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In this episode, Blake and David dive into Intuit's strategic shift towards enterprise solutions, discussing the potential impact on the accounting industry. They also examine some recent economic trends, including the U.S. debt situation and its comparison to historical empires. They then get into audit deficiency rates reported by the PCAOB, highlighting the need for transparency and reform in the auditing profession. There's also talk AI applications in education, recent accounting scandals, and more challenges facing the accounting industry.
Chapters
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Chapters
- (01:50) - Intuit's Strategic Shift to Enterprise
- (04:42) - Intuit's Pricing and Market Position
- (13:11) - Economic Outlook and Accountants' Perspectives
- (21:45) - China's Debt and Bankruptcy System
- (28:52) - Listener Mail and Industry Insights
- (35:56) - A Compromise Between Hourly Billing and Subscription Pricing
- (45:33) - AI as a Personal Tutor
- (46:34) - Understanding SAFE Notes
- (54:24) - AI in Retail and Business
- (01:01:47) - Audit Deficiencies and Industry Issues
- (01:25:34) - Conclusion and Final Thoughts
Show Notes
Intuit (INTU) Q4 2024 Earnings Call Transcript
6 podcast episodes CFOs should listen to before summer ends
Accountants bearish, mostly
Goldman Sachs Lowers Probability of US Recession
China’s Punishment for People With Bad Debts: No Fast Trains or Nice Hotels
Target to Roll Out Transformative GenAI Technology to its Store Team Members Chainwide
N.J. Accounting Professor Convicted of Tax Evasion
Everyone from the sunken yacht off Sicily has now been accounted for
PCAOB Posts 2023 Annual Inspection Reports Alongside Staff Observations and New Charts To Boost Transparency
EY Sheds U.S. Audit Clients in Response to Shortfalls
Regulator Explores Naming Companies Tied to Auditing Deficiencies Amid Investor Pushback
Auditors failed to raise alarm before 75% of UK corporate collapses
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Transcripts
The full transcript for this episode is available by clicking on the Transcript tab at the top of this page
Creators & Guests
What is The Accounting Podcast?
The Accounting Podcast (formerly the Cloud Accounting Podcast) is the world's #1 accounting, bookkeeping, and tax podcast! Join us weekly for a roundup of accounting news, analysis, and interviews. Plus, earn free NASBA-approved CPE credits for listening with the Earmark app. Learn more at https://earmarkcpe.com.
Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Blake Oliver: [00:00:04] Our interest payments on national debt are going to exceed defense spending this fiscal year. Just the interest on our debt is going to be more than we spend on the military, right. And the deficit projected deficit is $1.9 trillion.
David Leary: [00:00:18] Coming to you weekly from the OnPay Recording Studio.
Blake Oliver: [00:00:24] Hello, and welcome back to the Accounting Podcast. The number one podcast for accountants in the world. I'm Blake Oliver.
David Leary: [00:00:31] And I'm David Leary Blake.
Blake Oliver: [00:00:32] Another week I had a great weekend. I did a staycation at the Westin Kierland here in Scottsdale, which happens to be where the Institute of Management Accountants conference will be in 2025. So I'm very eager to join that. Again, very easy for me. Five minute drive down the road. But yeah, we got a, you know like a local discount because it's the shoulder season starting to cool down, but it's still pretty hot. Uh spent the day at the pool. Spent a night there the night before. Uh, it was great. I highly recommend.
David Leary: [00:01:03] It. Do they still have that surfing wave runner thing they do?
Blake Oliver: [00:01:07] I did not try that. I was not bold enough to, uh, to to try to stand on a board. But if I want to learn how to surf next summer, I better do it.
David Leary: [00:01:16] I think we should probably have an insurance policy before you do that. Yes, exactly. I sat there and watched 30 to 40 year old men just bail really horribly there. It's like a chiropractic dream.
Blake Oliver: [00:01:27] Oh, great. Great. Good to know. Well, how about you, David? What's new with you?
David Leary: [00:01:31] Nothing, really. I actually, I did, you know, obviously we have to file corporate returns here soon, and I finally caught up on all my QuickBooks stuff for the last year. Very nice. For for one of my businesses did that Saturday, and I just kept pushing through. I was like, I'm going to finish it all today. Um, I should be, you know, more on top of this every week, but that's good.
Blake Oliver: [00:01:50] Well, I know you've been busy because Intuit had their earnings call, and you always go through that transcript and give me all the good details. And I figure what a great follow up to our episode that ended up being all about zero last week. Let's talk about Intuit and where they are headed.
David Leary: [00:02:05] Yeah, so I jumped in and listened to the investor call. And here's my key takeaway. Intuit is going enterprise.
Blake Oliver: [00:02:11] Really?
David Leary: [00:02:12] No, no doubt whatsoever. It's very clear after listening to the conference call. So if you remember when Sasan Goodarzi became the CEO of 5 or 6 years ago, whatever that is now, he had his five big bets and one of them was mid-market, and they've been executing right. They've bought all these little apps and keeps shoving stuff into QuickBooks Online Enterprise. Right. They acquired MailChimp, which itself is like 8 to 10 products, including even e-commerce. Right. Mhm. Well, to quote unquote, we now have a business suite. And our business suite provides all the capabilities to for a business to be able to grow their customers, manage their customers, manage their cash flows, get their accounting done all in one place. We are going to go to market as one platform versus pieces and parts to really accelerate services penetration because of the one thing we continue to hear from businesses is they want to do everything in one place, and now we have a business suite for them to do everything in one place. Interesting. We've packaged all that up as an enterprise suite, able to pursue accelerate, pushing mid-market customer push, pursuing mid-market customers, and our ultimate goal to go far beyond 100 employees.
Blake Oliver: [00:03:20] So up till now, these have all been separate products into it. Bought them all and you had to buy them separately. Are they going to package these now into like a single monthly subscription fee?
David Leary: [00:03:31] Well I think the QuickBooks Online Advanced was a product, right? I think like payroll was a product. Maybe Bill pay is a product. I think time tracking was rolled into the price of advance. And all these small acquisitions were in the QuickBooks Online Advance. But then MailChimp did separate subscription.
Blake Oliver: [00:03:47] Right. So when is MailChimp going to be part of advanced? I guess is the question.
David Leary: [00:03:50] So I think that's the the next part, right? Just reading between the lines, they keep saying the one thing, right? One product. I don't think they're going to call it QuickBooks because QuickBooks equals what? Small business.
Blake Oliver: [00:04:04] Small business.
David Leary: [00:04:05] Yeah, right. So I think it's going to be called like Intuit Enterprise Intuit one, it's going to be Intuit something. And that's why.
Blake Oliver: [00:04:13] Quickbooks connect is now Intuit Connect.
David Leary: [00:04:15] Intuit connect right. It's very clear that it's going out market. So I was trying to figure out like, well what's this going to cost. Like what is this? And so if you take QuickBooks Online Advanced Plus Payroll Elite, because I'm assuming you're going to need a 401 (K) and you're going to have more than 25 employees if they're going for that market, right? That's $365 a month. Mailchimps premium is $350 a month. Both of these obviously could go more depending on how much, how many customers you have and how big you get. So it's about $8,500 a year. I couldn't figure out if bill pay is part of that, or you still have to pay 45 bucks a month for bill pay. Right. And then they have this, uh, Intuit expert assisted. That's another 50 bucks a month if you want to add in some AI stuff. Right on top. That whole AI, half a person, half AI service, right? But in theory, you won't need any third party apps unless it's super something niche for your industry because you're getting like spreadsheet syncing tools, you're getting cash flow analysis, time tracking, you're getting bill pay. You're getting everything under one umbrella, right? So that was like looking at other products out there. So Sage Intacct most deals for that are between 10,000 to 30,000 a year. Netsuite is 40,000 a year, up to $1 million a year. Acumatica is 15,000 to 40,000. Odoo, which is? I priced it out at the 25 users because they just charge per user 7500 bucks to 11,000, depending on the plan you get. And then versus other enterprise startups that are out there like campfire, right. There's no prices on their website, so obviously it's probably ten grand or more. So it's going to be interesting if they bundle all this together and they actually are the only enterprise product with a price, right? Right.
Blake Oliver: [00:05:54] That's less than $10,000 a year to get started, potentially.
David Leary: [00:05:58] Yeah, I imagine they probably make something that's in that ten K to 12 K price point because they are one of the quotes they, they talked about how they have the ability to be a great position to drive the price. So they're probably going to raise the current price of what they have, because now it's bundled together as a one offering. So they're probably going to have a $12,000 product called Intuit one or something like that. And they are full blown in enterprise now.
Blake Oliver: [00:06:25] And I don't see any competitors that can match what they're going to offer at the lower mid market for that price. So it's a it's a really good opportunity for Intuit. And like I said last week, it's a great opportunity for Xero to come in and offer an alternative at the lower end.
