there is a net decrease in auditor efficiency due to the ever increasing regulatory and cover-your-ass auditing requirements.  These non-legislative increases in workload lead to the need for more audit hours to complete the same job on a year to year basis.

In summation, auditors need to work more the 40 hours a week to be able to complete all of the work that is required to run a western style business.  I know this is a dramatic over-simplification (that is what economists do), and leaves out many other factors that effect this situation.  However, my bet is this analysis accounts for a large portion of the reason auditors work so many hours and burn-out so quickly. 

Read more here, here, here, here, and here.