Process for S Corp/LLC workpapers

So, I've been working (fairly independently) with my partner for 5 tax seasons now. I've never bothered to look at his business workpapers. I was trained 20 years ago, you review the balance sheet and tie out all make that most accounts, making adjusting journal entries to get everything tied out. Then of course you make whatever Federal Tax Journal Entries are necessary to prepare the returns.

Apparently, and I'm shocked by this, he takes the books, and checks for reasonableness. And he'll quickly glance through the P&L detail to make sure there are no auto loan payments in auto expense, etc.

But that's it. He then takes the client trial balance and inputs it into the returns. He makes the assumption the client books as they have come to him are correct. (ties out retained earnings of course).

He then proceeds to bill clients more than I bill. (we are essentially a cost-sharing partnership only).

So, in my mind, I'm thinking this falls somewhere between cheating and malpractice. But maybe I'm wrong. Is my approach of creating a workpaper with each year-end bank and credit card reconciliation, each loan balance, etc an incorrect one?

Interestingly we were each trained in our early years to use the methodology we use.

How detailed are you in tying out/confirming the balance sheet accounts?

Frankly it might drive me crazy to change, but if it's standard protocol to rely on the client books more than I am, I'll figure out a way to change. Would certainly save me a ton of time I don't have...

I handle it the same as you. I also tie into most of the balance sheet accounts. All of the client trial balances I get are prepared by clients that have no clue about bookkeeping, so their books are a mess and have to be cleaned up. There is no way I would sign their tax return based on the numbers they are giving me.

I will say that I have worked behind other practitioners that have obviously done the same as your partner. Will be curious to see what others have to say about this as well.

I check the amounts in the expense accounts and if they are outrageous, I start checking. Client uses QBO. His PnL showed about$35000 income with over $200,000 in receipts. Definitely an EIC/ATC return. Upon reviewing I learned that he and his wife used the business debit card exclusively for personal use. When I got done income was over $100,000. I don't trust most clients.

I check the amounts in the expense accounts and if they are outrageous, I start checking. Client uses QBO. His PnL showed about$35000 income with over $200,000 in receipts. Definitely an EIC/ATC return. Upon reviewing I learned that he and his wife used the business debit card exclusively for personal use. When I got done income was over $100,000. I don't trust most clients.

I would add to that that if they continued that habit, they need find another CPA.

I teach clients about looking at their financials each month. They should know what sales were, cash, A/R, A/P and all expenses should be known. If they don't do that, they are just kidding themselves.

I check the amounts in the expense accounts and if they are outrageous, I start checking. Client uses QBO. His PnL showed about$35000 income with over $200,000 in receipts. Definitely an EIC/ATC return. Upon reviewing I learned that he and his wife used the business debit card exclusively for personal use. When I got done income was over $100,000. I don't trust most clients.

I would add to that that if they continued that habit, they need find another CPA.

I teach clients about looking at their financials each month. They should know what sales were, cash, A/R, A/P and all expenses should be known. If they don't do that, they are just kidding themselves.

I'm not a CPA but I take what I do very seriously and try to follow the examples that members such as yourself set.

I handle it the same as you. I also tie into most of the balance sheet accounts. All of the client trial balances I get are prepared by clients that have no clue about bookkeeping, so their books are a mess and have to be cleaned up. There is no way I would sign their tax return based on the numbers they are giving me.

I will say that I have worked behind other practitioners that have obviously done the same as your partner. Will be curious to see what others have to say about this as well.

I know you're just a 2nd data point, but you don't know how relieved I am to here that. I was just taught that's what we do as though it's part of the tax prep process. And I can't imagine not doing it, let alone that I was the only one following that process. Are there places we can shortcut when we know a client has immaculate books - sure, but for the most part my process is thorough.

And let's be clear, I'm not an accounting nazi. But it's very rare for me to have a client who doesn't need at least some adjustment even in basic accounts.

I know I"m throwing my partner under the bus anonymously, and he's actually very bright and very good with clients, but he's charging a lot for returns that frankly the business owners could do themselves with just minimal training. I think the value we provide is in the adjustment of the books and the analysis that comes from it.

Personally, I make a much stronger delineation between accounting work and tax preparation work. If the client's books need more than the preparation of a journal entry for tax-basis depreciation/amortization/gain-on-sale-of-fixed assets, then it becomes an accounting engagement and is billed as such. Otherwise, I'm in your partner's camp.

When I do accounting work, I'm not hired to do an audit or a review, so I'm certainly not going to waste time on extra procedures that don't change the end result of the engagement. No, I don't keep credit card reconciliations or other penny-ante stuff in the file, but I'll usually keep the big stuff that often needs adjustment like loan balances.

