The Improv Is No Joke Podcast

Welcome to the Improv Is No Joke podcast hosted by Peter Margaritis, AKA The Accidental Accountant and author of the book 'Improve Is No Joke, Using Improvization to Create Positive Results in Leadership and Life'. This podcast series is also available on iTunes, Google Play and Stitcher.

FASB is the villain

After I heard this from an audience member for the third time, I realized I was perhaps on to something. This third time came when I was presenting a keynote at the University of Nebraska in Omaha, hardly a hotbed of radical CPAs. 

With the flood of complex changes to GAAP foisted upon us in recent years, it’s no wonder that accountants – and our clients – see FASB as a villain. Not only is FASB considered the enemy, but I recently learned that GAAP is the name of an actual demon!

The guidance from FASB is getting more and more complex. In 2018, the entire codification was over 10,000 pages, in five volumes that were more than a foot high. This complexity translates to full employment for CPAs and auditors. But for business owners and other stakeholders, this is incomprehensible and of minimal value.

Following GAAP and getting an audit are what business owners have to do, not what they want to spend money on. After all, what value is an audit report that’s dated three months (or more) after the end of the year?

GAAP is out of touch with today’s economy

The basic format of a set of financials hasn’t changed much in the last 100 years, as Baruch Lev and Feng Gu point out in their book, The End of Accounting. In that book, they put the 1902 financials for US Steel side by side with the 2012 versions. Except for the numbers, the format and the categories are exactly the same. 

What’s changed in the last 100 years is our economy. Back in 1902, businesses were far more reliant on heavy equipment and machinery. In today’s information age, customer lists, patents and intellectual property are more valuable. 

As Lev and Gu point out, the most important things for investors and analysts today aren’t even on the balance sheets. You won’t find contracts, proprietary know-how, and employee knowledge, except as an afterthought in the notes. In our current knowledge economy, the most important asset is the combined skills, proprietary processes and knowledge of employees. Yet the costs for developing “the most important asset of our company – our people” are expensed.

Another big change is the rise of the subscription economy, as Tien Tzuo describes in his book Subscribed. Today, besides all the SaaS applications we have on our smartphones, you can subscribe to almost anything under the sun. Toilet paper, vitamins, dog food, clothes – and even cars! Hertz and Porsche both have subscription offerings that let you swap out cars for a monthly fee. 

But as Tien Tzuo points outnowhere in GAAP-basis financials will you find any of the numbers that are important to a SaaS company. No annual recurring revenue, no customer churn rate, not even the number of subscribers. 

When GAAP doesn’t make sense

Now according to the FASB’s own website, their mission is “to provide useful information to investors and other uses of financial reports.” What a noble goal. But how do you square that with the contradictory results that the head of a SaaS company shared with me when they implemented ASC 606?

Previously, revenue for the implementation phase of a contract was recognized upfront, while the periodic revenue was recognized over time. But under ASC 606, that implementation revenue is recognized over the expected life of a contract. Not a problem if your customers stick around for the entire contract period. But now, losing a customer – which is operationally bad – results in immediate recognition of the remainder of the implementation revenue – which pumps up revenue. 

So, if you give your customers such lousy service that your churn rate goes through the roof, your financials will still look great because you’re pulling all that deferred revenue to the top line. How does that make sense? 

This complexity and irrelevance have led to an increased use of non-GAAP metrics, which are perhaps intended to give investors more realistic information, but in reality, can be manipulated to conceal less than perfect performance. In 2017, 97% of companies reported non-GAAP financials. This likely contributed to the rapid downfall of WeWork – just WTH is “community-adjusted EBITDA??”

The black box that is GAAP

Of interest to leaders of CPA firms, this complexity leads to a value gap between what we do and the value we bring to our clients. Our work has become a black box that they can’t see inside. How many of us have become the reluctant biller, embarrassed to charge a client for complex work that largely remains invisible to our clients? 

If we don’t have the ability to explain the complexity behind the numbers, then our clients indignantly ask us “how hard can it be to put numbers in boxes?” Translating what we do into normal English isn’t generally in the CPA’s toolbelt.

Slay the FASB villain by becoming data storytellers 

FASB and GAAP are not likely to change much in the near future, so our role must be to translate those rules into English. But we can’t stop at explaining FASB rules. GAAP-basis financials are backward-looking. They don’t contain the insights they need to grow their businesses. 

We need to evolve to become data storytellers. As data storytellers, we can guide our clients to slay the FASB villain and help them to be the heroes of their companies. Stories help us connect what’s in their numbers to what’s in their hearts. 

Business owners and entrepreneurs don’t think the way we do as accountants. We have insights into company performance that we’re not sharing. But when we share those insights in story form, we shine a light on their path forward.  