David Leary: [00:06:43] The lower end. And it's the opportunity for accountants. Like think about this where like start positioning your verbiage on your website. Look at your biggest client and try to understand what you could scale or what you're doing for that client. Right. Do you need to understand full end to end e-commerce and marketing and email transactions, or email funnels that tie all the way back to the product offering? So it's there's opportunity for all of us as accountants and bookkeepers to take advantage and ride this. But it's, um, it'll be interesting.
Blake Oliver: [00:07:16] That's a great point, David. I think there's a lot of opportunity for small accounting firms to offer help with digital marketing, because so much of so much of it is about the numbers now and connecting CRMs to accounting data, getting all the data flowing correctly. It's marketing data is not that different than accounting data, at least in my experience. That's why it was so easy for me to make the switch into a marketing role in tech from accounting, because when it's driven by the numbers, you get good results.
David Leary: [00:07:45] And the numbers have to be accurate. You can't make good decisions. Yeah, there's a lot of tie ins there. And the other way to think about this, it's very obvious this will be Intuit's priority for the next five years. So how do you jump on that train and ride it to take advantage of Intuit's marketing efforts? They're going to put behind this, including they talked about they're they're migrating their sales and service and optimizing that to sell in enterprise mid-market product like everything is headed that way. There's two other things that were in the conference call I found was interesting. So QuickBooks QuickBooks Live customers have more than tripled. That's um, yeah, QuickBooks online advanced customers grew 28% last year. And then some TurboTax numbers TurboTax revenue grew 17%. Turbotax live is now 30% of all TurboTax. Wow. So for all the. Oh my goodness. Turbotax is losing customers to direct file. The live product, the revenue they get from that offsets that by miles, probably. It's unbelievable. Then the other piece is new to TurboTax. Customers have tripled. So. So federal government launches direct file and Intuit's TurboTax new customers still tripled. Yeah it's unbelievable.
Blake Oliver: [00:08:57] They don't. That's why they don't care about it. Yeah, yeah. And we, by the way, tried out Intuit TurboTax live. And if you subscribe to our YouTube channel you can go see that right. Is that on the Accounting Podcast YouTube channel?
David Leary: [00:09:10] Yes it is.
Blake Oliver: [00:09:11] So search The Accounting Podcast TurboTax. You will find it. And we we actually do a video walkthrough, me and David doing our taxes with TurboTax live. And you can see what the experience is like. Compare it to how your firm operates. Are you at below or above the service levels of what Intuit is offering? You might be surprised and welcome to our live stream viewers! Hello Big Four. Transparency says marketing metrics increasingly rely on finance accounting as well. Moving from simpler, simpler rows and simpler metrics toward LTV to CCaC and payback period, which has many inputs far beyond what marketing usually has access to or knowledge of. Yes. So while I'm not saying accounting firms need to do marketing like writing copy and coming up with campaigns, no, I think you're in a great position, though to help with the data. Right. Organize that data coming in, make intelligent decisions, that sort of thing. Evan, welcome. Evan says hello. Hello. Welcome. We've been getting fewer live stream viewers on Mondays. No, no surprise there. But it is so much better for me and David doing this on a on a Monday versus on a Friday. It's a lot easier, you know, like there's that Ben Franklin, uh, piece of advice. What is it? Swallow the frog. Do the hardest thing. First. First. Yeah. Yeah. So we get it out of the way, and then the rest of the week is a breeze. Gator NYC says will the enterprise software be an online only model?
David Leary: [00:10:43] 100%.
Blake Oliver: [00:10:43] Yes 100%. Yeah. Intuit is not going back backwards on this. So desktop will live forever, but it will be harder and harder to get the support you need, and more.
David Leary: [00:10:55] Expensive and more.
Blake Oliver: [00:10:56] Expensive. Uh, well, David, I want to shift gears for a second and say thank you to Cfo.com for featuring the accounting podcast in an article six podcast episodes CFOs Should Listen to before Summer ends, and on this list includes The Secrets of rock star CFOs, the Bloomberg Businessweek podcast Beyond the Numbers with fresh CFO Chris Ortega. Secrets of Rock star CFOs. Wait, did they list that twice?
David Leary: [00:11:30] Well, it's two different podcast episodes. So this is episodes. Oh, podcasts. These are.
Blake Oliver: [00:11:34] Episodes. Got it. The auto remarketing podcast. Est? This is an episode in which.
David Leary: [00:11:41] Automotive.
Blake Oliver: [00:11:42] Automotive. So this is an episode in which Kathy Cruz discussed her experience working as the CFO for car dealerships in Southern California. Interesting. And of course, number six there on the list of the accounting podcast. And the episode is Intuit's shift to AI failed on day one. Yeah, well, and hopefully we've got some CFOs listening to us today. Let us know what you think about these stories we share or any others. And if you want to follow us on YouTube, subscribe on YouTube and you can join us live. You'll get notified on your phone. Hit that subscribe button. We pass 20,000 subscribers on YouTube and we want to keep it going up to 100,000. Let's get all the accountants and bookkeepers listening to the podcast. Teresa says Monday is the first time I had time to join in. Of course, there's something I'm not doing that I should. And Janowski says, just got fully licensed in PA last week. Awesome. Congratulations. I assume that is your CPA license that we're talking about there, and that is a big deal. That's wonderful. Well, David, where do we go from here? I, I mentioned in the title of this episode, The Economy. In this economy, Intuit is going enterprise. And I wanted to talk about this because even though this is like an accounting podcast and we're not an economics podcast. Accountants get asked a lot about how they feel about where the economy is headed, and we get included in surveys and Accounting Today published a survey, and the title of the article is Accountants Bearish, mostly save for their own firm and clients. And the takeaway from from this survey is that while accountants are generally pessimistic about the US economy and the small business environment, over the next year and a half, they are much more optimistic about their own clients and their own firm. Uh, Which isn't that.
David Leary: [00:13:36] Like a logical.
Blake Oliver: [00:13:38] Fallacy?
David Leary: [00:13:39] Fallacy of some type? Yeah. Right.
Blake Oliver: [00:13:40] Right. But this happens a lot.
David Leary: [00:13:42] Blinder a a blinder. Yeah.
Blake Oliver: [00:13:44] So here's the chart. So who's in trouble? The percentage of accountants who think the economy will get worse for these groups. So if you ask them about the US economy in general, it's like 50%, right? 50% of accountants think the economy will get worse for the US economy in general. And slightly less than that, like 49% for small businesses. But when you ask them about their clients, only 26% of accountants think that the economy is going to get worse for their clients and for their firm. It's only 13%. And for yourself and your family, it's only 12%. So there's this huge spread between how accountants feel about their own firms and their clients, and how they feel about the whole economy. And I just find this to be an interesting, like, disconnect. Maybe this is good marketing.
David Leary: [00:14:29] Like like if you don't work with an accountant, you're going to get punished when the economy goes bad. But if you have an accountant you're working with, you have better odds.
Blake Oliver: [00:14:38] Yeah, maybe I don't know.
David Leary: [00:14:40] It is a disconnect. I fully agree, though.
Blake Oliver: [00:14:42] I also, uh. Well, yeah, maybe it's that the healthier small businesses are working with accountants, right? That could be it. I also spotted an interesting stat from Goldman Sachs, so apparently. Oh, and I can't find it right now. I'm totally disorganized today, David. But like Goldman Sachs is now putting the chance of a US recession at like 20%. So you've got all this like fear, uncertainty, doubt in the media and especially on like CNBC and all of these like stock market picking shows about where everything is headed. And yes, the stock market is really overvalued right now. But at the same time, it looks like we're we might have this soft landing that everybody's been hoping for with the fed now saying like, almost certainly they're going to lower interest rates at the next meeting.
David Leary: [00:15:33] And I think this word soft landing has been thrown around for three years, like the recently like how long is a landing? That's pretty smooth to me.
Blake Oliver: [00:15:41] Well, it's such a strange economy we're in because we have really high employment, really low unemployment, and we are a consumer driven economy. So that is really good for the economy. When people have income and they can spend, that keeps the economic machine moving in our country.
David Leary: [00:15:59] I think back to school shopping was $38 billion we spent as Americans.
Blake Oliver: [00:16:03] Now at the same time, we've had this massive inflation of like it's gotten like 20% cumulatively over the last handful of years, which is a lot and puts a lot of pressure on families where incomes are not growing. But at the same time, that decrease in purchasing power is not nearly as bad as if people lost their jobs. So you have this situation where people are a lot of people are unhappy because they didn't change jobs, they didn't get a raise. And so their purchasing power is less. But we have a pretty strong economy at the same time. So there's this disconnect between what you're hearing in politics and what is happening in reality. And then we've got all these like crazy competing tax proposals from the two parties. I think I saw, you know, they've gone back and forth now on tips taxing tips. Both Trump and Harris are saying we're going to exempt tips from taxation. And now there's different tax credits being floated around. Jd Vance was out there saying we're going to give a $5,000 refundable tax credit to every American with a child, which is like outrageously expensive compared to what we have now. And of course, the Biden well, Harris campaign is is matching all this. Right. And so for those of us who actually care about debt and fiscal responsibility, which I would hope includes most of the accounting world, We are the masters of the balance sheet. We understand this kind of stuff. We might get a little concerned that American debt is rising to crazy levels that we haven't seen since World War two. Um, you know, we our interest payments on national debt are going to exceed defense spending this fiscal year. Just the interest on our debt is going to be more than we spend on the military of. Right. And the deficit projected deficit is $1.9 trillion. And so this is something that concerns me longer term is unsustainable debt levels.
