Quality Management: The Secret to a Scalable Accounting Practice

Why do so many accounting firms fail to grow effectively? One common reason is that owners struggle to maintain the high quality their clients expect as they delegate work to staff. Learn simple steps you can take to implement Quality Management in your organization. You'll free up your own time so you can stop worrying so much about current client work and focus on prospects and growth.

Attention: This is a machine-generated transcript. As such, there may be errors in spelling, grammar, and accuracy throughout. Thank you!

John Rea: [00:00:00] You know, we've seen this industry shift towards specifically with the bookkeeping segment, fixed fee pricing and this sort of bronze, silver gold model of these different tiers of offerings. Right. And those are bookended and it's pretty clear in each what you get. So in a certain sense, we've productized the offering and now we need to productize the delivery mechanism behind that. And so which mechanisms you put in place and which kind of processes you choose and the tolerance for error on each is ultimately going to depend on what what you've sold to the client.

Blake Oliver: [00:00:36] If you'd like to earn CPE credit for listening to this episode, visit your mark CPE. Com Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now onto the episode. Welcome to another episode of the Earmark podcast. I am Blake Oliver and I'm very excited today to be talking about quality management in accounting firms, which is the secret to a scalable accounting practice. I myself have struggled with quality management. Whenever I hear firm owners griping, my friends griping. It generally comes down to quality management in a lot of cases. So I'm very eager to be talking today with John Ray and Rachel Fisch. John, welcome to the show.

John Rea: [00:01:28] Thank you. Glad to be here.

Blake Oliver: [00:01:30] Rachel. Great to see you again, as always.

Rachel Fisch: [00:01:33] Hey, you too.

Blake Oliver: [00:01:34] This is new. We are live streaming this episode and we have a live audience able to ask questions. And I am deliberately not calling this a webinar because I hate webinars. Right. This is a live stream event. We are recording a podcast episode live. We didn't prepare dozens and dozens of slides that we are going to read off of. This is a discussion. If you've joined us for the live stream, you can click on the chat and you can chat with us. Let's kick things off, John. Why do you care about quality management? Why are you passionate about quality management?

John Rea: [00:02:09] Well, it sits at the center. I think of everything inside of running an accounting firm. There is no on a long horizon accounting firm without maintaining the quality that your clients rely on for the services that you provide. And so from a certain angle, quality management is just a lens through which to look at the activities, the government regulations, the industry norms and the processes that you have inside of your firm that govern. Ultimately, this end result and the end result is the most important piece, which is that you're producing high quality output for your clients. And the way I kind of define quality just to kind of maybe level set with some definitions that we can all we can all use or or disagree about and discuss is quality is really a it's a standard and it's it's a measurement of how close to a certain outcome you are. And so by definition, it's sort of not an objective standard. It's a subjective thing that you define internally depending on what you're producing. And so through that lens, you know, you can think about quality management as this large circle that is basically everything, all of the processes, standards, government regulations, everything involved with producing that, that service, that end result as a subset of that, you have quality assurance which are the specific processes that you use. So almost like you could think about like an assembly line, right? There's specific steps on that to produce a car at the end of it. Let's take a model T for instance. Right. Henry Ford came along and said, I want to build Model TS and I want to make them affordable for everybody. We need a consistent way to do that. That's the assembly line. And then quality control is the smallest bubble inside of that large circle. And it's really testing to say how close to the standard are we, you know, at any given time.

Blake Oliver: [00:04:00] All right. And do you have a firm did you have a firm like what's your background in. Oh, yeah, accounting. And in this space.

John Rea: [00:04:07] In 2017, I started what I thought was just going to be a fractional CFO for I was just going to help start ups here in the Austin community, raise money and build financial models and sit at that more advisory layer. And what I found over time was that now I was interacting with like 15 different bookkeeping firms and they all had these different standards of quality that then I was inheriting sort of at the CFO level, and that that ended up being a challenge for me. So through my firm, Pacha, we ended up centralizing and offering a bookkeeping segment to what we did. And then I found as we scaled that that quality management ended up being something that affected, you know, every single, every single piece of our ability to deliver that service from scoping and pricing to training and hiring to actually publishing error free financials. And so these kind of things kept me up at night and I started thinking about, you know, these kind of things ended up starting a company called Scrutinize, which is quality control software for bookkeeping firms. And that's kind of where my love of it and my passion comes from.

Blake Oliver: [00:05:10] So you're doing the CFO work, and I take it you were discovering that garbage in equals garbage out when it comes to the advice you were giving or what you were trying to do?

John Rea: [00:05:22] Yeah, 100%. You're inheriting a set of books from a third party. You're preparing some level of analysis to give to. Most often I was working with a CEO, so my client and then they're going into a board meeting and kind of taking this level of analysis and showing their board and it's like, well, unless I can verify the I'm inheriting something that's good enough to then do analysis on, you know, we're really sort of like, there's no point in going past that and doing the level of analysis on that crappy data, you know, so to speak.

Blake Oliver: [00:05:56] And Rachel Fisch, great to see you as well. You are now the recent proud owner of another accounting firm.

