20 Jun How to Reduce Compliance Costs
What drives costs?
What drives the cost of compliance services? The simple answer is time. The amount of time it takes to complete work for a client will fluctuate based on many factors, including the following:
- The complexity and volume of the overall business operations
- How organized and well documented the accounting information is kept
- The number of errors and omissions in the accounting records that require investigation and adjustment
- Preparing the organization’s year-end financial statements and the related note disclosures
- Preparing and filing corporate tax returns, slips, and other remittances and dealing with questions, information requests and audits from the Canada Revenue Agency
- The number of phone calls and meetings and the amount of email correspondence that is either required or desired by the client
After the amount of time is considered, the next critical factor is the person that is performing the tasks. Naturally, tasks performed by administrative or entry level staff accountants costs less than time spent by a manager or principal.
How are we trying to reduce your compliance costs?
Again, another simple answer: reduce the amount of time it takes to complete the compliance work.
CPA firms are always looking for ways to do this and Clearline is no different. For us, the trend in recent years has been automation (computer hardware and software that helps us perform work faster) and better communication tools (technology and software that makes communicating and sharing information easier and quicker). Unfortunately, we are constantly contending against accounting and tax rules that become more complicated each year, so it is in many ways an uphill battle.
In 2021, we launched our new proposal and engagement letter communication tool which makes it more efficient to send our clients proposals and to get engagement letters signed electronically. We also now make extensive use of programs like DocuSign to make it faster and easier to get client signatures on financial statements, various letters, and CRA authorization forms. This saves us all time and time is money.
Because it is not just the amount of time but who is spending the time, Clearline has expanded our team over the past two years to include Client Service Administrators (CSAs). Our CSAs are here to assist with all your general questions and requests. For example, if you are looking for a copy of one of your past financial statements, a personal tax return, or if you received correspondence from the CRA that you need to send to us, you can do this via one of our CSAs. Our CSAs free up our professional staff to concentrate more on your accounting and tax needs, which helps make our services more efficient.
How can you assist in reducing your compliance costs?
There are many ways this can be done, so we will limit this to a few key points.
Hire a competent controller or bookkeeper, or outsource the books
Yes, you can do your own internal accounting to keep your costs low. This may be a necessity when you start your business as you just don’t have the financial means to have internal accounting staff or outsource your bookkeeping or payroll services. However, are you really saving money by doing this yourself over the long run? Probably not. If you are not a trained bookkeeper or accountant, then you are likely not helping reduce your compliance costs at year end. More importantly, you are doing this at the expense of running your business, meeting clients, growing your revenues, building more efficient processes, etc.
Most well-established businesses need at least one full-time bookkeeper to process transactions, issue invoices and collect payments, pay suppliers, and deal with sales taxes, payroll and government remittances, corporate tax installments, etc. If you are unable to find a full-time bookkeeper, or don’t quite have the budget for one, you may wish to reach out to a bookkeeping firm.
The monthly cost of your bookkeeping will depend on the nature of your business, but in general it is lower than a full-time staff member. If your business is complex, such as a manufacturing operation or large construction company, then you will need someone with the expertise to properly account for inventory, work-in-progress and/or large project-based cost accounting. Businesses such as these should consider hiring a designated Chartered Professional Accountant to act as your controller.
Be organized and provide complete information
It is much more efficient for us to prepare year end work if we have complete information when we start the work. The more the information slowly streams in, the less efficient the process will be. We provide a detailed listing of all the information we will need for the engagement—ensure it is all gathered and organized and submitted by the agreed upon start date.
If you are unsure if we will need some information, a good rule to follow is that if in doubt, give us the information. Our professional standards require us to ensure that your organization’s information is kept confidential and is safely maintained in a secure environment. We strive at great lengths, and cost, to ensure this for our clients so there is no reason to withhold anything as it will likely slow the process down.