David Leary: [00:18:04] Because you hear people like this is going to be the collapse of the nation or that's this is so crazy. I've heard people take stances like, this is like hair on fire, like we have three more years left and then everything collapses. Like, yeah.
Blake Oliver: [00:18:18] So I'm trying to give myself some perspective on this. Like, is the American empire going to collapse anytime soon? Is my passive investing strategy going to fall apart because of that. And I have to say this is my armchair economist view. My my accounting podcaster influenced news view of the world. I don't think it's going to happen because I don't have it right in front of me. But like American debt to GDP ratios, which is our debt versus how much we produce, it's over 100%. But like I want to say 120% area. So think about this. If you're a family, right. It would mean having like credit card debt that is more than your family income and maybe not credit card debt, because the interest rate we pay as a country is not as bad. But let's say you took out like a home equity line of credit, and it's bigger than what you make in a year. That would be a big burden to pay that off. Or maybe student loan debt. Yeah. But historically it's not unsustainable because you look at the last global empire, which was the British. They achieved debt. I don't want to say achieved because it's not like a good thing. But before the British Empire began its decline, they had debt of over 200% versus GDP twice as much as their gross domestic product. So we actually, as an American empire, an economy, we have a long way to go. We can, we can, we can keep adding on to our debt. And it seems.
David Leary: [00:19:59] Like the politicians making poor decisions. Exactly. We'll just be just fine.
Blake Oliver: [00:20:03] Well, and if productivity improves, that just extends our runway. So I guess what I'm saying is if history repeats itself, which it tends to do, and there isn't some change fundamentally to how debt works and interest payments work and politicians work, then we will simply continue to spend more than we make until we reach an unsustainable level. But that could take a really long time to get there. And there's also one other condition that you need in order for an empire. An economic empire to be replaced. And that's you need a better alternative. And what's the alternative to the United States right now for the global economy, for massive global corporations to be headquartered for law and order? We're not perfect. Our system is far from perfect. And we'll talk about that when we get into audit issues later in the episode. But it's sure better than like in China. Remember growing up how the word was that China was going to take over as the next global empire? Well, that's not happening. They've got their own problems, and their leaders have clamped down on free expression, which is critical to a functioning market economy. Creative people don't want to work in a police state. They'll do anything to leave. So I want to highlight something about China that is really fascinating. Wall Street Journal did a story back in May or April. Actually, I've been saving this since April. China's punishment for people with debts. No fast trains or nice hotels. So one thing that is really unique about America and our system is that we have this really liberal system of personal bankruptcy and business bankruptcy. Like, David, if our business failed and we were unable to pay back our creditors, we could just declare bankruptcy and wipe the slate clean. Now, it's not quite as simple as that. There are steps you got to take, but we would not be personally. Generally, if we'd structured things right, we would not be like personally liable for the debts of the business. It wouldn't. We're not.
David Leary: [00:22:09] Ashamed. We don't have to put a special badge on our social media handles or anything like that.
Blake Oliver: [00:22:13] Right, right. It's almost it's gotten to the point where it's like bankruptcy is just a normal kind of thing that happens to people. And that makes sense because most businesses fail.
David Leary: [00:22:21] Then Abraham Lincoln like three times, I don't know. It could be a rumor, but didn't he have to declare bankruptcy? A bunch of times I think it's it's common.
Blake Oliver: [00:22:28] And this is one of the things that made our system so much better than the British system, where it was really hard to get out from personal debt. That was part of your business failure. If you had a business fail, you were on the hook for that debt, and you could even be put in debtor's prison and your family would have to ransom you out of there by paying off your debt. Like, can you imagine if we had a system like that? Well, in China, they essentially have a system like that. Um, if you first of all, you cannot discharge your personal debts in bankruptcy the same way in China. And so there is like a social credit system that has been put in place there where if you don't pay back your debts, you can be blocked from buying high speed train tickets, you can't stay at nice hotels. And the whole point is to pressure households into paying back their debt. And meanwhile, in China, household debt has increased dramatically. It's risen by over 50% in the past five years to approximately $11 trillion. And I think I mentioned that our debt payments are like 1.9 trillion. It's a lot of money that people owe there. And what happens when you don't let people declare bankruptcy and clean the slate is they kind of give up, right? If you can never dig yourself out of debt, what incentive do you have to work hard.
David Leary: [00:23:47] For a better life? Create new value or create anything of value for the.
Blake Oliver: [00:23:51] That's right. So I mean, there's some examples in the story that I wanted to share. Um, there's a former factory worker named Chin Huang Xiang, $40,000 in personal debt and a $400 per month base salary for $40,000 in debt, 400 monthly base salary. Can't buy high speed rail tickets. And the way that this happened is, is this person invested their savings in a failed startup and accumulated credit card debt to finance it, and is now working in a traditional Chinese medicine shop and will never be able to repay the debt. With $400 a month, there's now a black market where scalpers book tickets for blacklisted debtors. Authorities busted a ring in Shanghai and detained a debtor using this service. What do other blacklist restrictions include? Vacation restrictions. You can't go on vacation if you're blacklisted. You can't buy expensive insurance policies. You can't get a government job. Uh, courts can seize the salaries of blacklisted individuals, and they can detain you. If you don't comply with the restrictions, you can go to jail for it. So. And it can be digital. Your WeChat digital wallet could get frozen, right? Imagine if the government here could do that. So that's why I'm not worried about China taking over anytime soon.
David Leary: [00:25:13] Yeah, that's the the attack on your own people. Yeah. Not the good government policy, I think. What should we talk about next? I probably should do an ad. I almost feel like that's, like, scary, depressing. This this social score. It's like live credit reporting. Right, right.
Blake Oliver: [00:25:32] So think about this. Like this is the reason I'm bringing this up is because let's say you are a, like, a really talented startup founder, or you are a top scientist, or you are somebody creative, an artist. Do you want to live in China? No. You want to go to the land of the free, wherever that is. And that's us still right now, right? Where you can pursue economic opportunity and you can be free of worrying that your screw ups are going to cost you for the rest of your life, and that you have a reset button. Let's read that ad.
David Leary: [00:26:07] I think I saw just before we jump into the ad and read it, I think I heard Elon Musk say once, like a billion people in the world would move to the United States tomorrow if given the opportunity. And actually, we are the demand, right? Right. People coming here and.
Blake Oliver: [00:26:20] Our immigration policy is actually hurting us right now, because we are preventing a lot of those really, really smart people from coming to the US and starting businesses. Immigrants start far more businesses and create a lot of jobs compared to US citizens. And it's just strange that we have this like weird policy where we're trying to exclude everyone now. Yeah.
David Leary: [00:26:43] And more jobs means more payroll. So. That's right. On our next sponsor here. Do you want to read it? Want me to read it?
Blake Oliver: [00:26:49] You go for it.
David Leary: [00:26:50] Forbes and CNBC rank on pay number one for small business payroll. Onpay really knows how to get payroll done right for every client you serve, no matter how complex their software is, easy to use and backed by outstanding service levels, they handle new client onboarding for free and have experts on call to keep you and your clients on track. The system includes multi-state payroll, local filings, integrated HR tools, and more with no hidden fees. And when you join on Pays Partner program, you'll get a custom dashboard to manage all your clients in one place, plus gain exclusive perks like revenue sharing or discounts, free payroll for your firm, co-branding opportunities, premium swag, and more. Onpay helps you run your practice efficiently while providing exceptional payroll that your clients can count on. To learn more about using Onpay for your firm and clients, that may be farms, start ups, restaurants, bars, doctors, nonprofits, gyms, franchises, or dentists. Head over to The Accounting Podcast dot promo slash Non-pay. That's The Accounting Podcast dot promo forward slash onpay.
Blake Oliver: [00:27:55] All right, Donald says, long time CFO here, you guys your guys content is great. Keep up the good work. Thanks, Donald. Gator says Western Europe is pretty nice too. That's true. Uh, but definitely, like, not as great for startup founders. Like, I don't want to start a company and become really successful and then have the government tax 90% of my earnings. You know, like, that's what a way to thank people for their contribution. Uh, but we can have that debate. Hey, let's read some listener mail. Shane says, been listening to this show a lot lately, and I'm loving the content. I used to work in public accounting. I just remember the hyper competitive, nerdy bullies that overworked and exercised. I am a nerd, but not a bully. Most of them don't have any real hobbies besides maybe some golf. It was terrible. I wonder if this is still the culture. Hope not, because fixing the pipeline involves fixing these broken down people and culture as well. Keep doing what you're doing. I would be curious to hear from our Big Four listeners or recent alumni if that is still in fact, the culture. I imagine it is because nothing has changed about the business model to discourage people from prioritizing work over life and idolizing those who build the most hours and work the longest hours. It's all about inputs. It's all about time in the office, and it's not about what you achieve. So until that changes, until the culture of the timesheet dies, it's going to be the same way.