Rachel Fisch: [00:06:06] Yes. And it's been so interesting, Blake, because I feel like I've been around kind of a really long time. And so those who have joined the cloud accounting world within, you know, maybe the last five, six years didn't know that I actually had a firm on my own before I had a bookkeeping practice. We had a team of five, and that's actually how I got to know Deloitte a little bit and and ended up at Deloitte. But I feel like by the time, you know, I had already had my practice for five years and left, knew people were still coming to cloud accounting. And so they're like, what's it like to own your own firm? This is all new for you. I'm like, No, it's it's actually a bit of a revisiting. It's going back to my roots. And honestly, I just so first of all, it's it's something that I've been doing kind of on the side and in working with real estate agents and brokers in Canada for the last couple of years. And so when the opportunity came up for this firm, it just seemed an absolute perfect fit. But kind of piggybacking on what John was saying and from the perspective that he had as a CFO, I'm not on the other end, but basically, you know, I'm a CFPB certified professional bookkeeper. I'm on the board of Canada's CPB Canada, which is the certified Professional Bookkeepers of Canada.

Rachel Fisch: [00:07:23] And so for me, it was it was you know, we talk a lot about, oh, there's terrible bookkeeping out there and there's horrible bookkeeping. And I don't necessarily think that that's the case. I think that in John's case, he was just finding different people with different standards of quality. And so if we can start using tools to start kind of regulating this standard of quality and again, that that standard of quality might be different for your firm than it is for a different firm. But at least we've got these tools in place where the standard of quality isn't up to each individual as to what they think is good enough. You're setting that standard for the entire organization. And so for me, it felt like something that, you know, as we focused on on people, processes and technology, you know, we would work on making sure that people are trained up, you know, to the to where we thought they needed to be trained up. We would establish processes and the tools that allowed us to manage those processes. We would then incorporate technology where those processes could be automated. But I feel like the part that's really been missing from the conversation is but our out of all of these things, are we getting the results that we want to define as a standard for our team or for our organization? And I and there just have not been honestly very many tools to really help define that.

Rachel Fisch: [00:08:49] And so for me, in terms of buying this organization, we're going to be scaling pretty quickly. We better have a really good handle on what we think is acceptable. It's almost like a franchise model, right in Canada. I don't think they have kegs in the U.S. maybe highs, maybe Morton's right. You know, if you go to Martins, you're going to get a good steak. So because they've got that standard of quality throughout the whole organization. Right? If you get a mom and pop restaurant, you don't necessarily know that you're going to get a good steak. And so it's just, you know, wanting to make sure that that standard of care is across the whole organization. And that's actually how John and I met. I was at High Rock. We were looking for some of these tools where we could incorporate the quality management and quality assurance for our clients, right. Which is really important. And also the controls in place that make sure that we're meeting those standards. And so that's how we met and have been, you know, kind of working together ever since in terms of of making sure that that we're really, I guess, impacting this part of the industry that feels not very talked about.

Blake Oliver: [00:09:54] I'm going to take a quick break and we're going to talk about how you can earn CPE for listening to this episode. You can earn free CPE credit by downloading the earmark CPE app on your iOS or Android device. And then you can take a quick quiz and get your CPE certificate. So no polling questions. We don't have to worry about polling questions in this, which is very nice. So I too am very passionate about quality management. So I started my own bookkeeping firm. I come from bookkeeping as Rachel does, and I did it myself. I started as a freelancer and I think a lot of us start out as individuals, right? We leave the firm we're at and we start freelancing or we start moonlighting or something like that. And then when we have enough clients, we go off and we say, okay, I'm going to start my own firm. And then when we get overloaded, we say, Now I need to hire people and I need people to do the work that I was doing. And that was my situation. I had gotten dozens of bookkeeping clients and now I needed to hire somebody and I found somebody. I was super excited about it. I hired them, I started training them and handed off some clients and then I sort of didn't really check in. I mean, I was checking in, but I didn't I didn't know whether the work was really getting done.

Blake Oliver: [00:11:12] And unfortunately, a few months later I came back after some clients started talking to me and I found out that the work really wasn't getting done to my standard. Now, granted, I am a perfectionist like many of us are, and so I may have had unrealistic expectations and we can talk about that when it comes to quality, but like it was just not it was not up to my standard in the slightest. And it continued to be an issue. And I wonder if I'd had like, quality management processes in place. I could have caught that earlier and made sure it didn't happen. But it did lead to me losing a bigger client. And so it costs money, right? When we don't do good quality management, we lose clients and we it hurts our brand, it hurts our reputation. But I feel like in in most firms it's sort of just like a running around putting out fires kind of situation In the big firm that I worked in. That's kind of how it worked. We didn't actually have any quality management in place. It was, Let's hire people, let's hope they do a good job. And then if a client calls and says something's not right, then we have to go and run around and put out the fire. Like, is that.

Rachel Fisch: [00:12:18] Exactly.

Blake Oliver: [00:12:19] That typical? I mean, I feel like. Right. So like in most architects. Go ahead.

John Rea: [00:12:24] John. That's like that. I was just going to say that that feels like four from the hundreds of different bookkeepers that I've talked to and some of which work at firms, some of which started their own firms. That's the arc. It's like I have a few clients that I have some more than I have some more. And look, it's I think it's natural, especially when you go out on your own, you want to take all that business because you're like, I got to pay my mortgage, I got to pay my rent, whatever, you know, And and so you start just adding top line revenue, top line revenue, top line revenue. And then you wake up one day and you realize like, hey, it's a mess in here, you know, and there's no there's no standards and no processes sort of like mapped out for, you know, the phase that goes beyond me trusting myself to do all this work to now I've got other people that not only do I have to hire and train, but I also have to communicate like our values and our standards to on a on a recurring basis. So yeah, that definitely tracks for my experience and the experience of lots of people that I've talked to.