Adopt best practices
The way that your accounting information is organized can be critical to saving time and money on compliance work. Here are some best practices for organizing your accounting records:
- Each account in your accounting records should have an account description and an account number
- Account numbers should be made in a logical order. Most organizations follow a numbering system which could look like the following:
- Assets (i.e. cash, accounts receivable, inventory, equipment) are accounts starting with a 1
- Liabilities (i.e. accounts payable, accrued liabilities, debt, deferred revenue) are accounts starting with a 2
- Equity (i.e. retained earnings and share capital) are accounts starting with a 3
- Revenue (i.e. sales, sales discounts) are accounts starting with a 4
- Cost of sales (i.e. purchases, shipping costs, direct labour) are accounts starting with a 5
- Operating expenses (i.e. rent, insurance, professional fees) are accounts starting with a 6
- Other income statement items (i.e. interest income, foreign exchange gain/loss) are accounts starting with a 7
- Scan supporting documents and maintain electronic copies of invoices, agreements, statements, etc. This makes sending this information to us much more efficient. Also, we maintain 100% electronic records. Yes, that is correct. We don’t keep your paper or even paper copies of your paper. Anything that you send to us in paper we need to scan, which takes time, costs money—you get the picture.
Reduce the number of adjustments
There are several adjustments that many clients rely on their external accountant to perform for them at year-end. While there is nothing inherently wrong with this, it does lead to more time and costs. Here is a list of common adjustments that we can teach you, or your employees, to perform that could reduce the costs at year end.
- Ensuring the amounts booked to revenue, cost of sales, and expense accounts are booked to the correct accounts and that the description of the account is accurate
- Ensuring all accounts receivable and accounts payable are recorded at year end
- When recording the payment of a loan, or capital lease, recording the correct amount of interest expense and reducing the loan, or capital lease obligation, by the correct principal amount
- Recording capital assets (property, equipment, furniture, computers, etc.) and amortizing (i.e. depreciating) them
- Adjusting your prepaid expense account(s) to the correct number of items, and often the proportion of items, that have been prepaid for the organization’s benefit in the following year(s)
The additional benefit of the above is that it means your records will more closely align to the year-end financial statements and you will have a better idea of your organization’s profitability throughout the year.
Provide us with all key documents
Sometimes a lot of the time incurred in an engagement is because we don’t always know what information to ask for (we don’t know what has transpired throughout the year at your organization). Here is a quick cheat sheet of key documents you should always provide to your external accountant:
- New/revised lease and rental agreements
- New/revised loan and borrowing agreements
- Details on new bank accounts
- Share transaction information
- New/revised insurance contracts
- Any documentation on significant legal matters such as lawsuits
- Invoices for large capital asset purchases (the definition of ‘large’ is always relative to the size of your organization, so ask your external accountant what this means for you)
- Government and other funding agreements
- CRA correspondence (although we can access them on your behalf if you have authorized us to do so with the CRA. If you have not done this you should contact us to find out how)
- Summaries of business expenses paid personally, business use of personal vehicle and home office
Don’t necessarily wait until year end to send us this information. You can send it as you receive it, which means less work for you at year-end.
Switch to a cloud accounting system
There are many benefits, and admittedly some drawbacks, to cloud accounting systems such as QuickBooks Online (QBO) and Xero. However, the critical benefit that we want to outline here is that it is much easier for us to retrieve information if we have access to your cloud accounting system. If we can retrieve the information we need without having to request it from you and wait for your response, we save critical and costly time.
Call us before you close the deal
If you are about to sign a significant lease, loan or other major agreement, you should strongly consider running it by us, and perhaps your lawyer as well. We often see agreements that have punitive clauses in them such as high termination fees or financial covenants that will be difficult, or even impossible, for your business to meet. If we can see things like draft lease and loan agreements before you finalize them, we may be able to assist in pointing out some things that you should request be changed. We hate seeing finalized agreements with harsh, unfair and sometimes downright silly clauses in them, especially when we think these could have been negotiated away.
Pick the right person to call
Obviously when running an organization there are times when you need to speak to an experienced accountant and fellow business leader for their insights and expertise. So, if you are thinking about long-term tax planning or have been slapped with a major audit from the CRA, call your tax Principal (Shane, Bilal, Jeff or Dave). Similarly, if you are currently obtaining a review and now need an audit, call your assurance Principal (Tom or Bridget).
However, if the nature of your question is routine, then it will be more cost effective for you to contact the manager on your account, or as we mentioned earlier, one of our Client Service Administrators. These individuals may be able to respond faster to your questions and, more often than not, if your question pertains to using accounting software or completing a CRA form, these individuals may be better able to answer your questions than the Principal would be!