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Blake Oliver: Welcome everyone to the Earmark Accounting Podcast. I'm your host Blake Oliver, CPA. My guest today is Edward Mendlowitz. Ed is a partner in Withum’s East Brunswick, New Jersey office and has over 40 years of public accounting experience. He is a licensed certified public accountant in New Jersey, and New York. He is accredited by the American Institute of Certified Public Accountants in business valuation and as a personal financial specialist. Ed, welcome to the show. Thanks for joining me.
Ed Mendlowitz: Hi, Blake. Nice to be here.
Blake Oliver: Ed, you are an incredibly prolific writer. You have written 16 books, hundreds of articles, and I have been a fan of your articles, in particular, on CPA Trendlines, and Accounting Today for years. The impetus for this interview today was an article that you wrote on CPA Trendlines, and I love the title.
The title of the piece is, “Why Does All Work Take So Long?” This is a series of articles where you answer questions from accountants, from practice leaders, practice owners. You have been very helpful to folks in the profession after all of your experience running your own practice, and in Withum.
I like this article. I read it. I internalized it. The question is, “Everything in my office seems to take too long, and I can't put a finger on why. Can you provide any guidance?” You gave some great tips; a list of things including leadership, management, supervision training, systems, processes, scope creep — all of these things that we deal with in practices and that I'm familiar with in my own career.
There was one thing that I feel that wasn't in there, which is a touchy subject for a lot of folks, and that is timesheets, and time-based billing. I suggested, on the Cloud Accounting Podcast, and on LinkedIn that perhaps this might be one of the top reasons why work takes so long because we manage people based on their hours. They are often incentivized to take extra time to get things done because they have to hit these billable-hours targets.
I'd love to discuss this with you because you responded to that, and said, “I totally disagree.” I'd love to get your perspective as somebody who's been in this profession for a long time, who has a lot of experience as to what is the value of timesheets, of time-based billing, especially when it comes to managing a team.
Ed Mendlowitz: First of all, you have a lot of fans, and a lot of followers, and people thought I was criticizing you, and they took great exception to it, so you have a good fan base. Timesheets is really a peripheral issue. It's not a major issue. It's a major issue for people who advocate and evangelize that you shouldn't use timesheets. They say there should be a different way of managing a practice, and it’s a small group. It's a large group, but it's small in the totality of everybody that uses it. Those are the people that feel it’s an issue.
The people that are using it don't feel it's an issue. It's being used by a lot of firms. It's very effective as a management tool. I don't think it's effective as a billing tool, which I could give you a few reasons why, but as a management tool, I find it invaluable and very important. I also don't know too many firms that are larger-size firms, and I'll say 25–30 people or more, that are growing that are not using timesheets.
A lot of the firms that are not using timesheets are very small. They’re effective, and they're doing well, and good for them. I wish them all the luck that they want, but it doesn't allow a business to be scalable. It doesn't allow the business to be to grow because it's so hard to control people. In terms of incentivizing staff, I have never seen that. I’ve been around a long time; I've been at a couple of firms; had my own practices. I tried everything that you could try in an accounting practice. I tried not using it; I tried using it; I tried hybrid methods. I tried all sorts of ways.
I have never seen anybody stretching out time or, in effect, lying on top sheets. This was a big issue of the comments that were made in that LinkedIn thread that people lie on timesheets. That's not the case. People that lie on timesheets are liars. They don't belong in the profession, and no accounting firms should tolerate people like that.
There is a lot of time pressure in accounting firms to get work done. The time pressure is not because time goes on a timesheet. The time pressure is because we have deadlines. We have deadlines that the government imposes, that lenders impose, and that clients impose. We have to meet the deadlines. If people slacked off, and dilly-dallied, and they just added time to build up time, work is not going to get out. The partners and the managers are always pushing to get the work done. At the end of a job, they look at the time to get an idea of how much time was put in to use as a guide going forward.
Also, it's a myth that we build up time and we raise the fees because of that. There's tremendous pressure by clients on the fees, and any fee that's larger than expected is questioned by clients. If it's not questioned the first time, it’s questioned certainly by the third time. There's pressure to keep the time low, to keep the fees low, to be within budget, and to get the work done on time.
The implication of a lot of people that don't use timesheets are that there’s lying; that staff build up the time, they build up the fees. It's just not true. It's not happening. It's not true. Now, I'm not going to tell you that there’s [not] one or two people that do it. Of course, people do it, but in the totality of the profession, it's very small, and it's not an issue in firms that are using it.
Blake Oliver: To that specific point, the lying on timesheets, that's a strong way to put it. Maybe another way that I witnessed is stretching out activities. I put myself in the shoes of a staff accountant who knows there's a particular budget for this project. They could hustle; they could try to finish it sooner, but they know there is 40 hours allocated to this. Why not just take the full 40 hours, take it easy, stretch out the project to meet the budget? There's no benefit to that person to get it done any faster, and if the firm is actually billing hourly, it'll just hurt the firm's billings.
Ed Mendlowitz: First of all, the most bills are not time bills. A firm like mine, which is a large farm, and you could even go larger to the Big Four, when we take on jobs, big jobs, we say it's a time-based bill. Here are the rates, and here is a range. That range becomes a fixed fee, and actually, the midpoint of that range is the fixed fee.
If you do an exceptional job, or you run into things you didn't expect, it'll be at the high end of that range. If you get the job super-fast for whatever reason, because a lot of cooperation, or you didn't expect — the things that you were expecting to do, you didn't have to do, so it’s a low end of the range, but those are fixed fees. If you go beyond, you go a dollar beyond the range, clients are going to want to know why.