Blake Oliver: [00:13:23] So I think we can all agree that one right, like one aspect of quality management in an accounting context is defining what the standard is like. If you don't have a standard, you can't expect people to live up to it. So that is actually a challenge sometimes to write like like I might have to think about this, you know, is reconciling every set of books to the penny. Something that we need to do? Is that the standard or or should we tell our staff, you know, it's okay if you're off by 100 bucks or here's the threshold for materiality across our client base So they're not wasting time, That sort of thing. I don't know. Is materiality something that you consider in the in the quality management process?

Rachel Fisch: [00:14:16] So Absolutely. And I think that it kind of goes back to, you know, in talking about these common experiences that we're all going through, is it's basically you can't manage what you don't measure. Right. And I'm sure lots of people have said it. It's been attributed to many people. But ultimately, you know, in a year end flow, for example, that standard was not really communicated until a year end was getting done. And then it's, oh, look at all these things that I need to fix and all these adjusting entries and everything like that, instead of backing that up and saying, okay, then let's set, you know, a weekly standard or let's set a monthly standard or let's set, you know, we're going to close the books within a certain amount of time. And it's basically about kind of setting that goal. So whether that whether your goal is materiality. So, you know, talking about what those thresholds might be, whether your goal is time based, like being able to close the books within a certain amount of time, whatever that goal is, set that goal and then build the process to work towards it. And so when you're talking about materiality, absolutely. So when I worked in industry, I would be a down to the penny person. And when I ended up, you know, having my own practice, you know, way back in the day Fisch books. So that's actually where the name came from. It's just a Twitter handle was it was, you know what? It mattered a little less that I was down to the penny because ultimately, you know, we've got client communication between me and the data. And so I might not be able to get down to the penny. And so for me, that standard changed between when I was in a role, that it was my sole responsibility to make sure that, you know, things were as correct as possible. Things were being done as quickly as possible to a, okay, now how am I going to manage this across multiple clients? And of course with adding staff and and growing in practice.

Blake Oliver: [00:16:13] So we've got we've got materiality as one of our standards or one of our criteria. We've got Rachel, you mentioned time to close the books. That's a good standard, right? We want to have a deliverable to the client by the date we've promised. So for me, I think, you know, we for most clients, we said it's by the 15th of the month, the following month, right. Every month, unless we have arranged something different with you. So maybe a bigger client gets it in five days, right? It depends on what their needs are. But it was by the 15th. It had to be done. Is there anything else that we should consider as as part of our definitions for standard for quality other than time and materiality? You said client communication, I think.

John Rea: [00:17:01] John Yeah, Well, and then so I was always working backwards from the end, which is ultimately like, what have I said to the client? You know, because some of this is going to be determined, like if it's the 15th, it's the 15th. If they want to pay me extra to have it done by the seventh, we'll make it the seventh. Right? And so a lot of that ends up being like, okay, you know, we've seen this industry shift towards specifically with the the bookkeeping segment, you know, fixed fee pricing and this sort of bronze, silver gold model of these different tiers of offerings. Right. And those are bookended and it's pretty clear in each what you get. So in a certain sense, we've productized the offering and now we need a productize the delivery mechanism behind that. And so which mechanisms you put in place and which kind of processes you choose and the tolerance for error on each is ultimately going to depend on what, what you've sold to the client. Where I think it gets tricky or sticky is that we all tend to I think internally I don't think people get into bookkeeping because they, they want everything to just feel like, you know, it's on fire all the time. Like we want things to be a plus all the time, but sometimes the client's going to settle for B plus bookkeeping, and if that's what they're paying you for and the arrangement is, is there and as Rachel said, like that's, that's communicated that, hey, look, it's anything under 100 bucks, like don't chase it down. It doesn't even work. You know, it doesn't matter, whatever. Then then that becomes a standard. So some of that subjectivity is is really determined by what you've promised the client. At the end of the day.

Blake Oliver: [00:18:35] It's important to think about, like you said, John, what they are looking for, what you've promised to them, what what do they want out of it. So specifically thinking about bookkeeping, which I think is a great area for quality management, because it's one of those things that happens every month. And if you don't take care of it throughout the year, it gets to be unmanageable by the end, right? If you have to fix a whole year of books that your bookkeeper working for you didn't do right, you might as well have done it yourself. So with bookkeeping, the the quality, I forgot where I was going with this. So it's why are you doing the books for them? That's important to ask. And I think why does the client want you to do the books? So for most clients and this might. Irritate some people when I say this, they do not care about the financial statements that you are sending them every month. They do not look at them. 80% of clients, 90% of clients will never look at the penal. They will never look at the balance sheet and they don't care. What they care about is that you are doing the books so that they can get their tax return done right.

Rachel Fisch: [00:19:35] To me, that's.

John Rea: [00:19:36] That's yeah.