Blake Oliver: [00:29:34] Here's a here's an email from Sammy. I have abridged this email slightly to shorten it for reading on the air. Sammy says, I heard about your ADHD diagnosis on a recent podcast and wanted to relate. As someone diagnosed with ADHD as an adult, I believe public accounting can be a good career for some ADHD ers, especially early on. Public accounting offers constant change and novelty, which suits our ADHD traits. The associate to senior years and tax provided enough stimulation to keep me engaged. Adhd accountants may be more likely to embrace innovation due to our nature. The urgency of deadlines often brings out our best work. Team structures provide accountability, though. Work from home has made this challenging. The puzzle aspect of accounting can induce hyperfocus, making it engaging best, Sammy. I agree with that, and I think that's why I really liked digging into reconciliations and systems and hyper focusing on those spreadsheets, getting the data to look right. That is really fun. And you do get to do a lot of different things. That is one of the perks of accounting versus other fields is you can experience so many different kinds of businesses, do so much different work. We should really be promoting that to future CPAs is, if you like, variety. That's the spice of the CPA. You get a lot of variety and you can jump around.
David Leary: [00:30:56] And it's puzzles, I like that. The use of that word puzzles. A lot of work being done is all it's puzzles. You got to solve it, figure it out, put it together, and then when it's done, it's like a puzzle. It reconciles perfectly. And now you have this nice image or whatever the end goal is.
Blake Oliver: [00:31:10] Remember how we were talking about KPIs? I don't know if that was last week or the week before. They did another big markup, right? They yeah, they acquired Marcom big deal. Billions of dollars. Well, one of our listeners, Eric, wrote in about it, Eric said, hi, Blake, I'm the VP finance for a PE backed rollup strategy, and we use KPIs for both due diligence and post acquisition, help with financial integration and cash to accrual conversions. I asked them how their comp works. Nobody has equity, but their bonuses are much higher than you would expect in public. Sounds like a director level person who is above average. Their can count on $200,000 plus per year. Wanted to share as I hadn't heard of KPIs prior to working with them here, so that makes sense. If you aren't offering equity, you have to offer higher compensation.
David Leary: [00:32:02] Now they'll have to convert these Markham partners that had equity to some public stock of some type, I guess. What was that? They might have to. Because all those partners that Markham had equity. Right? Oh, yeah. Yeah. And now I guess they would. There'd be some equivalent value of public stock.
Blake Oliver: [00:32:22] Yeah. We don't know the terms of the deal specifically, but it could have been that the Markham partners simply got bought out with cash. No. It's true. Maybe they got stock. I don't know, but. Yeah. Um, I'd be curious to know the details of that. So I was wondering about the hours at Cbiz. So I asked Eric that because we know that Cbiz has the highest average hours of any firm, which is concerning, because if more and more firms are taking private equity and the hours are high at Cbiz, which is a public company, then could we expect the investors to drive more and more hours, which would be worse for the profession because we know the work life balance is. Number one. Number two, along with salaries. That's a problem in our profession. And so I asked a follow up to Eric. And Eric said he does see them working a lot of hours, but they don't mind because there's a more aligned payout. So they're making more money, but they're also working. They're getting paid for the hours they're working. But he also said this may be specific to the function they use Cbas for, because they pay a weekly rate per staff, not a straight hours basis. And I find this fascinating because to me, this is the way that you can bridge the gap between billing hours and going to a fixed fee in your firm is just bill for bigger buckets of time. If you think about it, a fixed fee arrangement is just billing for unlimited hours. Yes. So you can get there if you stop billing for an hour at a time, or 0.25 hours, or even 0.1 hour, and you move to billing a day rate or a weekly rate.
David Leary: [00:34:11] You're going to buy a bucket of hours from us instead.
Blake Oliver: [00:34:14] Right. And I but I would even encourage firms not to think of it that way as like a retainer where you buy a bucket of hours and we bill against them. You're just buying access for a certain number of days, or my staff are going to work on your books a certain number of days per week. And this is the model that your part time controller has used successfully for two decades, and has grown to be a top 100 firm as a result. So there is a compromise here. Don't bill hours bill for days. And Eric Franke, the founder of UTC, will tell you, no, we still bill for time, but I don't think this counts if you ask me, because they're not billing. One hour here, one hour here, one hour here. They're saying your part time controller is going to work on your account Tuesday and Thursday, and we'll get everything we can get done, done on those two days. And if you need more, buy another day.
David Leary: [00:35:06] And then if you are efficient and get the work done fast, you're you're going to build a client for the full amount you said you were going to build them for. Exactly.
Blake Oliver: [00:35:14] You're built for the two days.
David Leary: [00:35:15] Yeah.
Blake Oliver: [00:35:16] So that's a bridge to a subscription pricing for this kind of client accounting services. And I have one more email on this topic. This is from Victor. Victor says, Dear Blake and David, thank you for your work in modernizing the accounting profession. As a junior partner in a small Seattle firm. Your podcast has been an inspiration. I've completed my 150 credit hours, got married, passed the CPA exam, earned my CPA license, and now have a six month old daughter. My challenge is with implementing the subscription billing model for tax clients like individuals, trusts and estates. Currently, our cash flow depends on billing and arrears causing seasonal crunches. I'm considering billing a 50% deposit in January, or converting tax engagements to recurring monthly or quarterly services. This could improve cash flow, but doesn't address all issues, especially for one time projects. How can we bridge the gap between subscription billing and simpler tax prep engagements, particularly with the client displacement happening in the lower middle market? Looking forward to hopefully, hopefully meeting you both at Xerocon in Nashville. Ps, I agree with adjusting the 150 hours requirement to attract career changers to our profession. Best, Victor. This is a great question and if you have existing clients, I have a very simple suggestion for you, which is what Victor said.
Blake Oliver: [00:36:39] Bill a 50% deposit in January, but I wouldn't consider it like a I wouldn't consider it to be a retainer that you bill against Bill 50% assume that you are going to bill 100% based on that 50% and go up if you need to, but never go down. Yeah. And if you look at your historical billings, you should be able to figure out what this should be on average for a variety of clients and average it out. So instead of trying to bill every client individually, come up with some tiers that roughly approximate to the value that you're delivering for these different types of clients. Maybe you have a few different tiers for individuals, a few for trust, a few for estates, and just stick them in one or the other. And you're going to make more money. If you if you compute it on an hourly basis, you'll have higher realization on some clients and you'll have lower on others. But it doesn't matter because it all evens out in the end.
David Leary: [00:37:45] And you have to be okay with that mindset of like, oh, 2 or 3 clients, I might say I'm not going to make money on those 2 or 3 clients, but there's going to be six other clients that like a gym membership. They're not utilizing you barely at all. They're making more money on it. And so but you have to be okay with that. Yes. And accept that that's just the way it is. When you go to a subscription model and the.
Blake Oliver: [00:38:05] Way you get clients on board with this is one, you just do it because you have power in this relationship and you should stand up for yourself and do it. But also the way you sweeten the deal for them is you say, look, I'm no longer going to charge you hourly when you call to ask questions about your tax return or your tax situation, this is now included and if necessary, you up the fee to include that advisory, that planning. And maybe you roll in the biannual meetings with the clients, do a minimum of two meetings per year. And that's part of this fee. And you say we're going to do one in the summertime or the fall. We're going to do one whenever you schedule them out. To me, that's a good way to get going on this. And the very least, you can just see what you did last year. Build them 50% in the now and then. Build 50% on delivery if you like. But I would encourage you to consider doing 100% upfront if you can, because a lot of firms are able to do that now. And like, why wouldn't you do that for your cash flow?
David Leary: [00:39:08] I have an article I saw in a CPA practice advisor that made me think about business models of firms. Okay. The title of the article says one third of us workers want to phase into retirement. Well, our industry what I think what 75% are eligible for retirement, right. And so this was a survey by the Global Benefits Attitude Survey in 2024. And when they asked what was driving their decisions about when and how to retire, the top reason was financial security at 76%, followed by their health at 50%, having more time for family leisure and travel 45%. So I was just thinking about, you know, this and all these accountants that are eligible for retirement. If you could build a firm where you just hired all of them part time. Yeah. Right. And gave them that flexibility they're looking for. It would be a win for you and them. Like why try to hire a bunch of full time employees? If you could just hire a bunch of really highly qualified CPAs that are retirement eligible. Maybe they want 15 hours a week, 20 hours a week. But if you could build a system to do that. Yep. That could be a very interesting firm model.