Number two. there are some staff that work very quickly, and very good, and don't make errors. Then, there are some staff who work slowly and make errors. Actually, the staff that works slower usually don't make errors, and the staff that work quickly usually make errors, but occasionally, you get someone who works fast, and they don't make errors. The point is, the managers know who are good, and they know who are bad.
They know who ... If people are stretching out work to fit the budget, one time, two times, three times, it probably works. On a sustained basis, these people are not getting the promotions that they want; they're not getting the raises they want, and if the firm is paying bonuses, they're not getting the bonuses that they want. The firms know who the good people are.
Now, if you have a firm of a hundred people, you could lose people in the firm, or you need bodies someplace. Not everybody in the firm is a superstar, but in smaller firms, which I think a lot of the people that listen to your podcast and read what I write are smaller firms, and they have no leeway for that. They have no tolerance for that. Everybody has to be productive. Everybody has to perform. We try to meet the budgets as much as possible.
It's not the work budget that's important. It's the time budget. It's the due date budget that we have to meet; not the “Okay, this job is a 40-hour job.” No, this job is due in three weeks. That's the budget that has to be met, and there's pressure to meet that budget. If people are not performing the services that they're supposed to do, or if they’re spending too much time on, say, easy stuff, and too little time on the hard stuff ... A lot of people might tend to start on the easy stuff because they're more comfortable with it, and then they get rushed for the hard stuff. That's a problem of poor management to get the people to work in the right area.
Blake Oliver: Under the hourly billing incentive model, the easy stuff, and the hard stuff is valued the same for the staff person. Taking out this idea that they want to get promoted to partner, let's just talk about most staff. Most staff are not going to make partner ever. That's 90 percent, right? For them, the easy and the hard is the same. They know they have to hit a certain billable hour target.
I'm just speaking from my own experience. In the firm that I worked in, my staff- I was a manager. My staff had to hit certain targets in order to get their bonus, and it was significant. I was running a CAAS practice — bookkeeping, accounting, trying to implement new technology to make the firm more efficient. We were operating on fixed fees.
Just like you said, most firms don't actually do time-based billing in reality anymore. They either do time-based billing in a range, which is essentially a loosey-goosey fixed fee, or they do true value pricing, but they're not actually pricing it on hours. I think that's an important thing to distinguish between. Most firms don't bill hourly anymore. In reality, they bill a fixed fee. They are still managing their employees, though, under an hourly model.
That disconnect is what I experienced in the firm, and what caused a lot of grief for me, and ultimately was one of the reasons why I left that firm. There were a lot of reasons, but that was one of my frustrations was I couldn't seem to get staff, from a grassroots level, to adopt tech because ... One of them actually told me this straight up. Most of them weren't this honest, but one told me, “I have to hit these hours. If I use the tech that you're wanting to put in place with this client, it would cut my hours in half, and now I'd have to take on another client. I just don't want to do that. That's worse for me.”
Ed Mendlowitz: There's different kinds of- I'm not talking about getting promoted to partner. I'm talking about if you’re staff one, and you want to get promoted to staff II. If you’re a staff II, you want to get promoted to supervise. It’s to get promoted to the next level. Part of the promotion it is a title, but a better part of the promotion is a raise. race. If you are doing well, you get a very good raise because the firm doesn't want to lose you, and they want to recognize your value. If you're not doing a great job and, in fact, you become dispensable to the firm, you'll get a raise, but it won't be a big raise. After a couple years, you’ll find yourself not keeping up with maybe the market, and then you’ll leave on your own.
Managing staff, managing people is the fault — is the job of the supervisor, and manager. If the people — I don’t want to point to you specifically, but I never had trouble managing staff. I had good staff, and I had bad staff. If I had bad staff, I used them for the best I could get out of them for what they could do, but they didn't get the raises that the good staff got. I let nature take its course. I learned early on, maybe not early on, but I learned, at some point, that if I don't have the good staff, I'm better off letting them go because then I let them go on my terms, instead of letting them leave on their terms and their timing.
Blake Oliver: Can I ask you, on that, how did you ...? You said earlier, the managers and partners know who is good and who is bad. How do you know that?
Ed Mendlowitz: You see the work. You see them performing. You see how much time they spend on something. You look at the product. Look, I give a webinar — the most popular webinar that I give is reviewing tax returns. I get a few thousand people every time I give the webinar—
Blake Oliver: How to review a tax return?
Ed Mendlowitz: How to do a tax return. The biggest complaint that people — the biggest reason that people attend that webinar is because the amount of errors that are made when the return is handed in for review is staggering. A good firm, a very good firm has maybe 25 percent of the returns that are handed in for review have errors. Most firms have 75 to 95 percent of returns handed in to a reviewer have errors. What kind of crap is that?
Blake Oliver: On that point, why don't we, instead of measuring staff based on the hours it takes them, measure them instead on the number of errors on the returns that they hand in for review? That seems like—
Ed Mendlowitz: I did. When I had my practice, if staff made continuous errors, I let them go. I did not allow them to work for me, first of all.
Blake Oliver: In my firm, that wasn't a metric at the firm level was accuracy. It was all time. I struggled because, as a manager, I was responsible for the realization, and the utilization of my team. I struggled. I really struggled to fit the hourly performance metrics into my clients that were fixed fees because, let's say, one month, we have a client on a monthly subscription; it's a small one, $1,000 a month. One month, they might need a lot of help, and we might go over, but I'd know that in future months, we would go under.