Blake Oliver: [00:19:37] That's the lower end of bookkeeping work. But I think a lot of times we as accountants, especially those of us who have been trained as CPAs and have, you know, prepared financial statements for Fortune 500 companies, think that this stuff matters to small business owners, but it's a totally different, you know, customer, right? The small business owner just wants to get their taxes done. And so when you design the quality controls, right, when you define the standard for them, the standard is really low. Let's just be honest about that. But that's a good thing because it means that you don't have to do as much work, right? Your bookkeepers don't have to tie everything out to the penny. They just have to get it good enough so that a tax preparer can rely on it to do a tax return. And so communicating that with the tax preparer as to what is necessary. Right. How many do do we need to have? 200 accounts in the chart of accounts.

John Rea: [00:20:32] No.

Blake Oliver: [00:20:33] No. Right.

Rachel Fisch: [00:20:34] No. No. And I feel like I'm reluctantly agreeing with you, Blake, because I understand that that is exactly the current state right now. Right? Small businesses do not care about monthly financials or anything like that. But I do think that there is a way to work with clients that they are getting timely and relevant data. I just believe that it doesn't come in the form of a financial statement and that things there are things that still need to be in place, like making sure that your, you know, your balance sheets are reconciled and all of those things so that you can depend on the data in order to assist them in that way. And so that's why I was like that. That standard needs to be changing because if the standard is, my financial statements have to be right. And that's the thing that small businesses don't care about. Small businesses are not going to come to you and say, I really wish you would implement a quality management tool so that I can. That's never going to happen, but it is. Can I be confident, especially as I scale my business? Can I be confident that whoever is assigned to this client is going to meet, you know, the standard that we've set for this firm so that I can depend on the information that I'm then providing to the client, whatever form it comes in, whether it's a dashboard or a portal or KPIs or financial statements, whatever it is. Again, that agreement is with the client, whatever that thing is. Can I depend on the, on the data to, to support that.

John Rea: [00:22:02] Yeah. Yeah. I think a good dovetail. Maybe there too is that you know, we're talking about like the end result in terms of quality and how the different actions that you take lead to that quality. When, when I think about it, it's like, you know, if your client's paying you and they're okay with like B-plus bookkeeping versus three gold stars, A-plus bookkeeping. To me, though, that doesn't warrant chaos in the in the production line, so to speak. It doesn't weren't chaos in the delivery mechanism. It just means a different maybe set of processes or a different tolerance around each of those. It's still, I think, really necessary to think through the the steps and the sort of process workflow. Like, okay, we start here with scoping and pricing. They signed the agreement, we take over. Maybe there's a cleanup. Here's what a monthly engagement looks like. And having that all mapped out, I think it's still a really important exercise to continually go through, even if the end result is as variable quality depending on what the client expects or or wants.

Blake Oliver: [00:23:06] So John, you brought up, I think, the analogy of like the Ford Assembly line, the Model T, for instance, right? Henry Ford innovated in creating this assembly line that would reliably produce cars every X number of days. And so to go back to that analogy, to fit in what we're talking about to that analogy, there's the quality controls or the quality management around just making sure that the cars come off the line consistently right, that we're delivering them. But then there's also the the quality control around like what's the fit and finish on the car, right? How how does the customer really care if you know, every, every piece of the car is like perfectly aligned or is there some give there? And I would argue on the lower end of most clients bookkeeping and tax work, they're really just trying to comply. And so they're standard. They're they're standard, if you ask them, is actually pretty low. Right. And so we don't we're doing way more work than we need to be doing for those clients. They're okay with like, maybe we can make a hotel analogy, right? They're okay with staying at the two star motel. It doesn't need to be a four or five star resort. Yeah, And and maybe that's one of the reasons why we have trouble with capacity management, right? Is we're we're doing too much for a lot of these clients. They don't need it and they don't want it. I mean, that's where that's where quality management can make a big difference in your firm in in allowing you to take on more clients or to to take on more work is by scaling back what you're doing for existing clients to meet their needs.

Rachel Fisch: [00:24:39] I wouldn't necessarily say scaling back, but I would say better defining. So I think that as as a person, bookkeepers, you know, and other maybe junior accountants, they're very good ones anyway, really solid ones, very task based, very goal oriented. And I think that part of the challenge is, is not having those tasks and those goals in place.

Blake Oliver: [00:25:04] So going back, you know, we're going to keep coming back to this. So defining the, you know, quality management in the firm like so we're defining the time to deliver. We're defining the the smoothness. John, is that the right way to say it? The smoothness of the internal processes?

John Rea: [00:25:20] I think so, yeah. How things flow from one process to the next worth something ends and the next begins and making sure that's bookended.

Blake Oliver: [00:25:28] And that's really important when it comes to tax. Really, because there's a lot of people touching a tax return in a short amount of time. And so if that internal assembly line is not smooth, then you get a delivery issue. Right.

John Rea: [00:25:42] Yeah.

Blake Oliver: [00:25:43] And then we have like the the quality of the actual output, which I think is the hardest thing to define in a lot of cases, like what is the quality that's expected on a tax return? You know, like I've heard stories about partners sending stuff back because the staple wasn't in the right side of the paper. Right. Like, is that really what we care about in firms? No. Right. But because there's we have this perfectionist kind of, you know, look, I've been guilty of it, too. I have placed emphasis on things that really don't matter to anyone else because I'm a perfectionist. And so I think letting go of that is a challenge for for many of us. But if we just write down what actually matters, right? If we define it, then that can that can help us get started.

