Paul Dougherty Gets Sirius About Taxes on “Work of Tomorrow”
The Partner-in-Charge of EisnerAmper’s Philadelphia office, Paul Dougherty, was a recent guest on SiriusXM’s “Work of Tomorrow” radio program hosted by Christian Terweisch. Taking place on the Wharton School of Business campus, the wide-ranging discussion covered the art and science of tax planning. Client service was a big part of the conversation such as successful client onboarding, communications and expectation management. Paul also covered tax season strategy, the evolution of tax technology, what’s changed over the past 20 years, and what he sees in store for the next 20 years. Check out the complete interview here.
Narrator: This audio was brought to you by business radio, powered by Wharton, originally airing on SiriusXM. From the campus of the University of Pennsylvania Wharton School – this is “Work of Tomorrow” on Business Radio. Here's your host, Christian Terwiesch.
Christian Terwiesch: Welcome to “Work of Tomorrow” on Business Radio. I'm your host Christian Terwiesch and we are here with you every Monday night at 5:00pm EST followed by replays throughout the week. The purpose of my show is to explore how work will change in times of globalization and digitization. I want to understand the work of tomorrow. April turns out to be a special month in my family. My birthday is on April 2nd, in fact, I just turned 50 which might explain the occasional gray hair on my head. Less exciting but equally impactful on the life of our household is another April date and that is April 15 - tax day. As we do in every year, full of good intentions, my wife and I started preparing for this tax season some two months ago. To be honest, preparing really means creating a big pile of paper and then handing it over to the accountant who prepares our tax documents, but still with one week to go, I start getting nervous. My worries are somebody else's profession, companies like H&R Block alone have 10,000 retail offices and many other professional sub-consumers like me and small businesses file their taxes, but how do these jobs look?
CT: What are the top performing firms doing to get customer delight and efficiency and how is technology changing this work in the future? To answer these questions, I want to work with two wonderful guests on my show today. In the first half I will be speaking to old Paul Dougherty, a partner at EisnerAmper, which is a leading tax accounting firm and then the second half of the show I will talk to Varun Krishna, Vice President at Intuit, the maker of TurboTax. At this point, welcome Paul.
Paul Dougherty: Thank you, Christian.
CT: Hey Paul. Is April 15 for you like black Friday for retailers or Christmas for the elves?
PD: Yeah. That's one way to describe it Christian.
CT: How big is the seasonality factor? How much of your business, if you think about the total hours that you work or the number of client context, how much is happening in this four to six weeks ramping up to April 15th?
PD: I would say a big majority of our time is spent now- there's just been so much compression in the industry. Things are getting out later and brokerage information just coming out later and it's getting more and more compressed and squeezed into a shorter time period.
CT:How do you guys react to that? I mean then do you have flexibility and staff where you have like retired partners who come in and help out or is it just you have to really suck it up in overtime?
PD:It's a combination of things. We do bring in some part-time help. We do bring in people to help us during busy season, but for the most part, the staff puts in a tremendous amount of hours during this time of year. But one of the advantages lately has been with, with technology, people are able to work from different locations so they don't necessarily have to be in the office in order to perform their jobs.
CT: Tell us about your firm. Tell us about EisnerAmper and the services that you guys provide.
PD: EisnerAmper is a leading accounting and advisory firm. We have 1,600 people in the organization and we have offices in New York, New Jersey, Pennsylvania, Florida, California, and we also have international offices in Europe. We have offices in India as well as the Cayman Islands.
CT: On the customer side, how many customers or how many tax accounts do you serve per year?
PD: Well, me personally or the firm as a whole?
CT: The firm as a whole.
PD:Oh gosh, I don't know, a lot. Many.
CT: So you're a partner in this firm?
PD:I am a partner, yes.
CT: Describe a little bit of how you got into that position. What's your career path been like?
PD:I started with the firm back in 1990 and when I started with the firm, it was a much smaller firm. We had about 60 people in the firm at the time and as the it grew, I grew with the firm and we did a couple of mergers throughout the time and now we have, like I said, 1,600 people, but I decided I wanted to get into the tax practice. So I went for a master’s in tax. I also have a law degree. My current role though, I am running our Philadelphia office.
CT:How much of that is management versus still the hands on? Do you still see clients yourself or are you a full-time manager?