Blake Oliver: [00:40:13] I think it's a winning strategy. I would I would pursue that. And if you offer work from home remote work opportunities, you can do that. You can get these people from firms that don't offer part time work that want flexibility. Yeah. It's it's like such a it's such an easy opportunity to me. Maybe I'm just not seeing something about this. I mean, I do know you have additional software costs as a result of this because you're still paying per seat. Okay. Right. So think about all the different apps that your staff have to use. If you only have somebody for 20 hours a week, you still got to pay the full price for these tools. So that is something you have to consider and you have to build into your model when you do. This is I'm going to have maybe double the tech spend of another firm or even triple. But if you plan for that, you should be able to do it. And going back to why PTC they bill on a days model and they let their controllers can work 2 or 3 days a week if they want. You don't have to work full time. You work as much as you want. And your compensation scales. Hunter in the live stream says regarding the billing per day. Hunter says, as a devil's advocate, isn't that still tracking time, but just on a different magnitude in terms of billing days of hours? In a way, it's it's it's like a hybrid approach.
Blake Oliver: [00:41:40] I would say the difference is that when you write that engagement letter, when you make that deal, you are saying, my team, I or my team, whoever's going to do the work will be available to you working during that time, but you are not going to bill for the specific hours that are worked. So I'm going to work on your account on Tuesdays every week. I will get everything done on Tuesday. I'm not going to bill you or track the three hours, the four hours, the five hours, the six hours it took. You just know Tuesday is the day that my team works on your account. And what I like about this is that it's pretty easy to tell the difference between a one day a week client, a two day a week client three day a week client. There's enough difference in the amount of time things take. You can you can reasonably get an idea if you're doing a client accounting services practice or a bookkeeping practice, what's going to be necessary. And maybe you even go like to a half day. But at least that way you've got just bigger units. It's like how a lot of firms switched from billing 0.1 hours to billing quarter hours. Thank God I never had to bill 0.1 hours. Can you imagine having to divide your day up into a 10th of an hour increments? David.
David Leary: [00:42:57] It's the worst. If you work with Laura and you get bills like that, it's the worst. It's the worst.
Blake Oliver: [00:43:02] You know, it's not accurate. It's not possible to be that accurate with your time. I mean, you'd have you'd have to be. I mean, I know there are some people who can do it, but it's a very small percentage of people in this world that can track their time in a detailed way like that.
David Leary: [00:43:16] You'd much rather have them focus on the work, right? And that's what's freeing about billing by the day. Now you're motivated just to do the work, get it done as fast as possible. You don't have to track how long it took you to do it. Just get the work done. Yeah. So let's do our second ad before you jump off. Oh, yeah.
Blake Oliver: [00:43:31] Yeah, let's do it. Okay, who's our next sponsor?
David Leary: [00:43:34] Our next sponsor is relay. So between Blake and myself. We now have three, four, five business entities, maybe six. We have 20 or so checking accounts, dozens and dozens of virtual cards. And it would be impossible to manage all of this if we weren't using relay as our small business bank. Relay truly is a part of our tech stack we use every day to run our business. Really allows Blake and I to each have our own logins. We can grant access to our team, even our accountant, without ever sharing our passwords or two factor authentication codes. Really allows us to grow and scale our banking needs without ever going to a physical branch. I recently added an account to receive inbound merchant services. With just a few clicks, I had to create a payroll checking account again, a few clicks I instantly have access to my ACH info to give to the payroll provider. With relays virtual cards, we can issue debit cards to our team around the world for needed business expenses. I can instantly spin up a new visa debit card and set both daily and monthly spending limits. And when a team member doesn't need the card, I can just freeze it until they need to use it again. Relay Really as also as automation features to sweep money automatically from one account to another based on dates, amounts, target balances or percentages. For example, inbound payments could be split daily to our payroll sales tax, payroll, operating account, savings accounts, all on predefined rules. To learn more about using relay for your firm and clients, head over to The Accounting Podcast dot promo slash relay. That is The Accounting Podcast dot promo forward slash relay. Why thank.
Blake Oliver: [00:45:04] You relay. We love it. Highly recommend it. Go sign up. David, I want to show you an example of AI that I use in my daily life. A little different than what I showcased, uh, a couple of weeks ago. So a couple of weeks ago, I showed how to write an email using basically AI powered dictation, supercharged dictation. And I'm still using Super Whisper a lot. I love it, I hope it comes to windows soon so that our massive audience of windows users get to enjoy it as well. Uh, but here is something that you can use right now with ChatGPT and Big Picture. What am I talking about? I'm talking about using AI to teach yourself using AI as a personal tutor to help you learn new concepts. This is probably the number one use case for AI and how it's going to change. Accounting, education, education in general, how people learn things. Um, you can use AI as a tutor, and I want to give you an example of how I did this. So we are raising a seed round for earmark, David. And as part of this, our CPA advisor gave me the task of learning and understanding what a Y Combinator safe note is a simple, simple agreement for future equity.
Blake Oliver: [00:46:32] This is basically a convertible note, and it's very commonly used in the startup world to raise money in advance of a series A, you want to raise some seed money, maybe a few hundred thousand dollars. It's not worth it to go through all the paperwork to raise a formal institutional round of funding. So you do these convertible notes and you can raise the money. And then these notes are designed to convert when you actually do the series A, it gives you a few years before you have to do all that legal and whatever. And it's fast and easy. And so Y Combinator, which is an incubator for startups, has created a best practice safe note template. And companies adopt this very frequently. And we're going to do the same thing. We're doing the same thing. But I needed to understand exactly how they work. And our advisor couldn't, you know, quite explain it to me on the phone. It's a lot to understand, he said. Here is the guide. Go read this guide and then come back to me with any questions. And I open up.
David Leary: [00:47:34] This 33 page PDF.
Blake Oliver: [00:47:36] Right? It's a 33 page PDF written by accountants and lawyers, and it's like going to school again. Anyone who is watching on the live stream can see this is some dense text here, and it's not horribly written, but it clearly was not written by an educator. This is not as easy to understand as the concepts that you were taught in intermediate advanced accounting. You know, it looks like a.
David Leary: [00:48:03] Contract, actually. Everything's justified fully to the edges of the margins. Yeah.
Blake Oliver: [00:48:08] I mean, there's a lot of examples, you know, but picture me, I'm jetting off to Xerocon, I'm on the plane and I'm trying to read this document on my laptop in the four hours that I have to Nashville from Phoenix. And I'm just my eyes are glazing over. It's been a long time since I've been in school and I'm struggling, So I had a brilliant idea. I said, I'm going to use AI to help me figure this out. I'm going to drop this PDF into my ChatGPT, and I'm going to ask it to teach me this. So I say in ChatGPT 4.0, I drop the PDF PDF in and I say, I want you to be my tutor. Walk me through this document. Assume a baseline of knowledge appropriate to a CPA. And the first answer I got was not that great because it basically gave me an outline of the document, a big long outline, which is kind of what the document is. So this was not that helpful to me. I'm like, oh, I might as well just go read the document if I'm going to get it summarized. Then I had an idea. I said in my next prompt, teach me the concepts in this document using a Q&A format. Explain each concept and then ask me a question to confirm that I understand it. If I don't, then work with me to help me understand it. Don't move on to the next concept until you are sure I understand the previous one. Each concept should build on the previous one. Start with the most basic concept. So here is the response I got. Let's start with what I.
David Leary: [00:49:41] Love about this this this feed your ADHD right? Because now it's more like a game. Yes.
Blake Oliver: [00:49:46] Right, right. This is small pieces of information. I can digest it, understand it, get to the answer and then move on to the next one, as opposed to trying to read a 33 page document and then figure it all out. I really struggle to read long texts. I don't know about how, you know, normal people do it. So, but I think this is like relevant to anybody because like, even if you are not ADHD, it can be hard to read 33 pages. You don't have time for that, right? This is faster. So here's the answer or the next reply from ChatGPT. Says, let's start with the most basic concept and we'll build from there. I'll explain each concept basically just reiterating what I want it to do. So number one, what is a safe explanation? A safe, simple agreement for future equity is a financing instrument used by startups to raise money. It's an agreement between a company and an investor that allows the investor to receive shares in the company at a later date. Usually when the company raises its next round of financing. The safe is not debt. It doesn't accrue interest.
Blake Oliver: [00:50:52] It has no maturity date, meaning it doesn't have to be paid back like a loan. Instead, it converts to equity when certain conditions are met, such as a future investment round. Question what is the primary purpose of a safe agreement in startup financing? And then I wrote my answer and then I got the right answer and it said, great, now let's move on. The next question. What is a post-money safe? So there's two kinds of safes. There's pre-money and there's post-money. So now it tells me what that is. And then it asks me the question, how does a post-money safe differ from a traditional safe in terms of calculating ownership? And I gave my answer and said, great. That's correct. Now let's move on to the next one. What is a valuation cap? We went through that. Okay. Now how does a safe conversion work. We went through that. What are pro-rata rights. We go through that. What happens in a liquidity event. How is dilution managed in Post-money safes. And we're doing this Q&A and I'm demonstrating my knowledge and I'm learning how this all works.
