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 International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.
The
- ISA 620, Using the Work of an Auditor’s Expert;
- ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
- ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
- ISRS 4400 (Revised), Agreed-upon Procedures Engagements.
The IAASB is asking for comments via a digital response template that can be found on the
In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.
President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an
The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.
Trump has
Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.
Food prices could rise by 2.6% in the short run due to tariffs, according to an
The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.
Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist
Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.
“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.
One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.
“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.
Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.
“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.
However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.
“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.
As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.
“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.
While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.
“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”
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