John Rea: [00:26:28] Yeah. And and doing that in a way that I think encompasses your team, right? You've got different accountable people in that chain. You've got different stakeholders that maybe not are accountable for that individual task, but, you know, maybe accountable for the one after that. And so I'm inheriting some somebody else's work. And like, I think some of this ends up happening sometimes in isolation in the partner's heads where they just get together a little room, they go, Oh, we need to increase quality standards and this and train. And it's really a larger conversation and almost a cultural shift inside your organization where you're embodying these principles, wrapping everybody into the conversation and say, hey, look, this is this is the outcome. Let's make it crystal clear and and bookend like what it means. How do how do we all get there? Right? And then having an open kind of collaborative conversation where you're iterating on ideas and you have all the right people in the room versus like a top down quality mandate, which tends to just get rejected. In my experience, people go, I don't want to do it like that. That doesn't work for me.

Blake Oliver: [00:27:30] So let's talk about how people can get started with this. Like, if you don't have any quality management going on in your firm, like formally anyway. Like what? What should you be focusing on? So I think like for me personally, the thing that I didn't have was a consistent review process of once my employee is done reconciling the accounts, I get them for review and then there's like a checklist for me to review the books. Rachel I think this would be a good one for you because you're, you're, you know, you just bought a firm again. Now you're probably starting to look over these books, like, what's your review checklist when you go down a set of of books, what do you look at? What do you care about?

Rachel Fisch: [00:28:13] I'll tell a story actually about when I was at Deloitte and the bookkeeping manager was a CPA. Not that there's anything wrong with that. Just the way that you look at operational things is very, very different. And so essentially what they did was they took a trial balance and they start at the top and worked their way down and just kind of looked at and did a, is this reasonable or not?

Blake Oliver: [00:28:41] And let me stop you there. How do you know what's like? You're just glancing at a trial balance. Like, how do you know what's reasonable?

Rachel Fisch: [00:28:47] Exactly right. What is it? This is everything that was wrong with that review. That's exactly the point. And it was very much a well, what happened last year. So is it, you know, or for, you know, companies in a similar industry, but there is nothing data driven about it. It was just kind of by gut. And so this bookkeeping file, past review. And so at that point we were looking at putting some quality controls into place. And I said, Well, let let me start with a bookkeeping file that has been completed and successfully passed review, and let me review that as kind of my test on because this should be good. It took me about two and a half hours to go through all of the feedback that I had for the file, because in my case I was looking at probably more detailed write why are know? Yes, these are all reconciled, but there's a crap ton of outstanding transactions, some of which are very old. So although the balances are reasonable, although the you know, the amounts in here have been reconciled, there's all this junk sitting in here that we need to do something with. And in some cases I found where it was, you know, clearly the bookkeeper didn't understand QBO well. And so they weren't really using the tool the way that it could be optimized to be used. And in some cases it was just a you're doing bookkeeping like a tax preparer. And so it just wasn't effective. And so I just think that, you know, if that standard is that deliverable or that end of year thing, there's a lot of stuff that we're missing in in this instance.

Rachel Fisch: [00:30:28] So as I said, you know, there have been more tools coming up recently. Scrutinize, of course, being one of them, where we can just connect it to a data file so QBO or zero, and then we can take a look at the exceptions. So I think one of the most important things that I learned at Deloitte was to get to the point where you're managing the exception, not the rule. And so what I was finding was that this, you know, CPA that was going through was managing the rules and not managing the exceptions to the rules. And so like for example, we were using text at the time and we found that 93% of transactions, 93% of transactions were getting published where no changes were made after the OCR did its thing, 93%, but the bookkeeper still had to manually click publish. It's like a it's like a digital version of the manual, you know, postage stamp to send that off. And so what we wanted to be doing was we wanted those 93% to be auto published so that we really just needed to focus on the 7%. And so if we if we have controls in place that take care of the majority of the stuff that is done right, but have those data highlights or have the tools in place where we can recognize the things that are not quite right, exceptions, anomalies that will help us do this whole process way more efficiently.

Blake Oliver: [00:31:58] So. So you're managing the exceptions? It's a very good point, right, that you started you start talking about that trial balance, like looking down the trial balance. It doesn't make sense to look at necessarily every single account. Right. And to dig into the detail of every single account. You've got to have a system for reviewing what doesn't make sense. You know, John, I'd be curious to know what are the like, How does scrutinize? Surface. Those exceptions like what do you what are you doing in the app that would prevent me from having to go look at every single transaction?

John Rea: [00:32:31] So that's kind of where we started was that even when I was running my firm, we did this kind of flux variance analysis month over month. Does it feel right? Does it pass the sniff test thing? And where that fell short for me was that there are plenty of issues that are not material but that you would want to know about. And those those could be things like, you know, duplicate or missing data that you still want to make sure you have complete, complete and accurate data, even if it's not material. But I'm also super sensitive to something that, you know, happened earlier in my career, which was which was fraud. And so fraud may not always be material in a financial statement sense, but it's always something you want to find in eradicate in an organization. And this, you know, this lady had one, two, three, $5,000 at a time, stole $200,000 over eight years. And and we uncovered that not because of any kind of material gaps, but it was just like a happenstance, you know, just going through the the office supplies account and going like, what is this? And so what scrutinize did and and it started just like internal as an internal tool at PACHA is we ingest the general ledger, the contact list, the customer and vendor lists and then we look on a transaction by transaction level and say, does this transaction meet any of these couple dozen different patterns that we've identified with anomalous activity? And there's sort of two ways that you could fall on the fence of this.