Yet, I would get called out for being overbudget on clients, and I’d have to justify it to the partners, even though it wasn't a true cost. It wasn't a true cost overrun because we were all fixed salaries in the department. It didn't matter. If you looked at the whole team, if you looked at all the clients, it averaged out., but I couldn't get that across to folks. It was so difficult to explain that ... I really do believe that when you try to allocate cost by hours, it's imaginary because all these staff, they're not hourly. They were paid salaries, so who cares if we go over on one client?
Ed Mendlowitz: I don't want to call out any particular firm, but the firm that you worked for, I presume — were they a large firm? Did they have over 30 people or under 30 people?
Blake Oliver: Top 25, 1,000 staff, 100 partners.
Ed Mendlowitz: Okay, Top-25 firm. When did you stop working for them?
Blake Oliver: I guess that would have been four or five years ago.
Ed Mendlowitz: Are they bigger today than they were four or five years ago, or about the same size, in terms of total staff?
Blake Oliver: No, they've been growing. They've been growing quite a lot, yeah.
Ed Mendlowitz: All right. This proves that you could have poor management, or a bad management model, and still do well.
Blake Oliver: Right, and I don't think that time-based billing is broken. It obviously works. I just think that it's not optimal. The true all-stars in your firm, the ones who are able to achieve 10X outcomes, who should be future partners ... Like me, I was recruited, I think, as a manager into the firm, having never been a staff, because I had my own firm, and I think they considered me to be future partner material.
I was frustrated by this way of managing because it limited what I could achieve. I was limited by the billable hour in the growth that I could get because I couldn't incentivize my staff to actually take initiative and implement tech on their own. I had to do it top down, and I was basically fighting some of them because they didn't want to change because what they were doing was working fine for them.
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Blake Oliver: That was my frustration. I have one story I want to tell you; I want to get your take on this. I became friendly with a staff accountant. I think she was a senior, who was not in my office, and we worked on a client — she didn't report to me, so I think she felt more comfortable talking to me, and she showed me her secret timesheet. I don't know if you've ever seen anything this. She had a timesheet in our practice management system, and then she had a spreadsheet that she kept of all of her clients, along with the budgets on a monthly basis, and how many hours she could bill against those clients without getting in trouble or getting called out for it.
She would first record her hours that she actually worked in the secret timesheet. She didn't call it that. That’s my term for it. She’d record her hours in there, look at the budget, and make sure she was on track. If she wasn't, she would adjust things to make sure she was. She didn't think of this as lying on her timesheet. Perhaps, she even wasn't actually changing the hours. She was just changing how much she worked on certain clients. Whatever you want to call it, it's a little bit gray area.
It was definitely distorting the real timesheet, and the data that the partners were getting because she wasn't putting in what was actually happening 100 percent. She was doing that, I think, because she was incentivized to come in under budget on these clients. When people talk about lying on timesheets, sometimes it's a little bit more subtle than just making up hours, but that does happen. I’ve heard that happens.
Ed Mendlowitz: I've heard of it. I know that maybe people put down less time; lying to put down more time is a lie, and possibly overbilling a client, but also, putting down less time is lying, even though the client gets billed less — it doesn't get charged extra — but it's stopping the firm from having a tool where they can manage the practice.
I want to make a comment. We're talking about large firms using timesheets, but most of the people I think that are going to listen to your podcast are small firms; 20–30 people maybe, sole practitioners, two-person firms. I don't think that what we're talking about is relevant to small firms, whether they use timesheets or not. The owners are more hands on; the owners, and the managers, they know what's going on. They know who's doing what. They know who the stars are. They know how to nurture the better people, and they know how to tolerate the not-better people, and they know who they should let go.
We could talk about this because I find this very interesting, but I would suggest that the firm you work for does have a sustainable model. It may be sustainable for a period of time; it could be sustainable for 10, or 15 years. It's sustainable, and it's certainly sustainable because you left, now, four or five years ago, and they’re still growing.
Blake Oliver: Right, but don't most firms operate under this model? It's pretty standard.
Ed Mendlowitz: No, it's not standard. People are looked at, at the output, at the performance of the job they do, at the quality of the job they do, and the quality is measured in a lot of different ways. The quality is measured by the relationships with the clients — whether the client’s satisfied with the team, whether the work is delivered on time, whether the client refers work.
We have people in my firm — we have two people that just became a partner July 1. I know them well because they started in my office. They started with my firm. Their first job, they started in my office. These people developed relationships with clients; they got extra services from clients; they became the first person that the clients called, and the partners knew about that, and the partners knew about their relationships. I don't think that these people ...
I wasn’t in on the decisions anymore, but even when I was in on the decisions who to make a partner, I don't recall a discussion ever about how much time they put in. The discussion was relationships; did he get organic growth from the clients? Did he deliver the work on time? Did he do superior service for the clients? Did the clients make referrals to them? Did the clients pay their bills on time, and give us the annual raises that we asked for, and that we need? I don't see time as being the issue.
Blake Oliver: Then, if time is not the criteria for making partner, and it's not important at all in this discussion, then why even ... Why is that a metric that we obsess about in firms?
Ed Mendlowitz: You worked for a firm that obsessed on that metric.
Blake Oliver: It wasn't that they obsessed on it. It's the only one they really had, firm wide, to look at—
Ed Mendlowitz: It’s not a good metric. As far as I'm concerned, it's not a good metric. It’s not a valid metric—
Blake Oliver: What does Withum—
Ed Mendlowitz: -and I say that they’re making the wrong decision. Look, you obviously are a star, and if you were at Withum, and you liked what you were doing, and you were happy, we would never let you leave. That's a fact. To say that you left because of a screwed-up incentivization, it doesn't happen.
