Something seems out of whack when you can buy a new push bike for your child for the same price it costs an accountant to leave ‘please call me back’ messages on your voicemail. Push bike versus empty voicemail messages? Hmmm…which offers more value?
Something seems out of whack when an accountant can bill indiscriminately – charging thousands of dollars for phone calls, emails, random meetings, faxing and photocopying – tallying the bill, sometimes amounting to tens of thousands of dollars, at the end of the financial year. Here you go, they say. Pay it. Oh, and here’s your tax bill too.
Over the years the accounting profession has been largely shielded from criticism, while stockbrokers and financial planners have been actively scrutinised. Accountants have benefited from their image as conservative bean counters that can be trusted; the brown cardigan brigade and their fees have not been put under the microscope.
But don’t be fooled – some accountants can put a severe dent in your finances if you don’t stay on top of their billing activities. This is particularly relevant for time-poor small businesspeople.
Accountants can charge in two ways; they can either charge a fixed price for certain tasks, or charge by the hour at a rate that depends on who in the firm actually does the work (the junior will charge less than a senior partner, for example).
The trouble with the hourly rate is that the client takes all the risk. A yearly tax return and advice could be completed in 15 hours, or 15,000 hours, who’s to say? A big-billing accounting firm can easily justify its hours of ‘tax advice’; meetings here, phone calls there, important research over here.
Many accountants complete daily time sheets to allocate their time during the day, and around 80% of the day is to be charged to clients. Think of it this way – would you give any other service provider an open ticket to bill you, whether that’s a gardener, mechanic or painter? Of course not, you’d agree on a quote beforehand.
This system of billing differs from many other occupations, which bill on output – such as journalists who bill per article, not on the hours spent researching and writing. Or an electrician who bills on the job done.
If you enter into an agreement with an accountant that enables them to charge you indiscriminately – you’re under their billing regime, which can be a scary place to be (particularly when “them” can include anyone at the accounting firm). The accounting firm can leave messages on your phone and charge your account for their effort; they can write emails to whoever about whatever and charge you for it. They can even have meetings with new staff you’ll never know to update them about your account. For the client, it can feel like the accountant has directly accessed their bank account – and the accountant (with the need to bill out 80% of their day) is essentially incentivised to keep the bills rolling.
What’s the lesson here?
Savvy investors should treat all service providers with a degree of suspicion and that includes your accountant. At the beginning of the relationship the accountant will provide a fee schedule and engagement letter. Analyse it carefully. Whether or not you have 100% trust in your accountant, you probably should not agree to an open-slather billing arrangement.
For example, here is an example of an engagement letter that gives the accountant the power to bill at will during the course of the year:
“…Our fees will be charged as work progresses and will be based on the time required by the individuals assigned to complete it, plus out of pocket expenses…please note that our rates are subject to change from time to time.”
It’s much wiser to agree on exactly what the accountant is doing for you – the exact job required – and how much this will cost. An open-slather billing arrangement does not provide the right incentive for the accountant to keep costs as low as possible.
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