John Rea: [00:34:01] One is like a false positive. So you might throw the net a little wider and catch some things that the bookkeeper then can go, Nah, that's not a problem. Is that a problem? The other is the false negative where you you miss things because your queries are too tight and we go with the former where we throw the net maybe a little wider, you know, as a default state than some people want it across a couple of dozen different patterns like missing data, duplicate data, you know, expenses with no pay name. You got, you know, excessive accounts receivable credits that aren't related to the receipt of the actual income, things like that. And then we let people tailor that tweaking the knobs and the dials for their specific client, because ultimately the bookkeeper that's closest to those transactions has the most context to determine whether or not something is anomalous. And so we give them that exception list and say, here's the things that we think may be an issue. Don't worry about the other 10,000 transactions that weren't flagged. Go through these and then augment as necessary or just say, yeah, I reviewed it, it's not an issue. So that's kind of the tech that we take.

Rachel Fisch: [00:35:06] And this is why, though, John, I feel I get so frustrated when people talk about, you know, even when you're talking about so what tools do you have in place to manage, you know, your quality or what are what are your thresholds? And things like that is, oh, I don't have time for that. But the whole point is, again, to make sure that you aren't managing by the masses, but that you're managing by exception. And so like, do you have I guess when you get in to talking to people about scrutinize and or just quality management, you know, concepts as a whole, do you have some of those? Like I don't have time or some other objections that people talk to about this? Because to me, managing the 7% is a lot easier than managing the 93%. You know, that was our case in at Deloitte with decks, but just as an example.

John Rea: [00:35:57] So it's usually one of two things. No time, no need, right? Somebody thinks we have a small team, we do some kind of manual review. We don't we don't need a system that that just does this or hey, we don't have time to go in and do this extra level of check. You know that that may be on top of some some of the other like month end things that we're already doing. And and the way I kind of like to pivot that conversation is that, you know, there's some stat that I read that like up to 30% of an average accounting team's time is spent actually doing rework. So you've done the work and then some kind of manager review or self audit happens and you find something that was wrong and you have to back up and fix that now. So, you know, the way I kind of talk about it is like, well, what about all the time that you get back from finding that training gap further upstream and you realize that every time Dave touches a transaction, it's ending up down here with an issue. And now we could, you know, we could find and manage and fix this. But then I can also go back to Dave and say, Hey, this is actually how you amortize, you know, a prepaid over, you know, the 12 months or whatever it is. That's my my main objection handling. And you could use that internally, not just as a software vendor talking to people, but internally at your firm to say, hey, look, there is some probably large amount of time that we don't currently track or see that our our people are. Going in and like having to find and fix all these issues. And if we eliminate that, what does that open up for us to continue to improve quality, to continue to take on more business without necessarily having to grow the headcount? So that's kind of the way that I position it.

Blake Oliver: [00:37:36] But I think another objection. Go ahead, Rachel.

Rachel Fisch: [00:37:39] Well, I was just going to say it just makes so much more sense to find fix so it makes more sense. It's cheaper and it's more effective and efficient to find and fix those closer to when it's being made rather than years down the road where you've got all of these people in the chain that then you know, and it just I don't know, I, I don't know why there would be objection because it just makes so much sense to make sure that that's handled at the time. I mean, your tax returns should be a breeze at that point or you're you're in financials. And then in terms of what your margins then are on those, you know, to be able to charge the same you know, if you charge a flat rate for those and to not have to put in that cleanup work in order to to get that to me makes a lot of sense to me.

Blake Oliver: [00:38:27] So the most the most common explicit objection to quality management and review is I don't have time. I would say like on the flip side of that, like related to that, the implicit objection is it's not billable.

John Rea: [00:38:44] Mm hmm.

Blake Oliver: [00:38:45] And and I actually think that's a mistake because I see firms that. Well, it's not. It's not billable. You can't make money from quality control if your clients don't know you're doing it right. If they don't understand that you have a quality management program, you can't sell it. And I see firms and I did this myself successfully, so I can attest that it works. Where in the in the discussions with the prospect and you're talking about the services you offer and what you do. We were very heavy on emphasizing that we had a staff accountant who would do your books and that there was a manager who would review them every month to make sure they're right. And so that when we get to the end of the year, there are no surprises. And I think that a lot of times we don't talk about that with prospects and so therefore we can't charge for it. And you can you can charge a lot more when you have that double layer review. And I think the clients understand that having that expertise overlooking the books is like has value. Does that make sense?

Rachel Fisch: [00:39:53] Well, and that's how a quality management system turns into the quality assurance. Right. So let's go back to that example of Model T car. So think of quality assurance is we are going to make a safer car, right? That is an assurance that you are giving the customer. What is the quality control piece or what? What are you what is the thing that is causing that a seatbelt. Right. So when you when they started putting seatbelts in cars, they weren't selling the seatbelt, they were selling the safety that you would feel because of that. Right. So it's it's speaking to the benefit, not the function. And I think that's very much the relationship between kind of the assurance and control. John, would you agree?