Blake Oliver: Well, it was one of the reasons. The other reason was a tech company recruited me and offered me an absurd amount more money than the firm was willing to pay me, but that’s a separate issue.
Ed Mendlowitz: No, because they offered you — the money became an issue because you did not see a clear future with the firm you were at. You weren't happy with the work you were doing. You weren't happy with the management of the firm, and you probably felt you were stymied in the experience you were getting, so money was one of the criteria ... It's an important criterion ...
We have partners in Withum that started as interns. Their whole career was with Withum. Half the partners at Withum ... With all the mergers and everything that Withum has done, half the partners still started with our firm. Bill Hagaman, our managing partner, joined with a year of experience. The partner in charge of my office, John Watson, started with the firm. You worked for a firm that, in my opinion, was not good. Now, they're obviously good, but they weren't good enough to keep you, which means, in my book, they're not good because—
Blake Oliver: Well, I had just been there for a year, and I expected them to bend over backwards and change systems and processes for me. That's just not going to happen for a manager who's been there for six months. I get it.
Ed Mendlowitz: But they used the wrong metrics. They didn't treat you as an individual.
Blake Oliver: What metrics, then, does Withum use formally that would enable us to drop the hourly thing? Does Withum give bonuses to staff based on their hourly billings, for instance?
Ed Mendlowitz: Yes, they do. They do. They do get a bonus based on hourly billing. They also get bonuses based on other criteria. One of the criteria that we use is certainly hourly billing. Another criterion is realization. Another criterion is growth in the client; another criterion is mentorship and bringing up people under you. Another criterion is bringing in business. You could bring a business from new clients, and you could bring in business from additional services for existing clients.
There's a lot of criteria that's used. Hours is certainly one of the criteria, but it's not the only criterion, and it's not the criterion that people get beat up on if, for some reason, the hours are out of shape. If the hours are out of shape, we don't want people to not put down the hours. We want them to put down the hours, and then we want to know why the hours are out of shape.
A very good example is if you're training young people on a client, on a long-existing client, and you have a lot of extra training time, then we have a code for training time at a client, so we take that into account. We expect training. We expect growth. A lot of firms have pipelines of new business. Withum has a pipeline of staff growth, and we hire a lot of people — we hired 130 people that are going to start in November, where their first job in public accounting is with Withum. We have a class of 130 people starting in November, and we have a two-week training program.
This starts that pipeline, and some of these people may become partner; we hope some of these people become partners, but we also hope they stay. If the average life — by the way, Withum’s ... I don't want to make this about Withum, but one of the criteria that we also look at is turnover. If we have a manager, or we have a supervisor, whoever it is, and the people under them have a higher turnover than when they work with somebody else, we want to know about that also.
We're running a business. Everybody’s running a business, and they want to do it right. If you look at one thing, which is not ... It's not a good way of measuring performance, the hours that people put in. The guys that make errors on tax returns work later than the people that don't make errors on tax returns.
If a boss is in the office at 10:00 at night and sees two jerks in the office fixing their errors, and the people that didn’t make errors went home at 7:00, the partner’s not going to say, “Gee, these two guys are stars because they’re working until 10:00 at night.” He's going to say, “Why were these people working at 10:00 at night?” You say, “Well, they’ve got extra work to do. They wanted to meet deadlines, or they're fixing errors,” it's two different reasons.
Blake Oliver: Yeah, I guess. It sounds we're actually in agreement then that the billable hour is not a good performance metric. There are many better performance metrics. You just disagree that it's a negative incentive, the way I think it is.
Ed Mendlowitz: No, you said it was a negative incentive—
Blake Oliver: Yes.
Ed Mendlowitz: -to get people to do better work, or more work; they want to take on more work. I disagree with that.
Blake Oliver: Specifically, it discourages innovation because putting in technology will reduce their billable hours; they'll have to take on more clients. There's really no reason for them to want to become more efficient in a CAAS practice.
Ed Mendlowitz: No. If you're a professional, if you went to college, you want to be an accountant, you get a job with an accounting firm, you become a CPA, you're a professional. If you're professional, you want to grow. One way of growing is not to do work that could be done by a machine or by artificial intelligence. Anybody that says, “Well, gee, I'm not going to give this work up to a computer because I'm going to work less,” is a fool and doesn't belong in public accounting. Thankfully, those people leave—
Blake Oliver: Well, but not all of them do. Not all of them do. We all know who those people are in our firms, and I encountered them. There were some all-stars who agreed with me and wanted to implement the tech because they saw it as a way to improve their careers. Then, there was this whole group of people in the firm who were just pulling a paycheck. I think we have to admit that those people exist. They're not ... Not everybody's an all-star.
Ed Mendlowitz: Yeah, but they're not going to grow. One time, I had a firm in New York, and we had 50 people. I started a firm with one other guy. In 14 years, we had 50 people. We did not buy any practices; we did not buy any accounts. We couldn't get people with know-how. One day, we hired a guy who was with a larger firm for seven years, and we hired him as a manager. The guy was terrible. He was terrible. We ended up letting them go. One day, I ran into one of the founding partners of the other firm, and we started talking.
I said, “You know, you had this guy who was also working for you for seven years. The guy was terrible. How could you do that?” He says, “Eddie, first of all, if you’re ever going to hire someone who worked for me, you've got to call me and check them out first. Second of all, we're big enough that we could afford to lose some, but we need bodies at clients. He was a presentable body at a client, and on that basis, we kept him. He performed the role for us, but for you? No. You need everybody to be productive right away.”