AI and technology remove the human error and the manual effort so we can spend our time on the higher-level work that computers can’t do. With technology tools as our allies, we can 

uncover the hidden treasures in our clients’ numbers. We can show them the real trends so they can make decisions based on data, not just the gut-level instincts they have relied on in the past.

Our superpower is knowledge of accounting. We can help our clients defeat the villain of FASB by using our superpower for good in the world.  

Published in Accounting Today, January 15, 2020

Communication Matters for Accountants

Blog 1 PhotoAs accountants, we are in the business of helping people. This begins with the function of our jobs. Clearly, if we are effective in the functional aspects of our jobs, it is helpful to our company and clients. For our day-to-day tasks, it takes a serious analytical brain to be good at what we do. However, if you want to take your career to the next level and truly help your clients both internal and external, then it is going to take a healthy dose of creative brain.

Using Both Hemispheres

Our brains are divided into two hemispheres and both are necessary in communicating effectively. Each side has a distinct job to do and people tend to use one side more than the other. Traditionally, people who enjoy working with numbers, problem solving, and technical aspects of their job use the left side of the brain. Those who are generally good at music, art, and even teamwork, use the right side of the brain. Those creative and intuitive juices flow from the right and make spontaneity and feeling the highlight of life. While it can take effort to cultivate certain aspects that don’t come naturally to you, an effective communicator and leader taps into the strengths of both sides of their brain.

Improvisational Skills Provide the Bridge for Better Communication

The good news is that the principles of improvisation provide a framework to help cultivate those communication and creative skills. Learning to implement aspects of respect, trust, support, listening, focus and adaptability allows us to take the first step in becoming effective communicators. When people in the accounting profession can take these principles and apply them in the way they relate to their clients or even within the workplace, they become leaders.

Effective communication is what sets the stage for better leadership. People look to the accounting profession for leadership in the area of finances. You don’t have to be funny to apply the principles of improv, but using them to communicate effectively will set you apart. Ultimately, presenting information in a way that makes sense to your customers, whether they are left brained or right brained, will enable you to help them further and advance your career.

Are you ready to form better relationships and create greater positive results in your business?

Breaking News

steps-to-making-progress-onlineThe new revenue recognition standard has been issued by FASB.  This model is a principles-based approach which will require more judgment to determine the amount of revenue to recognize and when to recognize.

Earlier this year I wrote an article, How The New 5-Step Revenue Recognition Model Impacts Your Organization, outlining each step businesses will use to determine the correct revenue recognition method.

For publicly held entities, the standard is effective on or after 12/15/16 and privately held one year later.

For more addtional information about the standard, read this article from the Journal of Accountancy.

To help your staff better understand the impact of these new standards I’ve developed a course What It Means to You and Your Company.

 

Breaking News!

steps-to-making-progress-onlineThe new revenue recognition standard has been issued by FASB.  This model is a principles-based approach which will require more judgment to determine the amount of revenue to recognize and when to recognize.

Earlier this year I wrote an article, How The New 5-Step Revenue Recognition Model Impacts Your Organization, outlining each step businesses will use to determine the correct revenue recognition method.

For publicly held entities, the standard is effective on or after 12/15/16 and privately held one year later. For more addtional information read this article from the Journal of Accountancy.

 

Agency In Crisis

imagesThe IRS has been struggling for years to keep up with their workload. Because of budget cuts some say the IRS is in crisis. With an 87% drop in funding, the IRS is not able to answers about 40% of the phones received, cannot answer written correspondence within its own 45 day deadline and is making refund errors at an alarming rate. A recent Boston Globe article is both alarming and illuminating.

What is not good news for taxpayers may be important news for your firm. Differentiating the level of service you give clients is a big marketing opportunity for tax preparers and firms of all sizes.

There were 32 million returns submitted in 2011 by preparers who are regulated in their own field, such as accountants and tax lawyers. But there were 42 million returns in 2011 that were submitted to the IRS by preparers who are not formally licensed and regulated, according to the IRS. That’s right…more returns completed by “preparers” who had no formal training.

“Right now anybody can say they are a preparer,” John Koskinen, the IRS commissioner, said in an interview. “There are a lot of people hanging out a shingle and you can do it without any qualifications at all.”

Under federal law, a person can call him or herself a tax preparer as long as an identification number is obtained from the IRS. Getting such a number is easy. The main requirements are that an applicant pay the $64.25 fee, provide personal information and a recent tax return, and give “explanations for felony convictions (if any),” according to the IRS website.

Professional, trained tax-preparers can use this information to help clients understand why there may be a disparity in fees. The level of service and expertise you provide are not available from ill-trained tax preparers or even the IRS.