John Rea: [00:40:43] Yes. Yeah, I think I think that's the right way to think about it, is that you've you're sort of you've got some downstream kind of effect that's happening. But really, when you back up and you think about it, it's like, okay, the downstream effect is that we've got people that feel safer in cars because we added a seatbelt, because we did this level of analysis and then built in safety and adding seatbelts into our production model. And so, yeah, I would agree with that. That's a good framing.

Blake Oliver: [00:41:12] So I want to make sure I understand this. So quality assurance is the promise to the customer and then quality control is how I deliver on that promise. Is that accurate?

John Rea: [00:41:24] Yeah, I think assurance is like the it's the, it's the promise, but it's also like the all the processes that lead to this downstream effect of, you know, the, the outcome and then the quality control is kind of like the, it encapsulates the testing of like how do we make sure that, that the seatbelt does work, how do we make sure that we are, you know, selling safe cars? And it's like there's a testing component in quality control, which is part of quality assurance. Assurance, which is part of quality management.

Blake Oliver: [00:41:55] Qc is the testing of the process. Oh yeah, that's Rachel writing in the chat there. Thank you, Rachel. And so to bring this back to monthly bookkeeping or a tax return, QC would then be my review of the monthly books as a manager. That's a quality control that I've put in place, and the quality assurance in that context would be the standards that we have, what's expected, what we've promised to the client, the whole, the whole. It's bigger than QC.

John Rea: [00:42:32] Yeah.

Rachel Fisch: [00:42:33] Yeah. And I'd also say that quality control like review even is quite broad, right? It's, it's setting the goals and making sure that there are metrics beside it. So even like when you think of multiple firms using scrutinize, for example, they may have different thresholds or they may have different ideas for what they want that standard to be. And so everyone may have a review. Great. But it's what are those things that you're going to measure within that review? And then what do you find acceptable or not acceptable?

Blake Oliver: [00:43:07] So how do we get started as a firm? How do I get started doing quality management if I'm not doing it, or maybe I'm just doing it ad hoc.

John Rea: [00:43:17] I think most people are are intuitively doing elements of it. And so it's it's really just about being, I think, more thoughtful about the way that we do it. So if you're setting a goal for your firm, whatever that is, I want to grow revenue to $1,000,000. Implicit in that the dot, dot, dot there ostensibly is while maintaining the quality that my clients rely on and trust. So I don't have this huge churn issue as as we get there. Right. And so the quality management piece is just for each goal that you're setting. How do you ensure that there's no trade off for the standards that you've set for the outcome of delivery of that service along the way? So a good kind of like four part model for me would be, you know, goal setting is like the number one. So we're going to we're going to hit $1,000,000 in revenue, you know, next year. Okay, great. Now let's move into benchmarking. Where are we along that process? So we at 250, are we 500? Like how far away are we? And that goes back to the you can't manage what you don't measure, right? So we need some kind of objective criteria, you know, signposts along the way to tell us, are we moving in the right direction.

Blake Oliver: [00:44:29] Now, John, just to stop you there, does that mean like like scoring tax returns or sets of books? Like how do we how would you how do we actually know where we're at?

John Rea: [00:44:42] Yeah, it could be different and it's going to be different depending on like which which part of the process you're maybe tweaking to get to those goals. Right? So, so there's the goal, there's the benchmark, and then there's like this process map to go like, what are all the things that we do that are going to end up if we do them over and over and over again, end up getting us to this goal? And then those are the things that you can measure the success of. So those are the more objective criteria. So let's say I want to you know, I want to be able to run quality control checks on the books and have an error rate. You know, that's less than 10%. So less less than 10% of all the transactions that our bookkeepers touch, you know, have errors. There might be customer retention, there might be, you know, cross-selling aspects of that. But the idea is that you're you're systematically thinking through all the activities that your firm is taking to reach that goal. And then as you think through that, and again, I recommend doing this with all of the different stakeholders and accountable people in the org, like don't, don't just think through this yourself and then throw it to your team. It's it's generally like going to get rejected because, you know, the status quo is a hell of a drug. And people tend to be like, I don't want to change. So if you if you wrap them into this process of saying, okay, what are all the activities that we're going to do to effectuate this outcome now, how do we measure our success across these activities? And there might be some that are more subjective, like a client satisfaction.

John Rea: [00:46:12] That's that's going to be a harder one to kind of like really put a number on, but try your best to have some kind of objective criteria to measure the success of all these things. And then the final. Sort of piece of this is just the continuous improvement piece. So whatever you've decided after these meetings about how you might tweak and change these different processes, do that and do that for a long enough time where you can actually get like a good sample size, right? Six weeks I think is probably a minimum to get a good data set of like how well things are working. Then have another meeting where that has a retro component. You go, okay, what did we do? What you know, what are the what are the different things that we're measuring and how have those changed, you know, in terms of like where we're where we're going to this larger goal? Do we need to augment any of that? And then if so, make small iterations over time. It's like, you know, it's kind of a continuous iterative process rather than a hard left turn. Okay, we're going to go this way now and this is how we're going to do it. So let's kind of think about it.