David Leary: [00:51:55] And you're just reading a chunk, proving knowledge. Reading a chunk proving knowledge.
Blake Oliver: [00:51:59] What is a cap table. Why is it important? How do safe conversions affect preferred stock? We're getting more detailed now right. And then we go through some more stuff. Additional considerations the impact on future fundraising all this stuff. So if you struggle or you're trying to teach yourself a new concept, I think this is one of the best applications of AI is drop the document you're trying to understand in and ask it to be a tutor to you using a Q&A format if that's how you like to learn. And that works for me. Great. So think how this is going to change. Education and accounting education. We don't need necessarily a teacher to get up in front of the class and drill concepts into our brains. The AI can do that, and it can do it in a personalized way, and it can measure your knowledge. And then if you get the answer wrong, it can help you figure out how you got the answer wrong. That's individualized tutoring, and that's always been better than learning in a classroom. We only started doing classroom education because we needed a way to get knowledge from one to many in a affordable way. Somehow, the American educational establishment has managed to make this one to many, very unaffordable. So what's going to be the replacement for it? That is, it's going to be individualized I tutors.
David Leary: [00:53:22] Yeah. As you were doing this, I was like, oh, this is going to destroy all the CPA study exams. Tax the CPA exam prep companies because you could just.
Blake Oliver: [00:53:31] Well.
David Leary: [00:53:32] Use this.
Blake Oliver: [00:53:33] They still perform an important role of distilling all the broad knowledge you have to have. Yeah. But let's say you are struggling with a particular concept and your CPA exam review prep is not helping. You could just ask AI to teach it to you. Use ChatGPT or better yet, use perplexity dot AI because it goes out and searches the web before it gives you an answer, so you're more likely to get accurate answers that are backed with footnotes.
David Leary: [00:54:01] So I saw the target is going to use AI to faster assist customers, which is a great headline, right? Um, and we've seen this like you go around the target employees or Home Depot employees, they always got the little it's like it looks like a cell phone type thing hanging off their belt. Right. And I think as a barcode reader And you know, they can look up things on the internet, check the inventory in the back room often, make a little handheld device. What they've done is they put AI on that, and essentially they trained it on their standard operating procedures or their SOP. Now, I don't know, Blake. I know you said you used to work at Starbucks. I used to work at the mall retail. I was a barista this huge this huge three ring binder, right, of standard operating procedures and things like, how do I restart the cash register when the power goes out?
Blake Oliver: [00:54:45] I don't think anyone ever looked at that binder, but maybe it was just our manager who did that.
David Leary: [00:54:51] I did do that, but essentially now employees can just get that within seconds what the answers need to be. It's been used 50,000 times. And I'm like, that is like a very simple good use case for your firm.
Blake Oliver: [00:55:02] So they took their standard operating procedures document and made a chatbot.
David Leary: [00:55:06] That they didn't really say they did. But based on the examples they gave. Yeah, they.
Blake Oliver: [00:55:10] It makes so much sense. That's like what the Department of Defense did too. They did that with all their like finance and accounting policies. Now you can just chat and ask a question and get the answer.
David Leary: [00:55:19] And it seems like a good black and white project. Yeah. Let's roll out AI at our firm. Let's just do that. There's a very clear like start and finish. You know you're not going to be working on it for five more years because it's very gray. It's very black and white. Just just roll out the existing documents into a chatbot.
Blake Oliver: [00:55:36] Yeah I like that. And you can do that now. You can do that with custom gpts for your team. You could just upload the document, create a GPT that somebody can query the employee handbook, for example. It's a great one. New Jersey accounting professor convicted of tax evasion. I spotted this on CPA practice advisor Gordian. Uh, how do you say his last name? Ndubuisi. Oh. Do Bizo. Gordian and Bizo, an accounting professor at Drexel University, was found guilty by a federal jury on eight counts of tax evasion and filing false returns. Can you imagine if your accounting professor was indicted and convicted?
David Leary: [00:56:18] Taught the audit and ethics class.
Blake Oliver: [00:56:20] So this professor de Bezo co-owned healthcare pharmacy in Trenton and manipulated the business's financial records to evade approximately $1.25 million in taxes on $3.28 million in income from 2014 to 2017. Over $1 million in tax evasion. He created fraudulent books for healthcare pharmacy, inflating costs to reduce reported profits, and making wire transfers appear as legitimate business expenses when they were actually sent to his own accounts and those in Nigeria. He also falsely claimed he had no authority or interest in foreign bank accounts during the years in question, which I know is a big no no. You have to disclose those foreign accounts, and I wonder if there's more charges coming for this guy. Because of that, you can go to jail for a long time for hiding money overseas. He's been on administrative leave from Drexel University since 2022 and previously settled separate Medicaid overbilling allegations with the new Jersey Comptroller's office by agreeing to return over $280,000. You never know who the next fraudster is going to be. It could be your accounting professor. How embarrassing.
David Leary: [00:57:28] So, speaking of a little bit of fraud, I have some follow up on that Mike Lynch story from last week. So Mike Lynch is the tech entrepreneur from the UK that his superyacht or his yacht sank last Monday when we recorded the show or Sunday night, Monday, whatever that was.
Blake Oliver: [00:57:44] Freak storm came in, capsized it.
David Leary: [00:57:45] Yeah. Now there's a lot of conspiracies. But they did find his body, so it was not an escape. Like he's not fleeing.
Blake Oliver: [00:57:52] He's not faking his own death.
David Leary: [00:57:53] Faking his own death. But what drove it? And this is crazy because I didn't have this last week. So the other codefendant in the US fraud trial. Trial that they both stood for, the former vice president of finance on Saturday before the boat sinking. So, you know, 48 hours before he was jogging, got hit by a car and killed.
Blake Oliver: [00:58:14] This just I mean, this is just screaming conspiracy theory.
David Leary: [00:58:19] Yeah. What are the odds that both of these people that are on trial found not guilty? Wind up dead the same weekend, basically.
Blake Oliver: [00:58:26] Do you believe in karma, David? Maybe this is karma.
David Leary: [00:58:30] Well, it's hard to say because the one of the people did serve time. So CFO Chauvin Hussein, he'd served five years. Um, he basically from 2009 to 2011, he used backdated contracts, round trips, channel stuffing and other forms of accounting fraud to inflate Autonomys public reported revenues, according to the U.S. Attorney's Office in the Northern District of California. So he was the CFO. So what happened is the other two guys didn't know this was going on. So the CEO and some Mike Lynch, the founder, and then the codefendant, the the vice president, so they wound up dead. The other guy serves time gets out of jail. It's really bizarre, the whole the way this all went down. And then if you remember, like, you know, Deloitte's the one who missed all this audit in that HP buys the company. It's just it's just a weird story. It is strange.
Blake Oliver: [00:59:20] Strange. Well, well, we have one more sponsor to thank. Right, David? We have a third ad.
David Leary: [00:59:29] I'll get that ready here. Well, if you want to start queuing up, I think you said some more audit type stuff.
Blake Oliver: [00:59:33] Well, I do have a lot of audit. You know, Pcob released their 2023 inspection reports and that the takeaway from this is, like, hard for me to understand.
David Leary: [00:59:51] I'll read the ad while you digest it.
Blake Oliver: [00:59:53] Okay. Go. Go for it. Or do you want me to read this one? I've been reading it. You've been reading all the ads. Okay, you go for it.
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Blake Oliver: [01:01:20] Thank you Makers Hub. And now let's talk about audit deficiencies. The Public Company Accounting Oversight Board, which regulates the audit profession in the United States, released its 2023 inspection reports for the annually inspected firms. And the overall audit deficiency rate increased with 46% of engagements, nearly half of engagements having at least one significant deficiency. Although they noted that can you.
David Leary: [01:01:51] Rewind for one second because my ADHD was not catching up? These are the numbers versus last year.
Blake Oliver: [01:01:57] Uh, well, this is the deficiency rate is 46% of all the inspected audits. Okay. So almost half of audits had significant deficiencies and the deficiencies were so significant. They're called part one A deficiencies. They're so significant. Part 1AI don't know why they need a dot, but they love their dots. They're so significant that the auditor should not have issued their opinion. Now, it doesn't mean that the financial statements are misstated, but it means that the audit firm didn't do its job. Isn't that crazy? That's just nuts to me. Now, I can't figure out because we don't have enough information whether the pcob is just being too hard on auditors, or if auditors are just slacking off on their work. We have no way of knowing, and we don't know which audits actually had these deficiencies necessarily, because the Pcob doesn't release the names of the clients, we just get number of audits reviewed and then the percentage deficiency. And the Pcob has put together a fun website where you can go and you can look up the different firms and you can see who had the most audit deficiencies. Just go to long URL that I'm not going to read on the web right now. But if you just search for Pcob firm inspection reports, you can find it. And they've made this searchable. So you can like sort by the number of deficiencies. And let's see here. Let's go by part one A deficiency rate high to low. And you can see BDO East Coast partnership of three audits reviewed. They had 100% part one deficiencies. So that means they shouldn't have issued opinions for all three of these audits. Uh Morgan Sullivan LLC. They had four audits reviewed, 100% deficiencies, assurance dimensions, two audits reviewed 100% deficiencies. Smith and Howard, PC. One audit reviewed 100% deficiency rate. And it just goes on and on. There's actually quite a few firms that had 100% deficiency rates like KPMG in China, KPMG, Hua Hua Hua Hsin LLP, 100% deficiencies on four audits. I mean.
