Accounting Office Management & Administration Report
August 2005

Who is accountable at your firm? "Not I," tends to be the common response to this question—and most believe that others should be accountable, noted William Reeb, Winters and Reeb PLLC (Austin, Tex.), in his keynote address at the AICPA Practitioners Symposium in Orlando, "Accountability: Are You Willing to Pay the Price?"

The tremendous interest in accountability is actually a very serious topic—and it is an area where firms not only can increase responsibility among staff and partners alike, but can offer the opportunity to make structural changes in the firm that can enhance productivity and profitability, Reeb said.

Surprise: Accountability may involve less, not more, partner involvement. Despite the fact that many partners fear any sort of letting go, this may be central to creating opportunity for staff—and for training them early in accountability for their actions.

"You’ve got to give people the chance to make mistakes," Reeb said. "It’s the way to get performance to improve. That’s how we got where we are." He warned partners and other firm leaders to beware of the underlying philosophy of "all of our people are stupid but me." It not only prevents your firm from improving and growing, but keeps your staff from growing and developing. This narrow way of thinking can be responsible for killing your firm’s succession possibilities in future, he warned.

"We must allow our people to grow. If your people aren’t making mistakes, they’re not growing—which means your firm won’t be able to grow." In fact, he believes that owners and firm administrators should "thank your people for making mistakes. It means they are taking risks and trying to grow. You can cause an amazing cultural change if you do this."

If your firm’s partners complain that no one is willing to step up and take a leadership role, Reeb said the reason is clear: "You won’t step down!" Providing a learning and decision-making platform will help staff to begin to make decisions now. "Let them start making mistakes now, when you can exert some damage control. Let them learn proportionate to their positions," he said, since this will result in "smaller, cheaper errors"—and a smarter, more prepared staff.

Rather than pursuing a "super star" model, where a few stars get most of the work and attention, Reeb favors instead an environment where the opportunities to grow are offered to everyone. Rewards are based upon the ability of staff to rise above the basic level of performance, giving them incentives to challenge themselves—and to work harder and better for your firm.

"Balancing the firm’s agenda with that of each person is key," he said. "Our staff has a different agenda—not good or bad, just different. The greater the disconnect between the staff agenda and firm strategy, the less success you’ll have."

(The factors in accountability, discussed in greater detail below, are listed in the sidebar, "Seven Elements for a Quality System of Accountability.")

Managing musts. Reeb decried the lack of value placed upon managing staff in CPA firms, noting that managers’ duties are to spend time both leading and managing the firm.

"There’s a difference between these," he noted, observing that "partners are not likely to be trained in management." In particular, there is a need for partners and other firm leaders to spend time coaching and mentoring. While this is a popular MAP topic at firms now, Reeb cautioned that "everyone needs to be mentored the same way, and you have to learn how to do it better. Rules and responsibilities are needed in mentoring—you must deliver a consistent message. We need to do these things right. Just because you are in a position of power doesn’t mean you innately know how to do this."

Managers get their work done through others, he noted. "If you make staff better, stronger, faster—you are managing. If you make you better, stronger, faster, you max out. Don’t default to ‘I can do it better.’ Managers create capacity."

Reeb differentiated between two types of managers:

• Technical managers are technically competent, produce quality work, are "good with clients but terrible with staff," and believe in the "super star" model.
• Supervising managers oversee and develop staff, get work done through others, and focus on the production by staff.

"Don’t put part-time managers into supervisory posts," Reeb said. "They become bottlenecks. There is no excess capacity in them, so others always have to step in, drop their work, get up to speed, and fill the void. Use these people as technical managers so they can get excess work done."

The two types of managers may work in two types of firm structures:

• Direct reports. Staff reports to a manager, who reports to a partner. Managers are responsible for keeping staff busy.
• Staff pool. In this most common model, staff can be given work by anyone, and there is no emphasis on developing staff. The best staff are constantly busy, while others are underutilized. Pools work far better if a supervisory manager is in charge of a schedule, with all use of staff cleared centrally. This avoids a single powerful partner from monopolizing staff time.

Goal setting. Without goals, there can’t be accountability. Goal setting should be part of your firm’s overall performance-management approach. Reeb cautions that you must take care to not set the bar too high. "Don’t let that army slogan, ‘Be all you can be’ be your performance evaluation strategy!" Instead, he suggests a standardized base goal, with separate rewards for everything that is achieved above the base.

An essential part of goal setting involves updating your firm’s workflow process, so that there can be achievable goals at each level. Too many CPA firms operate with an upside-down pyramid workflow process, with the partners at the "top" and staff at the bottom. Problems resulting from this structure include:

• Partners doing non-partner work. Partners only pass down excess work when they lack the time. Managers do the same.
• Undertrained staff.
• Partner conflict.
• Little financial leverage. If capacity is lost at the top because partners are doing work that staff could be handling, no one markets or talks to clients. This stymies growth.
• Disparity of roles. Most firms with less than $8 million in revenue are what Reeb calls individual based—owners share the office and other overhead but don’t function as a true firm.
• "Hostage holding." "Big book" of business partners tend to rule.
• Underutilized resources.
• Underserved clients.