Blake Oliver: [00:47:17] And it can be overwhelming, I think, to start because we might like go too far with the the benchmarks and the metrics. Right. Like, let's try to keep it simple. I think it's a good way to go. Like, I'm trying to think what I might start with, you know, I'm already doing let's say I'm already doing reviews. Maybe I have the seniors or the managers start keeping track of how many sets of books needed to go back for rework every month. And then we we set that as our benchmark. Here's where we're at, you know, 60% or maybe it's not that bad. Maybe it's, you know, 30% of all the client books had to be adjusted by me. Right? So let's try to get that down to 10%. Right. Setting those kind of goals.

Rachel Fisch: [00:48:05] 100%. That's the benefit of continuous improvement. And I think, you know, starting out, as John said previously about casting that net pretty wide because again, if you cast it pretty narrow, not only will you have some false negatives how we said it, but but that you will feel overwhelmed at first, especially if there have been no quality controls in place. And so casting that net pretty wide. But then as you're starting to see the improvement, right as you're meeting those goals that you're setting, just keep tightening and kind of tightening and tightening because there will genuinely always be something to improve. There will always be new clients coming in. There will always be new bookkeepers starting right, and all of those things. And so, you know, starting out cast pretty wide and then just keep tightening up as you go. That that mindset of continuous improvement is so critical.

Blake Oliver: [00:49:01] Yeah, And I guess the other thing I would add, like for me personally would be defining what is the standard of a say, a good set of books or a good tax return, Like what is writing that down can be really enlightening because there might be this, what do we call it, verbal or understanding, right? Just a general sort of like cultural understanding of what quality is in your firm. But if you don't write it down, then it takes somebody a long time who's new to learn what that is. And so getting this oral tradition in writing can be really helpful to.

Rachel Fisch: [00:49:34] Yeah, again, I think I don't know who mentioned it, but it was like, you do so much of this intuitively or, you know, by gut feel and it's just kind of taking it out of your gut and getting it into a process.

John Rea: [00:49:47] Yeah. Well.

Blake Oliver: [00:49:50] John and Rachel, this has been really fun. I've really enjoyed this conversation. I think it's really helpful for those who want to learn more about scrutinize. You can head over to scrutinize Dot I O and learn how to close client books faster and more accurately automate those reviews that we were talking about so that you can service more clients without sacrificing quality. And if you are interested in CPE, you can get that on the earmark CPE app Download the app on Google Play or the Apple App Store. Look for the course quality management. The secret to a scalable accounting practice. You can find that on the earmarked channel or you can search for it and get your CPE for tuning in today. And if you want to follow us online, John and Rachel, you are our fans of Twitter like me. So John, you are John Wray, 88 and we've got Fisch books, FICA books, and I am Blake T Oliver. Follow us all on Twitter and we'll keep the conversation going. On how to improve quality in your firm, how to implement a quality management initiative. So I am you know, it's funny, this, this applies to just everything in life. Every, every business ultimately succeeds because you have quality controls in place. Like and we talked about cars, we talked about restaurants. If you want to scale up, you've got to have a way to insure quality without you as the owner having to oversee all of it. Personally. It's just that's that's that's it. And so that's why I'm glad we talked about this today. And thank you, John and Rachel, for bringing your expertise.

Rachel Fisch: [00:51:40] You're welcome. And it's actually that process that this thing turns into scalable because it doesn't have to be you. It doesn't have to be the person with the with the gut check it it can be based on the data.

Blake Oliver: [00:51:52] Yeah. Yeah. And that's what I see. Like when I see really successful firm owners, they've got processes in place where they can run the firm without having to look at the client work. They can manage by exception, right? They have systems and processes that surface problems to them so they can deal with them, but they are not looking at every tax return, they're not looking at every set of books, and they can do that without worrying. That's the other thing that's important, right, is it takes away the the stress and the worry and the anguish of what's the next fire that's going to start in my firm that I'm going to have to go put out, because we don't we don't want to be putting out fires.

John Rea: [00:52:29] No, no, no, really. Start small, start small and keep doing it and you'll build a flywheel over time that'll, that'll self propel, you know, and then the other people in your firm will, will continue to buy in.

Blake Oliver: [00:52:41] So thanks to everyone who has joined us live and thanks to everybody who is listening on the podcast, stay tuned to the earmarked accounting podcast for more tips, tricks, best practices for how to run a modern accounting firm. Thanks for listening. I hope you enjoyed this episode and that you learn something new. And if you did, wouldn't it be nice to get some CPE credit for it? Well, I've got great news. My new app, Earmark CPE offers free Naspa approved CPE credits for listening to podcasts, including this one, visit earmark CPE. To download the app, take a short quiz and get your CPE certificate. That's earmark CPE.

Creators and Guests

John Rea
Guest
John Rea
Building automation software for bookkeepers. Founder of @scrutinize_io. Prev. founded @pachafinserv.
Rachel Fisch, CPB
Guest
Rachel Fisch, CPB
Accounting & Tax for Real Estate Agents & Brokers, Technology advocate, former @Deloitte & @Sage_Canada, Inaugural member @accountingsalon, 80s Music Nut
Quality Management: The Secret to a Scalable Accounting Practice
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