Among all the major advisors (financial people, lawyers, bankers), accountants get the easiest ride. The answer is pretty simple: they are the only advisors who consistently can give you cash which you are not borrowing in the form of a tax return. But are all accountants created equal? How do you differentiate between a good accountant and a bad accountant? When is it time to switch accountants?

To deal with the easy question, all accountants are not created equal. If they were, the corner store accountant would have the same skill-set and expertise to prepare the tax returns as the accountants preparing GE’s tax returns. Clearly, this is not the case.

The difference between good accountants and bad accountants is that, in some cases, bad accountants are not accountants at all but book-keepers who file tax returns or tax preparers who use the same software you and I could get. To be clear, this is not to disparage book-keepers; in many respects, valuable book-keepers are worth more than good accountants. My point rather is to highlight you may not be getting value for your dollar. Let me explain

Professional advisory firms work like all businesses. You either work in quantity (lots of clients, low to modest pricing and small profit margins- think Walmart) or quality (fewer clients, higher pricing and high profit margins- think Saks Fifth Avenue). Professionals who charge by the hour have an additional wrinkle: you can either leverage your time, working 18 hours a day, or leverage your staff’s time, by working them 18 hours a day or both.

If you work in a quantity professional practice, you tend to fall back on leveraging your staff’s time given, with low profit margins, you want to push down the work to the lower paid employees and devote your resources to pushing more numbers through the funnel. What ends up happening then is that accountants who operate a quantity practice tend to push all the work down to his/her staff. The issue is the staff may not be: (i) qualified; (ii) experienced; or (iii) could not care less since it is not their professional license on the line.

The potential result is that their staff, who may not be trained to prepare taxes properly, may be missing deductions and credits or simply overlooking tax planning opportunities since they are not accountants but tax preparers (Jim Yih has a good blog about the difference between tax preparation and tax planning).

Even if your taxes are simple to prepare, it begs the question of what value one is deriving from an accountant who runs a factory operation (slips in, tax returns out)? Would one not be better buying a tax preparation program? This is a personal choice based on comfort, time and expertise.

How can you tell if your accountant is good or bad? The size of the tax return is not the end all and be all since this is not necessarily the best indication of talent; after all, a large tax return may be a function of you simply over-paying your taxes and if your accountant allows you to do this year over year without stopping the pattern can they really be that good?

More often than not, to use a well worn phrase, look for accountants who take a holistic approach to your finances. Will they sit down with you and explain what tax deductions and/or credits could have applied to you but you missed? Do they actually do some tax planning with you (even a cursory comment like “I noticed you are not maxing out all your tax deferred accounts” falls within good tax planning)? Will they refer you to other advisors and/or resources to help with your personal finances?

At the end of the day, good advisors are like good friends or family members. Do they actually spend time with you? Even if they cannot spend that much time with you, do you actually feel like they care about you in that limited period of time as opposed to seeing you as a dollar sign?

When is it time to switch accountants? Again, it is not because the tax returns are getting smaller. From a practice management perspective, look for perceived indifference. From a professional perspective, look to see if your tax planning needs are beginning to outgrow the tax planning needs of her other clientele.

Often, you may have simply outgrown your accountant. Accountants niche like everyone else. If you become self-employed, you may have an accountant who specializes in employed middle class families and cannot provide the same amount of value as they previously did.

Finally, there is one final thing to consider. Accountants are only good as their source material. If you wonder why your returns are small or the tax planning advice poor, perhaps look at how you gave the underlying paperwork to your accountant. If its all in boxes and a mess, your return may mirror the state you brought the work product in.

I geek out and write a cover letter to my accountant stating what I am enclosing, receipts which I think may apply and some odds and ends about my life goals (for example, I am buying a house soon, please plan accordingly).

Good accountants are to be valued. Bad accountants are to be replaced like every other bad advisor. When you see your accountant next, please assess whether they are good or not. Best of luck this tax season.

 

 

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