You And Your Accountant

How to evaluate the relationship between you and your company's most important adviser.

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The public accountant is a powerful force. The quality of his advice directly affects a company's taxes, its balance sheets, and even its management decisions. Yet many small business executives find it difficult to work with accountants since their own backgrounds are more likely to be in sales, engineering, or research. More than two out of three (69%) of the chief executives surveyed by INC., for example, have no finance or accounting background.

As a result, many small businesses find public accountants somewhat intimidating, regarding them as outsiders who serve as buffers against an even more intimidating Internal Revenue Service. At best, the public accountant is considered an impartial paper-pusher who comes in periodically to wrestle with the company's books at a borrowed desk.

But an increasing number of small businesses view their outside accountants in a different role. Asked to identify their No. 1 advisers, for example, more than half of the respondents to INC.'s study cited their public accountants. Many of these companies have established a working relationship in which the accountant is an indispensable sounding board and business counselor. In short, their accountants not only review the books and compute taxes, but also provide crucial advice on such matters as cash flow, credit, cost control, and systems management.

To help small companies evaluate and improve their rapport with accounting professional, INC. surveyed more than 5,000 small business executives and over 2,000 public accountants (see box). The results of the study are summarized in the following eight-point checklist and accompanying tables.

1. How big should your own staff be? Most small companies have limited in-house accounting staffs. The majority of those with sales of less than $1 million employ only one person in a bookkeeping or accounting function. Those with sales of up to $5 million generally employ only two or three in accounting, and the number jumps to five or six as company size grows toward $25 million. Only in companies with sales of more than $25 million is the in-house accounting staff likely to exceed half a dozen employees. Furthermore, in two out of three companies surveyed by INC., the chief executive also doubles as the chief financial officer. Only among companies with sales of more than $5 million does the majority have full-time chief financial officers. In these cases, the top financial manager is generally a vice-president, treasurer, or controller heading an accounting staff.

Whether it consists of one person or half a dozen people, your internal staff is a vital link between your business and its outside accountants. While any decision about your accounting firm is up to top management, it is one that should not be made without consulting your staff, which may have different insights into the technical competence and personal chemistry necessary for a productive relationship. Does your staff feel free to call the company accountant with questions? Do they receive a ready response, and does the advice work? How often has your outside accountant shown your staff how to streamline its paperwork? Does the accountant take the time to make sure your staff understands the finer points in a company statement? Answers to such questions represent the first step in evaluating your outside accounting firm.

2. What should your public accountant be telling you? Some 51% of the respondents to INC.'s survey regard their public accountants as their chief outside advisers (followed by their attorneys and bankers). Preparation of tax returns and financial statements may be your accountant's primary responsibility, but it should not be his only duty. The documents he prepares should satisfy Uncle Sam's requirements, but they should also be treated as financial tools that meet management's needs.

Besides combing your books, your accountant should monitor your business and suggest alternatives for controlling costs and improving profits. In short, he should serve not as a part-time manager but as a full-time adviser to management.

The recent changes in the tax law provide a good test of your accountant's technical competence and ability to keep you advised. Chances are your accountant has mentioned the Economic Recovery Tax Act of 1981, but has he fully explained its impact on your business? The sweeping revisions in the tax law may or may not affect your 1981 return, but they're guaranteed to have an impact on your business taxes this year and for at least six years to come. While the new rules governing depreciation schedules and investment credits may not be important to you, your accountant should be filling you in on other revisions ranging from the modest cuts in corporate tax rates to the new rules governing estate and gift taxes.

Understandably, the impact of the 1981 tax law is currently the chief topic of discussion between small business executives and their public accountants. Close to half (49%) of the respondents to INC.'s survey cited the tax act as a matter on which they have recently received accounting advice. Other key concerns include state and local tax laws, reporting rules, employee retirement programs, estate planning, and inventory valuation.

Top management apparently keeps business and personal matters separate, however. Less than 1% of the respondents noted that they rely on the company's public accountant for personal needs.

3. How often should you talk with your accountant? The answer: whenever the need arises. And for most small businesses that's no more than once a month. While one out of three small companies is in touch with its accounting firm on a weekly basis, most of them talk with their public accountants about every four to six weeks. Among respondents to the INC. survey, 57% report 30 days or more between contacts, with the average frequency running 39 days.

Although lack of communication is a source of dissatisfaction among small businesses, less than 1% of the survey participants cited availability of the accountant as a problem. The more important question, therefore, is how often your accountant should talk with you. If the communication is always a one-way street, it's time to evaluate the entire relationship.

4. What type of accounting firm do you need? The accounting profession suffers from what can only be described as "Big-Eight syndrome," a disorder that suggests bigger means better. Fortunately, it's not necessarily contagious. While the prestige of a multinational public accountant may impress your banker and attorney, the horsepower and expense that such services represent may be impossible to justify. Size is important only to the extent that it represents sufficient staff to meet your needs.

If your sales have topped $25 million, if your accounting needs are highly complex, or if you're moving toward public ownership, a national or Big-Eight accounting firm may be the best bet. Otherwise, smaller companies generally stick with smaller accounting firms.

The majority (56%) of the respondents to INC.'s study deal with sole practitioners or local accountants. Another 26% rely on regional accounting firms. Only 18% indicate use of a national or Big-Eight organization. Not surprisingly, the last group of respondents includes 80% of the companies with sales of $25 million or more. But it also represents a sprinkling of companies with sales of less than $5 million and even a few whose sales are under $1 million. Such figures testify to the inroads being made by accounting's giants.

All of the Big Eight now boast separate small business staffs. Overall, half of the national firms responding indicated that they offer discrete small business advisory services. Among the national accountants, the average small business client is a company with sales of $6 million, while among the Big Eight, the smaller client is more typically a company with sales of about $14 million.

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