That's how you’ve got to look at things and measure things. There are always going to be some duds in a firm ... I had a woman working for me; I could probably count my major mistakes on my fingers on one hand. One of the major mistakes I had was that a young lady working for me — she worked for me for a number of years. She was not growing. She was not growing. She worked on about 30–35 of our small clients that we maybe didn't care about. We gave it to her. We started giving her small raises, and after a couple years, she figured out that she should leave.
After she left, my partner and I started getting calls from 30 clients that were calling her every day or calling her every week on something. She was the most pleasant person. She handled all their needs, and they didn't need a genius working on their stuff. They needed someone who would make sure the work got done, and it was on time. My partner, and I looked it over anyway. The work was done right. We had our annual meetings with the clients, and we misjudged her. People have walls.
I could tell you a dozen stories of people like that. I had another guy that, he didn't want ... He's the kind of guy, you saw him walking, you’d walk the other way because you didn't want to talk to him. One day, I'm looking at ... Talk about timesheets. I'm looking at the timesheets ... You look at them, but you don't always focus in every time on everything.
One day, I’m looking at the timesheets, and I'm looking at five clients that this guy's working on. I had no idea why he's working on it. I called in the manager on the account. I said, “How come so-and-so worked on this?” “Oh, I had a tax question. I asked him.” I said, “Why didn’t you ask so-and-so in the tax department?” He says, “Well, I did. I asked him two or three times. He never got back to me. I asked this guy, and he gives me the answer.”
Five managers told me that this was a resource for them that I underestimated because I didn’t like the way he walked; I didn’t like the way he talked. I started advancing him and giving him better work to do because he was a resource that I didn't know about in a small firm. I didn't know about it, but I picked it up on the time sheet. Talk about value of timesheets — that's a good value of use of the timesheet.
Blake Oliver: I have to give that to you, Ed. That is actually a good use of a timesheet, and I'll have to take that into consideration.
Ed Mendlowitz: I’ve got a dozen things like that. That’s just one thing. I’ll give you another use of a timesheet.
Blake Oliver: Okay, let's do it.
Ed Mendlowitz: I hired a guy, a hotshot manager, and I looked at the time, and the time is — the realization is terrible. Realization is the amount you collect divided by the time—
Blake Oliver: The amount you billed? Yeah.
Ed Mendlowitz: Let's say it was 40 percent. This was a profitable client. I used to do it myself. I turned it over to him. I look at it, and it's a big client, and he's doing all the work himself. I said, “You can't do all the work yourself.” “Yeah, take some away. I don't know how to train them. I don't know what to give them.” I started working with the guy and training him, and I reduced his time — let's say I reduced his time on this client from 150 hours to 50 hours. Then, we put younger people where maybe they spent 150 hours. I increased the actual hours on the job from 150 to 200, but I increased the realization. I had a good separation of work. I had my star guy, or someone who became my star not bogged down. I freed up 100 hours.
Do you think he complained to me that I freed up 100 hours, and now he had to do more work? He grabbed the work [CROSSTALK 39:42] grabbed this, and he learned new things. We got new clients with new services, and he became a ... I ended up making him a partner. I got that from the timesheet because, on a daily basis, we think we know what's going on, but sometimes, you don't always know what's going on. Don’t forget, I had a small practice, and I’m working with clients; I’m with clients all the time. I'm reviewing the reports, and the output, but I'm not reviewing the input. I’m relying on managers and staff to do that.
Blake Oliver: I suppose the information you get from knowing what clients staff are working on, and when, that's helpful in in figuring out if they're really being utilized properly. This star was trying to do everything himself, and you were able to figure out from the time entries what was going on and get some junior staff in there to help. That made him happier because he got to do more and better things.
Ed Mendlowitz: Actually, initially, I made him unhappy because I made him do something out of his comfort zone. I made him train people out of school. Also, I picked it up from the timesheet. Now, you might say that I was a poor manager because I should have been aware of it and not needed to look at the timesheet. I’ll tell you that, eventually, I would have picked it up without ... If I didn't have the timesheet, I would have picked it up eventually.
In this case, I picked it up sooner than I would have from the timesheet. The timesheet is a tool. It doesn't replace management. It doesn't replace oversight. It doesn't replace checking in with people — what they're doing; if they're on target; if they're doing extra work that they shouldn't be doing, or if the client is [asking] for help on something. It's just a tool. It's not the tool, it’s a tool.
Blake Oliver: Unfortunately, I think there are some folks who use it and don't use the other tools you're talking about. If you do that—
Ed Mendlowitz: The firm you worked for, they clearly did not use the other tool because, I'm telling you, we would have never let you ... When I had my own firm with the 50 people, we would never let you leave. Then, I had a small practice when I left that, and you would have never left. If it meant making you partner, we would have made you a partner. By the way, I made this guy a partner without him asking to become a partner. We felt he earned it. He reached that level. One day, we went in to him — this was before I merged in with Withum. He's still at Withum. I merged in with Withum, with two other partners, but all three of us are still at Withum.
Blake Oliver: One of the other criticisms of timesheets is that it creates this unhealthy culture among the high performers of I want to have the most hours. Do you agree with that? Do you disagree? Do you think there is that negative impact?
Ed Mendlowitz: Yeah, it's a negative impact, and if you stop ... If you're driving a car, and you have to stop for a stop sign, that has a negative impact, too. You’re forced to do something. People don't like to be forced to do things. If I had managers working for me, and they had that attitude, they wouldn’t have made it to manager, working for me, and they're not going to make it to the next level.