David Leary: [01:04:35] So they're just randomly picking an audit from a firm.
Blake Oliver: [01:04:38] Sometimes they do it randomly and sometimes they do it based on risk. Okay. So the higher risk audits get chosen for inspection. You know I'm just like I'm still scrolling and I'm still on the list of firms that have 100% deficiencies. Kpmg in the UK three audits reviewed 100% deficiency rate. Pcf one audit 100%. I mean, if you only had one audit and you failed it, you're going to have 100% deficiency rate. It just keeps going and going. There's 168 pages of this and I'm on page two. Still 100%. Now I'm on page three. Still 100%.
David Leary: [01:05:17] Page 468 pages. We'll be here all day.
Blake Oliver: [01:05:20] Yeah. I mean, it's like page five. I mean, how many of these firms just have 100% deficiency rate? What does this even mean? You know? Does this does this mean that these firms are doing fake audits like BF Borgers because BF Borgers was in this group? If you search. Um, I guess you can search Borgers in the search bar. Borgers. Yeah. Bf Borgers ten audits reviewed 100% deficiency rate. That was the guy who was doing fake, completely fake audits just making up work papers. But my question is how many firms are doing that or doing? Not much better than that. We don't know because the data isn't released and we don't know what clients are affected. I mean, if these are public companies, the investors, don't you think the investors ought to know if the audit was shoddy? We're relying on these financial statements, but we don't get to know.
David Leary: [01:06:12] It doesn't make any sense that it's secretive, considering the argument of why accountants exist and what the audit is for. Right? To protect the public. Right.
Blake Oliver: [01:06:22] To protect the public. And so there's a big difference here. If you go through this list, you'll see a lot of these are small firms. Which makes sense right. Because there's only four Big Four and there's tens of thousands of small CPA firms like something like 40,000 of them. Now, I don't know how many are registered with the PCAOB, but the PCAOB inspected 4000 firms. It looks like there's like 4000 search results here on this page, 168 pages, 4000 results. So so let's say like there's 4000 firms doing public company audits. The small firms are the ones that have the biggest problems. So you look at the big four right. Again these are the this is a chart I'm showing here. Uh, on. It's a little blurry isn't it. That's weird. There we go. Fixed it. So this is a chart from the spotlight report. The Pcob put out figure one a 2023 inspection. Part one A deficiency rates again. Part one A. It means a deficiency so significant that the auditors should not have issued their opinion on the financial statements. And you can see that Deloitte's at 21%, E is at 37%, KPMG is at 26%, and PwC is at 18%. So E that's actually like really bad. That's shocking. Like 37% of your audits don't pass muster with the pcob like, but you know, the other 20% around that BDO is at 86%. Bdo is a big firm. Wow. Top ten firm, right? 86% of their audits had major deficiencies. To the point where the auditors should not have issued their opinion. And yet BDO rakes in how much in fees every year. And there's apparently nothing stopping them from continuing to do this other than Erica Williams at the PCAOB, saying do better. Auditors Grant Thornton had 54%. In what world can you operate as a business and have that deficiency rate? This would be like if an automaker like if their cars were falling apart on the road, right. I think the yeah.
David Leary: [01:08:30] If they if they selected three cars and tested them and they had this defect, you probably wouldn't buy it. It would probably kill an automobile manufacturer, right? Right. Like like, hey, we grabbed these three cars and all three of these. The tire falls off like they shouldn't have gotten out of the factory. Yeah, they would probably be a big problem. Now, I have an article for about E. That in a way, maybe E is trying to address this. The title of the article. This was in Wall Street Journal this morning. E sheds US audit clients in response to shortfalls. So Ernst and Young said it's Ernst and Young is cutting ties with many US public companies as the auditor. 84 companies linked to EY between January 23rd and August 15th of this year. They basically let go. Now they did add 21. Other clients say that number again.
Blake Oliver: [01:09:16] How many did they let go of 85.
David Leary: [01:09:18] They let 85 go in a period of a year and a half. Okay or no. Yeah. Yeah we're in 2024. So a year and a half um, probably resulting in the loss of $215 million in fees. I thought a funny note, Bill.com bill was one of the ones that got dropped. Um, and to quote their vice chair for assurance, Dante, Diageo. The reduction is largely by design, is intended to accelerate our transformation efforts. So a lot of this is they want to offer more quality, but they need to cut back on the number of clients to increase their overall quality.
Blake Oliver: [01:09:52] Okay, so let's put this in perspective. Yeah. As of January 30th, 2024, EY audited 971 public companies registered with the SEC. So they're saying they cut less than 10%, about 10% client base. Is that going to massively improve audit quality? I don't think so.
David Leary: [01:10:14] I don't know. But remember in June they said they plan to invest 1 billion over three years right into AI and strengthening their audit and tax platforms. So maybe in part of the article talked about the pressure from fees, right. And prices and people leaving Big Four to go to smaller firms to get things done cheaper. Like maybe EY sees the writing on the wall that like it's a race to the bottom for audit fees. So let's step back and figure out how to get there first. Right? How to be efficient, how to use AI, right. So that way they can compete and take those clients on in the future. But it's just interesting that they're, they're they're letting go of clients. Right. Audit clients.
Blake Oliver: [01:10:52] Yeah. But the question is, is this really, like, meant to actually achieve anything or is this just for PR. Is this just a right. Like I don't.
David Leary: [01:11:02] Know. Is that enough? Less than a difference.
Blake Oliver: [01:11:04] Less than 10% reduction. Is that going to improve your audit quality to like reduce your PCAOB failures to like they're going to have they have to cut that rate in half if they want to be equivalent to the other big four, they're closer to 40% than 20%. Yeah.
David Leary: [01:11:19] And if you think about, like all these accounting firm coaches that are out there for smaller firms and they're like, raise your prices so half your clients leave and that's how you actually get capacity to improve. Right. And yeah, 10%. You're right I agree with you. But 10% is not enough of a cut to improve.
Blake Oliver: [01:11:34] I have a, uh I have an idea as to why audit quality is low. One reason might be what Chris Vanover highlighted on LinkedIn. Chris is the CEO of audit CPA club used to be called Audit Club and I'm just going to read his post from two weeks ago. We received feedback from a prospective member. I should also add that CPA club provides a outsourced audit services to clients. So instead of hiring an auditor, a CPA to join your firm, you can contract with audit CPA club. Chris said, we receive feedback from a prospective member that decided not to move forward with CPA club. It happens and it's just business. I understand that CPA club isn't the right fit for everyone and I respect their decision. However, what struck me was the reason they didn't choose us. They mentioned, and I quote, I considered that for a relatively similar price, I could hire someone of comparable skill level full time and have them available for approximately 3000 plus hours per year. Chris continues I surely hope that was a typo, but deep down I know it isn't. This highlights the two most important issues in our profession that need to be fixed and fixed fast. People are overworked and underpaid, period. Full stop. Their reasoning reflects an outdated mindset that people will continue to accept a toxic culture of overwork for pennies of the partner's profits. This mentality is far too common and seriously counterproductive to driving positive change in our profession. Hopefully they're transparent about the hours expected in their job postings.
Blake Oliver: [01:13:09] Realistically, it's hard to imagine anyone will willingly take on that kind of workload, regardless of compensation. So there you have it. We overwork auditors, make them work 3000 hours plus per year. And what do you get as the work quality output? You get really low quality audits. It's just natural. It's to be expected. And the Pcob doesn't find these firms enough to make them change their business practices, as we've discussed in many previous episodes. It's a slap on the wrist when you look at the overall revenue, so these firms can continue overworking staff, checking boxes, doing low quality, shoddy audits. They don't get called out by the pcob and the results of their inspections are secret. At least the results of the client names are secret. And the Pcob has explored they've they've floated the idea of naming the clients. So if you get an audit inspected and there's a big deficiency, we would find out. Oh ey. Audited. I don't know who's an audit client. Let's not say names. Right. We don't want to get in trouble. But ey audited. I don't know, big tech company. Yeah. Ey audits earmark and their audit had a part one a deficiency. It was. They should not have issued the opinion. Now investors know that those financials are not supported by an audit opinion or should not have been anyway. And I think that's valuable information for investors to know. And guess what would happen to Aei's engagement with earmark? If that were the case, I think we would probably fire them.
David Leary: [01:14:54] Well, the board would demand it and the shareholders would demand it.
Blake Oliver: [01:14:56] The shareholders would demand it, right. So I think that that seems to be a natural thing.