Creating a workpaper file is great if your firm has a delegation system with an internal "quality" review process where a staffer does the work, a senior reviews the workpapers, a manager takes an eagle-eye and/or technical view of the file, and a partner gets paid for all of the time spent on it. If you don't have that, then what's the actual benefit to either you or the client by scanning credit card reconciliation J-4 to the file next to the FUTA year-end payment J-5?

he's charging a lot for returns that frankly the business owners could do themselves with just minimal training. I think the value we provide is in the adjustment of the books and the analysis that comes from it.

The value that we professionals can provide are to help our clients understand their financials and help them grow their business or make it more profitable. If the client doesn't look at the P&L, then no matter how good your adjustments are technically, it's a very low-value activity to the client.

The value we provide in a tax return is that the client doesn't have to worry about preparing the darn thing with all the laws that change each year, and that we are best able to help make elections and plan with them to give them the highest after-tax income.

I handle it the same as you. I also tie into most of the balance sheet accounts. All of the client trial balances I get are prepared by clients that have no clue about bookkeeping, so their books are a mess and have to be cleaned up. There is no way I would sign their tax return based on the numbers they are giving me.

I will say that I have worked behind other practitioners that have obviously done the same as your partner. Will be curious to see what others have to say about this as well.

I know you're just a 2nd data point, but you don't know how relieved I am to here that. I was just taught that's what we do as though it's part of the tax prep process. And I can't imagine not doing it, let alone that I was the only one following that process. Are there places we can shortcut when we know a client has immaculate books - sure, but for the most part my process is thorough.

And let's be clear, I'm not an accounting nazi. But it's very rare for me to have a client who doesn't need at least some adjustment even in basic accounts.

I know I"m throwing my partner under the bus anonymously, and he's actually very bright and very good with clients, but he's charging a lot for returns that frankly the business owners could do themselves with just minimal training. I think the value we provide is in the adjustment of the books and the analysis that comes from it.

With some minor exceptions, ALL of my biz clients I check the bank rec, tie in fixed assets, tie in loans and do a reasonableness on the income statement. It adds maybe an hour or so BUT in all fairness, I do that in the field or they use QB online. I bill separately for that. THEN... I do a tax return based on a solid set of books.

I dont keep copies of bank statements, loan statements etc.. thats in their files BUT I look at it.

On the value side... you may be under charging.

I maybe a touch light on the billing side - I use a full bill rate of $175/hr for the whole package unless I get into something like actually having to enter transactions and reconcile, in which case, especially if the client has a limited budget, I'll bill at my lower $65 bookkeeping rate.

Truth be told, I probably underbill a bit and he probably overbills a bit. But I do okay.

he's charging a lot for returns that frankly the business owners could do themselves with just minimal training. I think the value we provide is in the adjustment of the books and the analysis that comes from it.

The value that we professionals can provide are to help our clients understand their financials and help them grow their business or make it more profitable. If the client doesn't look at the P&L, then no matter how good your adjustments are technically, it's a very low-value activity to the client.

The value we provide in a tax return is that the client doesn't have to worry about preparing the darn thing with all the laws that change each year, and that we are best able to help make elections and plan with them to give them the highest after-tax income.

[/quote]

Agreed, but I'm suggesting when I get into the books, I'm better able to see things I can advise my client on. And not have the situation that just happened this afternoon where a client asked my partner why he didn't adjust some balance sheet items that he records on the income statement (who knows why) that he typically adjusts every year.

Now, tying a bank rec to a bank statement is overkill, fine. In fact, from this moment I'm going to stop taking that extra 5 minutes it takes, but I am going to confirm it is reconciled, and I'm going to see if there are issues with outstanding checks, etc.

I just think it's a more professional look. But I definitely have some room for improvement in providing service value.

To be clear, I gloss over the P&L. I make sure the balance sheet is all tied out. And I make some assumptions - i.e. I don't touch petty cash and the like. But i definitely ensure what they are showing for FICA payable is what they paid in January (90% of the time it's not, and half of that time it's a debit balance...)

I'm just not sure how I could feel good about not doing so?

One more thing. I'm asking the question so I can change my ways if I should, either from a billing or process standpoint. I'm not trying to suggest my way is the best way. Just telling you where I'm coming from.

I maybe a touch light on the billing side - I use a full bill rate of $175/hr for the whole package unless I get into something like actually having to enter transactions and reconcile, in which case, especially if the client has a limited budget, I'll bill at my lower $65 bookkeeping rate.

Truth be told, I probably underbill a bit and he probably overbills a bit. But I do okay.

The I do OK part.... I always use the Big 4 as an example. A junior partner at PWC in my city makes $450K, after 5 years 700K. senior manager makes 180K to 200K. Somewhere in that range between 200 and 400 is what I use as my barometer. Every city is different of course. I know guys who make 80 K and in their minds they do OK. it’s all perspective.

I used to work for one partner who did not review much of our work. That put us under a lot of pressure of making sure everything was right before putting on this desk. He just came in; took a quick look at the returns, sign them and sent them out.