Blake Oliver: What attitude do you mean?
Ed Mendlowitz: The negative attitude about keeping track of the time, or about building up the hours, and all that.
Blake Oliver: Let's say they're being honest — they're being honest about their time, and they are all stars, and they're just trying to bill more hours—
Ed Mendlowitz: They don't get it. First of all, if you’re trying to bill more ... If all you’re trying to do is build hours, you're not building relationships with clients; you're not building relationships with people that might be able to refer work to you in the future. You're not joining organizations that you're getting involved in. Maybe you're not learning new skills. Maybe you're taking the obligatory 40-hours-a-year CPE, and not 60 hours, when maybe you should take the other 20 to learn added skills and everything. Maybe you’re not reading books and not talking about the books.
Blake Oliver: That was one of my frustrations is I couldn't get the staff to take time to train. They had a limited training budget, and if they'd already used it, I couldn't get them to go take the certification for the application that I wanted them to learn to become more efficient because they said, “I don't have training time. I’m going to have to eat these hours if I do this training.”
Ed Mendlowitz: I’ve been around a long time. I worked for four firms before I started my own firm. I would have never hired me, based on my work history. I had my own firm for a year. I then formed a partnership. I was there for three years, and then I formed a partnership with another guy. We ended up with 50 people. Then, I left that and formed a small firm, and then my small firm merged into Withum. Never had that problem. I never saw it. I never had it. I never had it in the firm. I tell you, I did have bad apples working for me, but I never had—
Blake Oliver: They didn't tell me this straight up, but I could tell they weren't excited about it.
Ed Mendlowitz: You could tell. You could tell from people. You could tell they're not excited about new things, about taking on added work—
Blake Oliver: Yeah, exactly. You never encountered that, like that resistance to change that you get?
Ed Mendlowitz: Occasionally, I did, and they left. I had them leave. I told them to leave, or I didn't promote them because, if I needed a body somewhere ... You don't wake up smart; you don't wake up knowing everything. At one point, I reached the point where I said, you know what? If I have someone that's not that good, I'm not going to carry them anymore, and I'm not going to wait for them to quit. I'm going to get rid of them ... I once hired a guy December 1 to get ready for tax season; December 31, we fired him.
Blake Oliver: I think the challenge for me is, as a as a manager, I didn't have the luxury of firing and hiring my own staff. I had to deal with what I inherited when I came into that office, so I was looking for ways to incentivize these people who were kind of average. Every firm has them. Most of the people in the firm are average. That's the nature of how things work. You have a small percentage who are extraordinary. You have a small percentage who are terrible and should be fired immediately, and then you have a bunch of folks who are in the middle. That's what I was trying to figure out how to motivate was those people that just weren't — they didn't seem very motivated. I think every firm has them, especially big ones, right?
Ed Mendlowitz: Every firm has them, number one. When you say average, there are bunch ... To be average, you’ve got a bunch under them and a bunch over them. The ones that are way, you don’t spend time on—
Blake Oliver: It’s a distribution.
Ed Mendlowitz: I had a small firm, and when I had my small — we only hired people out of school. When I hired people out of school, I did not get the top students, or the next to top students, or the third from top students ... I didn’t get first choice, second choice, or third choice, but I hired good people who became good accountants; became CPAs. Some of them stayed with me for many years. You’ve got to look for other things.
I’ll give you an example. When I hired out of school, I hired people that didn't have the top averages. Who did I hire? I hired people that had to work their way through college. If you're working 30–40 hours a week, you're not going to get straight-A averages. I hired people who ...
I had one young lady. She had a soccer scholarship in college, so she was on the soccer team. She had to work to cover her other costs, so she didn't have great averages. She didn't have great marks. When she was in high school, though, she also started a girls’ soccer team in high school. She was with me 10 years until she had her third kid and decided she didn't want to work anymore. I did whatever I could to try to get her to stay in any terms she wanted. You’ve got to look for other people.
Also, not everybody knows the same as everybody else. I’ll use the example of an audit. You have not-for-profit audits; you have 401(k) audits, and you have business-firm audits. Well, someone who does a not-for-profit audit, or a review of a not for profit may not be good at reviewing a manufacturing company with inventory, so you don't give it to them. Someone who reviews an audit of a manufactured inventory, you may not give them a 401(k) audit to review. You try to give people work to their strengths, and you shield them from their weaknesses. The book “Good to Great,” there’s a premise that you can’t have a great firm unless everybody's great, but by definition—
Blake Oliver: Yeah, not everybody is going to be great.
Ed Mendlowitz: You're not going to get great people ... If you have great people, and everything they’re doing is not great, then they're not great people, by my definition. You could take someone who's not great, and you could find what makes them — what they're great at. Now, if someone's working 40 hours a week, and I have work that they're great at that I could give them for eight hours a week, I'll make sure I give them those eight hours. I’m not going to give it to someone else who's not great in that. I'll take away eight hours some from that person that maybe — the work that they’re the least happy with.
I taught an MBA course one time in macroeconomics, and there was one thing I couldn't get. I just couldn't get how to teach the damned thing, and I couldn't figure it out. I had a kid working for me, very smart kid. He did exactly what he was told, and he did it great; not one thing extra. I found out one day, from talking to him, that he was taking a master's in economics. He taught that session for me.
