Accounting
Rethinking the billable hour, once and for all
Early in my career, I was doing well at a midsize accounting firm. But one thing struck me as absurd. There was constant pressure on my team and me to hit a certain number of billable hours — a lot of billable hours! In effect, the longer it took us to get our work done, the more we were rewarded. And if we got an assignment done too quickly, we were reprimanded and usually given more work to fill up our hourly billing quota.
Many of you are nodding your head in agreement. But this billable-hour mindset discouraged my team from adopting new technology and processes that would make us more efficient. So, we ended up doing things the same way month after month, quarter after quarter, and as you can imagine, burnout eventually prevailed.
Innovation is inherently disruptive. Implementing new technologies or new systems takes longer at first. Eventually, you get faster—a lot faster—but not right away. In other words, if you don’t give innovation the space it needs to develop, you’ll never realize efficiency gains. That was the other problem with billable-hour quotas. There wasn’t enough slack in our schedules to try new things in a meaningful way.
I got so frustrated by my firm’s mindset that I eventually left accounting for a tech company where things moved at lightning speed. The primary goal was to get stuff done. Nobody cared how long it took. Without the constraints of time tracking, we achieved a lot.
The other problem with accounting firms is that too many think “burning the candle at both ends” is a badge of honor, not a mental (and physical) health risk. It rewards the lower performers at the firm who take longer to do the same amount of work that the high performers do quickly. Encouraging your team to rack up billable hours isn’t fair to clients either. You really shouldn’t be charging them the same hourly rate when you’re exhausted at the end of the day than you charge for work done in the morning when you’re at peak efficiency.
Under an hourly model, partners have a similar challenge. Much of their compensation is based on how many billable hours their teams rack up. They’re measured on how much top-line revenue they bring in, not on how much profit they generate. At the accounting firm, my team took on a lot of work that wasn’t particularly profitable, and much of our effort was wasted. At my former firm, I asked my boss if we could switch my team’s performance compensation from hours to “revenue under management.” The idea was to allocate income to teams of three to four people who were responsible for a book of business. I was very proud of that plan and I presented it to my higher-ups. Alas, it went nowhere.
My boss told me the firm was so deeply entrenched in the hourly billing system that it would be too hard to pivot. He didn’t even want to test revenue under management as a pilot program to see if my idea had potential. Every service line at the firm had to report its hours to a department head whose compensation was directly tied to their team’s billable hours.
Fortunately, my friends at Tri-Merit Specialty Tax Services conduct an annual CPA Career Satisfaction Survey to address some of these legacy issues. Their data confirmed that less than half (48%) of accountants working at firms still charging by the hour were highly satisfied in their careers compared to 55% who worked at firms using value billing and 75% working at firms using subscription pricing. The data tells us not only are clients more satisfied with a firm’s work when they’re billed based on outcome rather than hours, but so are the staff members who do the work.
Real-world examples
Let’s say a client asks you a question via email. In the past, you could charge them for the time it took to read their question thoroughly (15 minutes), to do the research (30 minutes), and to write them an email response or explanation (15 more minutes). That was roughly an hour of billable time. But now, in your email program, you can ask AI to analyze the client’s question, and it finds the answer in a matter of seconds by scouring the Tax Code at lightning speed. All you had to do was review the summary that AI came up with to make sure it was correct. Then you send it back to the client. Are you going to bill the client for just 15 minutes? Of course not.
The same goes for writing a tax memo. Doing an advanced analysis might take dozens of hours and you could bill thousands of dollars. But with AI, the initial research time could be virtually eliminated. So, are you not going to bill for that? That’s where fixed fees, value pricing and subscriptions come in. It’s all about delivering positive outcomes to clients and it shouldn’t matter to your client (or your partners) how long it took you to deliver that positive outcome.
My new book,
Accountants making the same mistakes as aspiring musicians
As some of you know, I was a classical musician before becoming an accountant. When I first entered accounting, I was astounded by my colleagues’ preoccupation with racking up billable hours. I wondered how the quality of their work could be maintained when they were eight or nine hours into an 11-hour day. I discovered that many of them were not actually working those long hours. Instead, several told me they kept a “secret timesheet.” All of their clients were listed on the sheet, with the total number of firmwide billable hours budgeted for that client and each accountant’s share of those hours. Every day, they’d fill in the number of billable hours they put in for that client. At the end of the week, if they were over the budgeted time, they adjusted the numbers downward for that client and allocated those hours to other clients when they submitted their timesheets to management. This practice remains more widespread than you would think. Staff accountants got so tired of being punished for going over their time budget and for having to explain themselves that they just fudged the numbers. So, the billable hours aren’t real and have no impact on a successful or unsuccessful client outcome.
It’s no secret that our profession is facing a staffing crisis. Millennials and Gen Z often prioritize the value of work-life balance and flexibility over money. They want to be rewarded for doing great work, not for racking up 60-plus billable hours every week just to climb the corporate ladder.
As artificial intelligence streamlines many accounting tasks, clinging to hourly billing will become increasingly unsustainable. The future belongs to firms that adopt fixed-fee, value-based pricing and that align their staff compensation accordingly.
Making the transition to a subscription-based model is key to building a sustainable, modern firm. But this transition will fail if performance management remains tied to billable hours. Firms must align their team compensation with how they bill clients.
The good news is that a flexible, remote-friendly staffing model with a “book of business” compensation structure can be a powerful tool for attracting and retaining diverse talent. It can be especially attractive to working parents and to others who need greater flexibility in their workday. By valuing staff contributions beyond billable hours, firms can tap into a deep pool of skilled professionals that traditional firms often overlook or push away.
So, there you have it. You can go back to filling out timesheets, or you can build the practice of your dreams. The choice is yours. If you have another billing model that’s working for you,
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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