I maybe a touch light on the billing side - I use a full bill rate of $175/hr for the whole package unless I get into something like actually having to enter transactions and reconcile, in which case, especially if the client has a limited budget, I'll bill at my lower $65 bookkeeping rate.

Truth be told, I probably underbill a bit and he probably overbills a bit. But I do okay.

The I do OK part.... I always use the Big 4 as an example. A junior partner at PWC in my city makes $450K, after 5 years 700K. senior manager makes 180K to 200K. Somewhere in that range between 200 and 400 is what I use as my barometer. Every city is different of course. I know guys who make 80 K and in their minds they do OK. it’s all perspective.

Well I'm not in your range yet, but I'm closer than I am to the $80K guys, and I'm not in a metropolitan area.

What's hard is to transition. I've got clients I've serviced for 7 or 8 years, and now I'm gonna suddenly increase their bill by 40%?

But our volume has reached a critical mass where I can definitely raise rates without losing many, but not caring if I do.

I actually appreciate this kind of feedback though. Gives me some hope I may retire some day .

To be clear, I gloss over the P&L. I make sure the balance sheet is all tied out. And I make some assumptions - i.e. I don't touch petty cash and the like. But i definitely ensure what they are showing for FICA payable is what they paid in January (90% of the time it's not, and half of that time it's a debit balance...)

I'm just not sure how I could feel good about not doing so?

In that case, we're actually not that far apart. If I were to see a debit balance in the FICA payable, I would stop and investigate -- the difference is that I wouldn't save the workpaper to the file or make reference to it except as an adjustment on the ATB. And yes, tying the bank rec to a bank statement is overkill, but verifying that it was done and reviewing O/S checks is something that I absolutely do. It sounds that your clients need help with their accounting, though -- do you meet with them mid-year to clean up their books and do tax planning and to train them to use their software better?

On billing: Few of us are in southparkcpa's range I'm in a worse market than you price-wise, but my hourly rate for tax services is higher than your standard because I don't base my rates on hours. Ditch the billable hour and value bill those suckers! You deliver a better product than your partner, although most clients would be unlikely to realize it, so you should at least aspire to bill the same as him! You don't need to correct the past all in one fell swoop, but you can do it over a number of years if you wish, and for new clients you can implement your stolen market pricing immediately.

Obviously you feel that there are changes you need to make, based on your use of the term "critical mass." You either need to invest in more people so you can delegate work, you need to invest in technology to allow you to do the same work faster, or you need to excise low-value work. But that's stuff to think about in a week's time.

I maybe a touch light on the billing side - I use a full bill rate of $175/hr for the whole package unless I get into something like actually having to enter transactions and reconcile, in which case, especially if the client has a limited budget, I'll bill at my lower $65 bookkeeping rate.

Truth be told, I probably underbill a bit and he probably overbills a bit. But I do okay.

The I do OK part.... I always use the Big 4 as an example. A junior partner at PWC in my city makes $450K, after 5 years 700K. senior manager makes 180K to 200K. Somewhere in that range between 200 and 400 is what I use as my barometer. Every city is different of course. I know guys who make 80 K and in their minds they do OK. it’s all perspective.

Well I'm not in your range yet, but I'm closer than I am to the $80K guys, and I'm not in a metropolitan area.

What's hard is to transition. I've got clients I've serviced for 7 or 8 years, and now I'm gonna suddenly increase their bill by 40%?

But our volume has reached a critical mass where I can definitely raise rates without losing many, but not caring if I do.

I actually appreciate this kind of feedback though. Gives me some hope I may retire some day .

I apologize, I wasn't pointing at any of us individually. I simply am passionate about business and find our business is full of practitioners who aren't that qualified and thus drive prices down as customers can't tell the difference. I feel that any business, us, our clients etc.. if you use the "Economic Profit" model, thats a good guide. Meaning you must make X because you could get a job that paid X. A college kid in a big city 21 years old who works for a Big 4 earns 80K. I look at a ton of practitioners in my city working til 7pm on Saturday, 8pm other nights because they charge $250 to $400.

I have former students ( I taught 2 years at a local college when I moved to NC before opening my shop) who are partners in big firms earning I imagine 500K. I dont think about it. But we all have a level where we chose to be.

We need ask ourselves why aren't we attracting the $600-$800 returns? Deep down we know the answer.

Last example.. I promise. When you do the tax return for a civil servant who pushes you on your fee, remember, that person will have health insurance for life, a pension for life and retire at 55 to 62. We need to put $2 million in the bank to do that. That requires a contribution of no less than $30K every year. So... I treat my pension contribution the same as my rent.

Some civil servants are retiring at 50!

Some civil servants are retiring at 50!

Trust me I know....

Some civil servants are retiring at 50!

Trust me I know....[/quote

And they have a nerve to cry about being on a fixed income can I wait until the first of the month.