Of course, the minute he got his master's degree, he left, and the time he was with me, we got good work; we got good value from him, but we didn't invest any time to bring him to the next level because that's not what he wanted. You got to have awareness ... Also, you’ve got to match clients with the staff. This young lady that I talked about who worked on these 30 clients, they loved her. She was great. Now, maybe I could not have given—
Blake Oliver: The one that you fired, or you pushed out—
Ed Mendlowitz: I didn't fire her. The one that I misjudged; I was very bad at that. This was a very bad mistake I made, and I regret it. You can't go back and change things, but I tried not to make that mistake again. She had a quality that the clients loved her, and she was ... You know what I say the biggest quality that clients value more than anything? Availability. They don’t value how smart you are ... They value if you return their call right away, if you're proactive, if you initiate calls.
Blake Oliver: Isn't that crazy that the number-one thing people complain about is not being able to reach their tax preparer?
Ed Mendlowitz: That's right.
Blake Oliver: It's nuts when that's what people value.
Ed Mendlowitz: That's what I teach. I don't teach how to do a 1031 exchange. I teach: you return calls right away. You're available. You follow up. I tell my tax staff, if they need information from a client, and I don't get a complaint from a client that you're driving them crazy, then you're not doing your job. Of course, the biggest problem I have is when what staff call clients — we're missing information, and the staff don't respond. I told them, I want you to call every three days. At some point, if they don't call, or complain about you, then you're not doing your job.
Blake Oliver: I love that, and I agree 100 percent with you on this, and I see this all the time. You go out on social media — if you look on Facebook, or on LinkedIn, or on Twitter, and you ask people: what is your biggest complaint about your current CPA? The number-one complaint is: they don't call me back. I don't know where my tax return is. I have to bug them. I'm in the dark.
It sounds like that's something that you can help people with. It brings us back to the original topic of this discussion, which was why does work take so long in firms? It relates to this issue of client satisfaction because when the tax return takes a long time to get through the firm, it's a bad experience for the client. It would be better if, when they get us what we need, it takes two weeks and it's done, right?
Ed Mendlowitz: Blake, if you wanted to talk about why does work take so long, that, to me, is a much more important topic than timesheets.
Blake Oliver: So, let's talk about that.
Ed Mendlowitz: Work takes so long because the staff are not trained properly. They're not given the right work to do. They're not given the CPE that is at the level that they're at for the work they're going to go on, and they're not supervised enough. There's no oversight, or there's not enough oversight on them. That's why work takes so long.
In my firm — I haven't done this in the last two years because of COVID — my office hires ... We hire two classes; each class has six interns, for six weeks. I get one of the interns for six weeks to work for me, whatever I want done. The deal I got is they don't have to put it on the timesheet. I have them do all these weird projects that I have in mind. I’ll give you an example. One of the projects I did ... Sustainability is a big deal, right?
Blake Oliver: ESG, yeah.
Ed Mendlowitz: I developed the first CPE program on sustainability about six or seven years ago for the New York State Society of CPAs and had an intern work on it for three weeks. When it was finished, I had him attend the program. The program was in the morning, and then I had him — I set him up in our New York City office — because he worked in my East Brunswick office — just to meet people and have him show them around.
I had a college kid, someone who was going to be a junior in college, develop a ... He spent three weeks developing a sustainability CPE program; pretty complicated stuff. He did a great job because he was properly supervised. Look, I don't want to take away — this is a smart kid, and he listened, but he was also very closely supervised, and he worked at the next desk from me.
I had to do a retreat for a CPA firm, but before the retreat, I wanted to go through all their numbers. What I did was I went the first day; I was at a table that was maybe two-and-a-half, three-feet wide. I took an intern with me, and she spent the whole day with me, right opposite me, and she laid out all the numbers — the five-year analysis of their tax returns, and the timelines, and all this stuff. She did it all. She didn't know what she was doing, but she got it all done because she was properly supervised. You know what the big shame of that was? I did not have a young partner doing the work instead of having the intern because the young who would have seen how a CPA firm runs. This intern was just pushing numbers to get the work done.
I know that you could take people out of school ... When I merged with Withum, every single person working for me, we hired, it was their first job. My chargeable hour was when I merged with Withum was 50 bucks an hour more than Bill Hagaman’s chargeable hour. He was the managing partner of my office at that time. I had good rates. I was making a lot of money at a small firm. I wasn't overworked. I had 1,200 chargeable hours, and I was doing it all with people that I trained out of school. This stuff can be done. The work takes so long because of poor management, period—
Blake Oliver: Poor training, and poor management.
Ed Mendlowitz: Poor management. Training falls under the management. Look, you have obligatory CPE. You send a kid who's working for you one year to an all-day tax update. Seven of the eight hours have nothing to do with what he's going to do. Send them to an eight-hour quiz on how to prepare a basic tax return.
Blake Oliver: I always wonder, why is it that academia — maybe this was just my experience, but when I ... I'm a career-changer. I went back to school for my core accounting classes. I took them all actually fairly recently, right before I got my CPA. I studied really hard for audit. I was terrified of the CPA exam in audit. I did well in my courses, and I wanted to nail it. I studied my butt off. I got a 96 on audit.
Ed Mendlowitz: That’s great.
Blake Oliver: Right, but I couldn't ... If you gave me an audit, I wouldn't know the first thing about how to run an audit. Same thing with tax. If you told me, “Hey, Blake, here's an easy tax return. You've studied accounting for four years, and you've taken the CPA exam. Prepare this tax return,” I wouldn't know the first thing about it. Isn't part of the problem that our educational institutions do not prepare us to actually be accountants and that firms have to basically train them from scratch?
Ed Mendlowitz: The answer is yes, but the problem is also the firm—
Blake Oliver: They have to do it. I get it. It's not optional.