How to reverse this situation. Working to reverse the upside-down pyramid takes time, but the rewards can be great. Steps include:

• Manage the workload. Partners must do partner-level work, which is client account management, high-level advising, implementing strategy, and developing people. "Don’t let work consume your role, which is working with clients and developing those relationships." Managers need to do the work that is appropriate to their level: supervising the work, supervising and training staff, reviewing work, doing more technical detail work, and talking with clients. "Staff need to become the workhorse," Reeb emphasized.
  
  Owners need to understand the difference between delegating and "dumping" work. Delegation involves developing staff so they are ready to take on new responsibilities, but "dumping" is simply that—giving work to others who lack any related training.
   
• Adjust revenues and profits. With realization going up and write downs decreasing, CPA firms should be prepared to make some changes. "If you are billing at 97% or 98%, raise your fees! So you’ll work hard to raise realization, then repeat. We underprice and underbill all the time." How to change this:
  
  — Assign interim roles to help your firm develop a better organizational structure. Most firms have a "boutique" structure, as discussed above. Changing that takes time.
  
  — Fire clients—it is the best way to "add staff." How? "Bad work" wastes staff time, "so get rid of it. Staff your firm where you can keep good work."
  
  — Staff the firm for low-season or average season, then "back fill" with part-timers.
  
  — Avoid discounting fees, especially to fill slow periods.

The compensation connection. How you pay your people is an important part of revising your firm’s work structure and reward system.

To begin, change how your firm thinks about longevity. "Judge people not by how long they stay around, but by what they do." Moving the focus to "lead" measures, rather than focusing on "lag" or historic measures, will encourage your staff to try to do more. An example of a lead measure: Get staff to increase business by asking them how many clients they saw during this quarter. A lag measure would give a referral fee for business brought in.

In addition, Reeb advocates using a pay-for-performance system, noting that "lockstep raises doom you to failure. People get fired once they get too many raises because they get too expensive."

Problems with typical CPA firm compensation systems include:

• The compensation is not aligned with the current strategic plan.
• They reward past work rather than what’s being done now.
• Focus is on billable hours rather than total income.
• They emphasize seeking only new clients, rather than growing existing clients.
• Firms have separate retirement, ownership, and compensation formulas.

Instead, Reeb believes that firms should begin to institute a pay-for-performance system, including these factors:

• Pay for objective performance.
• Pay managers to manage and for staff performance.
• Understand the difference between budgets (ranges), targets (base-line expectations), and accelerators (above and beyond)—and plan accordingly. For instance, don’t set unreasonable targets. Consider administrative duties, the type of work, and type of clients, among other factors.

"Consider that if targets are too high, you are in the ‘be all you can be’ level of accountability," he said. This consistently fails to motivate staff to take the actions you desire.

And compensation systems should be tied to strategy. "Without this, you can’t get people to spend time with clients if the money is about billables."

Getting started on a new compensation system. Reeb suggests that firms begin with the billing worksheet. Start with the same base salary for everyone doing a similar job or with a similar revenue target. This will be adjusted over time.

The next step is to establish a performance pool, from which you will reward staff who have achieved more than your base-line requirements. The pool must become large enough so that its rewards matter to staff. You can give a cost-of-living raise, but the real raises get added to the performance pool. Once the pool gets to a certain point, you can start to raise base salaries.

The system is one that will require adjustments and customization for individual staff so that fair targets can be set, Reeb noted.

The goal is an ROI on salary that includes production and performance, rather than the traditional measure of charge hours.

For a better compensation and incentive pay system, Reeb recommends:

• Building a model around the revenue budget, with targets based upon revenue rather than hours.
• Informing targets that the firm will do "marginal" work at times. Realization and utilization must be considered.
• Knowing that direct report accountability versus pools works best.
• Focusing on paying for lead indicator performance to change pay behaviors.
• Understanding that compensation plans must be flexible, and may need to be changed as you incorporate a new system. "Don’t get so caught up in this as being a rule-based system."
• Considering the behaviors you want to reward, and building them into your model.
• Publishing results regularly. Let people know how they are performing. This is a great motivation tool.

"This is an evolution. Staff will complain about ‘bad work’ because it is not a big enough money maker—and they’re right. Get rid of the bad work. Staff will challenge you—and that’s a good thing."

Finally, firm leaders need to understand that these are not easy changes—and they take time. These systems require managing partners and other firm leaders to spend a lot of time thinking about and developing a compensation model and system, Reeb explained. "Are you willing to devote the time to do this? It includes identifying what is expected of employees and coming up with compensation targets that are fair and effective. You also need to deal with the politics of making this kind of change—and be willing to spend time on the necessary staff coaching."