What do accountants actually do?
I was asked recently by a potential new client, what it is I actually do, and why can't they just do it themselves. I've been running my practice for nearly 7 years and this is the second time I've been asked this. The short and blunt answer is, because I know what I’m doing, but I thought I would stick a more comprehensive answer in a blog.
Contrary to popular belief, accountants are not there to make tax disappear or to create profits out of thin air. Yes there have been some very clever accounting techniques employed by big companies to please the shareholder or to reduce tax bills. These often are too good to be true or have huge consequences. If you’re old enough you may remember the Enron scandal in the late 90’s, the Accountants had “cleverly” inflated it’s earnings to hide the debts, wiping out billions on Wall Street when it collapsed in 2001.
Ok, so if it’s not the job of the accountant to “work their magic”, what is their job? Well the job title ‘accountant’ can be a bit generic, there are many roles that come under this heading. People often say “I need an accountant” but what they actually need is slightly different. The main job roles are described below, but for the quick reader let me answer the “What am I paying you for?” question.
As said above, the short answer is, you are paying for them to know what they are doing! Can you do it yourself? Sure, but do YOU know what you are doing? One way to think about it is, if you have a chip pan fire, yes you can put it out yourself It’s not necessary to call the fire brigade, but what happens if you threw water on it instead of a wet cloth? Yes, you can go and get a garden hose and try and put it out, you may even be successful, but it may have caused a lot of damage in the process. Wouldn’t it be better if you got the people who:
a. Know how to deal with different types of fires.
b. Have the correct skills to put out the fire.
c. Have the tools to put fires out quickly and efficiently.
d. Can stop a small fire turning into a catastrophic disaster.
e. Put out fires regularly.
f. And constantly train to keep up with modern techniques and scenarios.
FYI you also get what you pay for with accountants, a cheap accountant isn’t likely to spend a lot of time on your accounts so they will only use the figures you give them. If the figures are wrong, tough that’s your fault you provided them. The fees charged vary greatly, and it often depends on the skill, complexity, risk and more often, time it takes to prepare your accounts or give you advice (if you hand over a pile of crap expect to pay a lot more for the accountant to sort it out!)
We’ve established so far that the accountant is charging you for their skill and time to complete the job. But what job are they completing? Below are some of the roles that “accountants” have.
Bookkeeper – This role is about data entry. Filing in the spreadsheet or entering the invoices into a piece of software. Their job is to enter your transactions correctly on the software or spreadsheet. These transactions form the main bulk of your financial records (the books).
Payroll clerk – It's their job to process peoples wages. While these days the hard work of number crunching is done by software, it is still an incredibly complex area of law. The Employment Rights Act 1996 stretches to 385 pages of legalese and in 2018 alone there were over 121,000 employment tribunal applications. While not all of these would relate to payroll, it shows how complex getting payroll right can be!
Tax advisor – This role as the name suggests is all about tax. Tax can be broken down into 3 broad categories, Personal/Income Tax, Company/Business Tax and Value Added Tax (VAT). I put VAT on its own, because this area is so complex even accountants struggle to find someone who actually enjoys it! Their job is working out how much tax is due and when. How they calculate tax is by taking the information the bookkeepers have provided and adjust it to get to the taxable bit. Then apply the tax rates to these sources of income. For example, income tax has several tax rates (12 I think if you exclude capital gains tax) depending on what the type of income is, how much of it there is and in what order it should be taxed (oh and these rates are slightly different for Scotland and Wales).
Auditor – You may be forgiven for thinking an auditor will check every single transaction for accuracy or fraud. However, their job is to check the numbers are correct, but they don’t check everything. It would be a Herculean task these days (a single Tesco superstore in 2016 stocked around 40,000 product lines!), there are just too many transactions to check individually so they will check a sample to make sure they look right. Another role is to check the processes within a business, who can authorise payments, how are invoices generated. That kind of thing. Auditors are not the same as forensic accountants either by the way! (their job is to figure out what has happened, often in fraud cases).
Accountant – We got here eventually! The accountant’s role is to write up a business’ books into the financial statements. That’s the same thing as the bookkeeper I hear you shout! Ah contreir! The financial statements are a fancy way of saying “here is how much profit you made” and “this is what the business’ financial position is”. They take the bookkeepers work and use that data to work out the profit or loss, and position of the business. In terms of companies though, accountants have to comply with the Companies Act 2006, the various regulations that accompany the act, as well as strict guidelines on how to prepare the accounts, known as Financial Reporting Standards (FRS). FRS102 for small businesses is 404 pages long, for large companies there are 17 IFRS's, 41 IAS's, 23 IFRIC's, 32 SIC interpretations, and 2 practice statements.
These are the job roles that accountants have, in large firms they will likely be individual people in departments. In smaller firms they often double up, for example the accounts team may also do directors or sole traders’ tax returns
Hopefully this will help you understand what we do.
USDA Foreign Agricultural Service - UK Supermarket chain profiles 2016 (13/12/2016)