Ed Mendlowitz: I went to college probably before you were born, and they did not train me to do tax returns, or to get a job done. I worked for a firm that sent me to Sidney [INAUDIBLE 60:01] tax workshop. By the way, now, I’m very good friends with him. At the time I was a kid, and he's giving the ... They sent me to a tax workshop — how to do a tax return from A to Z. Of course, in those days CPE wasn’t mandatory. Once it became mandatory ... You’re sending a staff II, to an eight-hour session on revenue recognition. What kind of crap is that?
I told you, I give this webinar at CPAacademy that has a few thousand people. Every time I give it, on reviewing tax returns, I give another one that has the second-most people, called Essential Auditing for Individual Growth. I give a one-hour webinar to explain what benefits you can get out of auditing. There's a big disconnect between the checklist that the staff has to fill out, and the guy walking into a grocery store, and buying a jar of mustard. There’s a complete disconnect between the two.
If you don't understand that a guy had a jar of mustard, got into the store ... You could have a million transactions an hour. Walmart, I'm sure, has a million transactions an hour. At the end of the month, the total of the month's transactions is in the general ledger. At the end of the year, it's on a trial balance, and it's on a financial statement that’s spit out. We tell the accountant, “Here are some checklists. Look at the aging of the accounts receivable.”
They’re not learning anything. They’re not learning the business cycle. They’re not learning how the transactions get created. Five years from now, no one is going to understand tax returns because, right now, we're not doing tax returns anymore. What we're doing is we're scanning the original documents. It populates the software, and then you get the kids checking that the summary stuff is scanned right, and that the indexing is right in the PDF file. They’re not learning anything.
Blake Oliver: Or we're offshoring the actual entry of that data, as well—
Ed Mendlowitz: It's the same thing. What we're doing is we're taking away the preparation of the return. When I had my firm, I merged in 16 years ago with Withum. We used to have a training program where we made a tax return. Everybody had to do it by hand. When I went to college, we had to do a practice set in our auditing class. One jerk did it, and then 12 of us would sit and copy it from him, and we didn't learn it. We didn't learn it. But, in those days, everything was more hands-on.
You’ve got to develop systems and training that becomes interesting, that they could buy into, that they could see a benefit from, and that they could grow from. I've done it in my small firm with on-the-job training. I had very rigid training; it was on-the-job training. I’m telling you, my staff ... A lot of the people that worked for me that I hired out of school have their own practices today ... In fact, some have retired already.
It all gets down to management, and you've got to look at what you want. I’ll give you one more example. My method for reviewing tax returns is if someone makes an error, they have to fix the error. Now, in most firms, they want the reviewer to fix the error. If it’s less than 15 minutes, or 10 minutes of work, they want to be you to fix it. When the reviewer fixes it, the person doing the return never learns what the error was, and they never learn to fix it. I stuck to this. If you make everybody fix the errors, that takes time. It takes time, and it may be late getting the return out.
My question to me, to Ed, was: am I in business to get through the tax season or am I in business to build a business that will sustain itself and be worth something in the future? It was to build the business that would sustain itself. I made the staff people fix their own errors. It delayed things; it added time. I had people who learned how to do things and I had people learn not to make errors. I had people that knew if they made an error, there's a cost to it. Sometimes, the cost is very expensive because I once made someone come back, an hour-and-a-half ride back to the office to fix a zip code.
Blake Oliver: Well, thankfully, we don't have to do that anymore. We can just do it from home, right?
Ed Mendlowitz: Well, it's the same thing, but doing it from home is okay, as long as the reviewer doesn't fix it and then puts on a sheet: “I fixed a zip code.” It's okay to do it from home, as long as you tell them, “You made a mistake on the return; you got the address wrong. Fix it,” or whatever.
Blake Oliver: This has been very educational for me. Thank you so much, Ed, for taking the time to discuss, debate ... I've enjoyed it a lot. If people want to get in touch with you online, where would you point them?
Ed Mendlowitz: Actually, a good way is to contact me through LinkedIn. The other thing is they could just email me: email@example.com. If they have any questions, they’re welcome to email me, but put down a brief sentence of what the question is, and always include your phone number. I have people — two-thirds of the emails I get, people write long things; they want answers, and they don't even give me their phone number.
They expect me to spend two hours to answer their damned question? If they give me their phone number, I pick up the phone, and I call them. It's much easier for me ... I’m loath to write anything out. First of all, it takes time. Second of all, if I’m going to write something, I’ve got to make sure I cover all bases, and I've got to make sure it's right, and I didn’t leave something out. It takes a lot of time. I'm very good at calling people that bring me phone numbers.
Blake Oliver: It sounds like you're also then a fan of being on podcasts. I would love to have you back for future episodes and future topics. Again, I've been speaking with Ed Mendlowitz, partner at Withum, in East Brunswick, New Jersey. Reach him at firstname.lastname@example.org.
Ed Mendlowitz: Yeah, email@example.com. You could also Google me and then figure it out, but also, LinkedIn is pretty good. Send me a message on LinkedIn.
Blake Oliver: Just don't make it a really long one; include your phone number. The contact info for Ed will be in the show notes. Thanks, Ed. It was great talking with you.
Ed Mendlowitz: This was great. I had a good time.
Blake Oliver: Hey, everyone, Blake here again. I hope you enjoyed that episode. If you'd like to get CPE for listening to episodes like this one and many more accounting and tax podcasts, go to earmarkCPE.com, sign up, and get early access when the app launches later in 2021.