CPAs Beware: Dot-Coms Don’t Know What They Don’t Know

By: Rick Telberg

Nov. 30, 2000 (SmartPros) ? More and more tax and accounting professionals are finding that getting their piece of the so-called New Economy riches isn’t that much different from winning in the Old Economy.

Dot-com companies may seem different than others. But at heart, each of them is a business with basic business needs. That’s how CPA Stephen King got started several years ago providing basic bookkeeping services to a host of Web startups in New York’s Silicon Alley. As “the virtual accountant,” King found that his clients wanted to work digitally, mostly by email and eventually directly through the Internet. Today he’s the visionary behind Virtual Growth, one of a new breed of accounting service providers.

But most importantly, King found he was mainly providing basic business services to small and growing businesses in desperate need of the knowledge of the fundamentals of business.

Just ask Jim Darragh, CPA at Clark Nuber in Bellevue, Wash., and Linda Gill, CPA at SS&G in Cleveland. They told a meeting of the Leading Edge Alliance that they are focusing their practices on dot-coms and finding, with a few exceptions, that working with New Economy companies requires many of the same technical and client-handling skills of any small business client.

For instance, the services dot-com companies seem to need most are:

Strategic planning,
Business plan development,
Financial projections,
Pulling together a board of advisers or directors,
Properly segregating costs between capital and expense categories,
Tax issues, such as research-and-development credits, nexus, sales taxes, and electing methods of accounting and depreciation.
Legal matters, like entity selection, capital structure, articles and bylaws,
Business valuations,
Teaching founders the hard facts about dilution in equity financing,
Developing or reviewing stock option plans, stock option plan administration, and tax consulting for stockholders and option holders; and
Developing overall accounting systems, as basic as selecting software, installing internal controls, and helping to generate management reports.
The risks of taking on any new client are significant, and maybe even more so among starry-eyed dot-com entrepreneurs. So at SS&G, they created special thresholds for these higher-risk engagements. The companies don’t know what they don’t know: They simply lack real-world business experience. They need speedy turnaround and a lot of hand holding. And they can try to get a lot of free advice by shopping from one CPA firm to another.

Dot-coms are some of the fastest growing and most lucrative areas at an increasing number of tax and accounting firms. But more than one firm has established at least one ironclad policy every accountant will understand: Get paid in cash, up front.

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Posted on November 30, 2000
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Industrial Age Accounting Fails the Information Age

By: Rick Telberg

Nov. 21, 2000 (SmartPros) ? No matter where the debate on Cognitor goes, or cpa2biz, or international harmonization of accounting standards, the inevitable demands of the marketplace will win out.

Robert K. Elliott, while still chairman of the American Institute of the CPAs and testifying before Congress, has it right when he says: “Unfortunately the current accounting model is somewhat out of date. It is very much based on the assumption that profitability depends on physical assets, like plant and machinery; on raw materials, like coal, iron ore, sheet metal, electrical wire, and plastic — in other words, on the tangible inputs needed to produce tangible products. This is the accounting model of the industrial age.”

But we are no longer in the industrial age, Elliott says. “We still have elements of it, of course, and we always will, but we have moved deeply into the information age. We now have information companies, companies that do research and produce findings that they hope to profit from. Manufacturing companies are no longer rooted solely or predominantly in the physical. The role of intellectual inputs that ultimately lead to sales has multiplied enormously. The range of these inputs runs from patentable ideas to marketing, process design, computer programs, know-how, brand names, work-force expertise and training, quality controls, executive strategy, and organizational mechanisms to generate both quality improvements and innovation. All of these things can add to corporate revenues.”

Elliot is right, also, when he blames today’s stock market volatility at last in part on “the relative absence of up-to-date information with which to assess corporate earning capacity.” The world is moving too fact for accountants and financial reporting rules to keep up.

“The annual and quarterly reporting regime is not only on its way to becoming less and less useful, it is on its way to becoming a dinosaur,” Elliott says bluntly.

Others have said that auditors may still charge as much, or maybe even less, for the basic report. But as real-time, universal reporting becomes more in demand, they’ll charge by the click. Companies will pay for how useful their financial reporting is for investors. And isn’t that the way it ought to be? The fact is that none of this is new, the so-called Jenkins committee, headed by Ed Jenkins, now chair of the Financial Accounting Standards Board, predicted this more than six years ago.

The only question left is: What’s taking so long?

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Posted on November 21, 2000
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Posted on November 17, 2000
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Posted on November 9, 2000
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