David Leary: [01:15:03] And I think the firms would get sued because the the stock price, because earnings come out and you might not find out there's a problem with the audit until two years later. Who knows. Right. And I could see shareholders suing that have had bought the stock during that time period. Right. Somebody's going to be held accountable for that.
Blake Oliver: [01:15:21] So Erica Williams floated this idea back in May. And it was covered in the Wall Street Journal. And this idea has been put up as trial balloons for a long time, but nothing has come of it. I think the problem is that there are just too many people in the regulatory state in the SEC and the PCAOB who don't want this to happen because their friends at these big firms would have to deal with it. They'd actually have to change their business model and the revolving door of Big Four into SEC, PCAOB Congress, all that prevents it from happening. But this is the thing that we could do. Just transparency. Give us give us the results of these inspections and reveal the clients. And then tell us what the issue was in the financial statements that what did the auditor not look at so that we can make informed decisions and.
David Leary: [01:16:13] Then based on these numbers. So I'm trying to think I'm the CEO of a fortune 100 company. I hire this audit firm. I found out there's deficiency. But based on the math, the next firm I get is going to have deficiency. I could have three, four years in a row of having a deficiency in every one of my audits.
Blake Oliver: [01:16:30] It's possible. Yeah, but you could go to math.
David Leary: [01:16:33] I'd roll the dice.
Blake Oliver: [01:16:34] You could go to what was the. I already lost it. I moved away from it. But what was the firm that had the lowest efficiency rate? Pwc 18%. So let's say, you know, why does a shoddy audit you go to PwC, or especially if you're like with one of these smaller firms like BDO 86% deficiency rate, maybe you go find another top 100 firm that does better quality audits. Hiding all this stuff doesn't help us as a profession, and I think this goes to ultimately the it contributes to the talent crisis. Because even if young future auditors are not aware of this explicitly, maybe they are now because they listen to the accounting podcast. But if they weren't aware of it, when they go to work at these firms, they figure it out really fast. The smart ones figure out, oh, we aren't actually meant to find any problems. Our job is to get the client through the audit and find as little as possible because that's how we get paid. That's the business model.
David Leary: [01:17:38] So just summarizing this. All right. I'm in high school. I get outreach by the AICPA or my local CPA state society. I'm excited about accounting. I go major in accounting, I become a CPA. I discover two years in everything I've been told is a lie, and that the work I'm doing actually doesn't matter, because I'm not supposed to actually find anything in the audit.
Blake Oliver: [01:17:59] That is the worst possible outcome. Now, I don't say that's everyone, but I have heard personally from people who have been really frustrated because they thought audit was a noble profession. Accounting, we are taught, is a highly ethical, noble profession. And then you go into it, these big firms with high audit deficiency rates. And as soon as you raise a red flag, they're like, nope, put that down. We don't want it. We don't want to see it, hear no evil, see no evil, right. Ignore it. So yeah, you're not going to get high quality people in. And this is the elephant in the room that the profession has ignored because the big four partners who influence accounting, education and influence the state societies and the AICPA don't want to deal with it because their livelihood depends on perpetuating a flawed business model. So until somebody decides to take a stand and sacrifice profits for the long term sustainability of our profession, we are going to have a big problem. And that problem could be huge like in the UK. The big four are under serious fire because of stats like this. 75% of UK audits failed to raise alarm before collapses. A study by the University of Sheffield revealed that 75% of audits on major UK companies that collapsed between 2010 and 2022 failed to issue a prior warning about potential bankruptcy. Now, again, the defenders of the audit profession will say, well, that's not our job. Our job is not to warn about a company collapsing. And I say, really? I think that probably is the number one job of auditors is to, like, see it coming and say something to the investors. And 75% of the time they don't see it coming. Or if they do, they don't say anything.
David Leary: [01:19:51] And a lot of it's obvious stuff like, oh, these bank accounts don't exist. It's really they should be missing these things.
Blake Oliver: [01:19:58] They shouldn't be missing a lot of these things if they just did a little bit of digging. You know, if they acted like investigators and not buddies of management. But you don't make big money getting clients in audit if you're adversarial. That's the problem with the whole business model. It's very clubby. It's friendly. You want to be friends with your clients. You don't want to pick at the flaws that they have in their financials. But otters should be working for investors, not for management and the whole business model has auditors really working for management and not looking out for the investors. And I think it's gotten harder too, as more investors are institutional. It's harder for the auditors to care about the investors. And when the audit profession developed 100 years ago, it was very different. It was like individual investors, very wealthy people hiring the auditors to go act in their interests across the Atlantic Ocean. Yeah. Very different.
David Leary: [01:20:57] I love your your analogy where the restaurants. Right. If the accounting firm has a client that's a restaurant and the accounting firm is also doing the health food inspection, the health inspection of that restaurant, of course, they're not going to fail that restaurant. They want their business on the bookkeeping side. Right. And you're going to have a bunch of restaurants that are getting passing grades because they're paying for the, um, review or the score. That's right.
Blake Oliver: [01:21:24] By the way, we haven't looked at this in a little while, so I want to look and see if BF Borgers is still a licensed CPA in the state of Colorado. You know the guy who faked like, thousands of audits. Let's just let's just take a look and see. Has the Colorado accountancy done anything? Nope. Benjamin Fitzpatrick Borgers remains a licensed CPA with an active status in the great state of Colorado. And there are no pending cases against him. So even though the SEC called him a fraud and he faked a bunch of national news, it was national news. National news. He faked an audit of of Trump's social media company. That's how he got. That's how he got attention. Never, probably never would have been caught if he hadn't done that right. He picked the wrong client. Um, yeah. He's still a CPA. Still can do private company audits. So What are these society leaders doing if they're not getting those people out of our profession? Instead, they're spending all their effort on making it harder for people to enter the profession, making it harder for good people, smart people, to enter the profession. It is totally messed up where their priorities are.
Blake Oliver: [01:22:45] So Colorado Board of Accountancy, do your job. Take this guy's license away, and if it's too hard, then I don't know. Change the laws. Make it easier to kick CPAs out of the profession. David in the livestream says name and shame would really shake up the audit industry. Imagine fees put at risk for future PCAOB deficiency rulings. Anonymous deficiencies aren't doing anything to improve, audit or protect anyone. 100% agree. I think naming and shaming would be a great first step. Of course, the problem is that deficiency rates are so high it would create havoc if the PCAOB started doing this all at once. So maybe maybe they just start like naming a a small percentage right of the of the 100% deficiency of the firms that have like 100% deficiencies. Sometimes you can even figure it out. Right. Because you can see, okay, this firm only does one public company audit. And they had 100% deficiency on the one that was looked at. So then you can go find the firm. It's like doesn't it's not that hard to figure. You can go find the company and figure out which public company that was.
David Leary: [01:23:52] So you can create a little table spreadsheet a little site like you could start naming. We can.
Blake Oliver: [01:23:56] Start naming them.
David Leary: [01:23:57] By, by working backwards and determining who the client.
Blake Oliver: [01:23:59] Is. It's just so it's so depressing like that. And nobody's talking about this in the accounting profession at the leadership level. Like they don't even want to look at it. I don't even know. Maybe they're not aware of it, or maybe they just. You want to fix accounting? This is where two thirds of accountants start their their career. And it's not very good. They're not doing a great job. Even 20% is embarrassing, right? 20% of your audits you shouldn't have issued the opinion on. I mean, I wasn't I wouldn't consider like an 80% an acceptable grade in college. That's like, you know, like c-plus. Are we going for c-plus in this profession?
David Leary: [01:24:45] And then my understanding, this wasn't a thing. This is they should not have issued an opinion, which means there's like a major deficiency. This is not a oh, there's a.
Blake Oliver: [01:24:52] Lot more small deficiencies. We didn't even get to that.
David Leary: [01:24:55] But yeah.
Blake Oliver: [01:24:56] Yeah. David says three consecutive 100% deficiency reports and then start naming and shaming I like that.
David Leary: [01:25:03] Yeah three strikes you're out.
Blake Oliver: [01:25:04] Rule name and shame the firms with the longest history of of deficiencies. Well thank you everyone who joined us for this live stream. If you want to let us know what you think, send us an email The Accounting Podcast at earmarked me. That's the The Accounting Podcast that earmarked me. I personally read and respond to every message that we get, and we will likely read it on the air. You can also join our community earmarked community. You can chat with us and with our fellow listeners, and give us your feedback on the earmark app, where you can earn free CPE for listening to this podcast and many other accounting and tax podcasts, go to earmark Dot app. You can use it in your web browser. You can also go to the App Store and download it for iOS or Android. It's that time of the year we're approaching September, October, November, December. I know a lot of you folks have calendar year deadlines, so grab the earmark app now and start doing an hour or two of CPE every week for listening to podcasts, and you won't have to stress during your Christmas week.
David Leary: [01:26:04] Yes, enjoy your Christmas week. Don't don't stack it all up.
Blake Oliver: [01:26:08] All right. I will see you here next week, David. And as always, a pleasure.