PD: I do both. I have a dual role, so I'm a managing our office in Philadelphia. We have about 180 people. I'm responsible for all of our people. I'm responsible for growing the office and responsible for the office's profitability. But I also have my own book of business, so I do still see all of my clients.
CT: If you think about managing an office like Philadelphia, how do you track if you're doing a good job? What are the key performance indicators that you're tracking to see if you're delivering another great year?
PD: We do have a budget, and at the beginning of the year we track our numbers to a budget, but the key metrics that we look at or our clients. We look at the client profitability as a key metric and then the other big metric that we look at is staff utilization.
CT: And so staff utilization, basically, you're sitting on a significant amount of fixed costs, right? So it's about keeping that staff busy. It's about some version of billable hours. Is that the right way of thinking about it?
PD:Correct, yes. There's always a balance between profitability and utilization. During our busy time, we have to staff up for our busy time of year, so we have to make sure that we have enough people. Then in the summer, when it gets a little bit slower, we might have jobs that are less profitable, but it keeps our people busy throughout the year.
CT: Over the last couple of years, I think my wife and I have always filed for extensions. If you think about, you mentioned early on Paul, this trend toward this pressure on you guys because lots of things are going to release at the last minute. One thing to do, of course, is to adjust to that pressure and handle the staffing as you explained. Do you see a trend toward more people filing extensions? Is that becoming more common, or is it just for kind of slow people like me?
PD: No, I think, particularly this year, I think there's going to be a lot of people going on extension. With all the tax law changes, I think we're going to have a record number of extensions this year.
CT:Now our personal financials are not super-complicated, but the days of the 1040 EZ are certainly over. If I were to take my financials and bring it to the 180 partners at your firm, would I get pretty much the same advice from everyone or what? Is there a lot of subjective decision making? Everybody has their kind of their own style and their own way of kind of coming to conclusions and recommendations for me as a client.
PD:Well, I would say you would probably go to one of the tax professionals. I think you would get consistent advice from the tax professionals. Everybody has a little bit of their own style, but I think the advice that you would be getting would be consistent from most of the people in our tax group.
CT:So the work is, and I'm not saying this in a negative way, but the work is fairly standardized in the way that there is a right way of doing this as opposed to being more artistic craftsman where everybody has their own way. One baker bakes a croissant differently from another baker, right?
PD:Right. Well what I would tell you is that part of our process with our clients- I think one of the keys in being successful is that we do planning. Typically what we do is we reach out to all of our clients in the last quarter of the year and we'll talk to them about any events that had happened during the year. Then we'll do planning because one of our biggest jobs, in addition to having the technical expertise, is to be able to manage people's expectations because nobody likes a big surprise on April 15th.
CT: Paul, walk me through that process from the customer's perspective.
PD: Sure, one of the first things that I probably would have done with you if you came as a client last year was I would have taken your 2017 tax numbers and put them into our program and projected what it would look like in 2018 with the new tax law. So you would have at least an understanding if everything stayed the same to what impact tax reform would have on you, but like I said, I think the key ingredient is just the ongoing communication and the planning. We would talk to you about any significant transactions that you had during the year. We would talk to you about what your goals are financially. If you had any children and you wanted to pass on wealth, you wanted to fund college, if you were going to be inheriting any money, if you had any kind of foreign transactions or capital transactions. The tax return is the end product, but what goes into it is, as you said, the ingredients, right? And the ingredients are, to me, the planning throughout the year.
CT: That's something I want to certainly get back to later on in the interview, which I strikes me as really interesting, right? There's this clear transaction of filing the actual return, but there is an advice giving that is much more, that is a little bit more artistic and leveraging your intuition and experience. Before we get there, Paul, you mentioned this idea, “we would put it into our system.” What does this system look like?
PD:We have different programs that we use. We have a program that we use to do income tax projections and it allows us to do different cases and allows us to project out 10 years forward. So we would take your information and we would start with your, your previous year, input that into our computer program and that would be kind of our base year. Then we would run different scenarios based on that. If you had a big capital gain or if you had some other kind of transaction, we would kind of walk through and see what the taxes would be and then see if there was anything we could do before the end of the year to help you minimize those taxes.
CT: So when you to refer to that system or software, is that a homegrown thing that you built over the years? Is that something that is like TurboTax for grownups? Is this an Excel spreadsheet that sits on Paul’s desktop? How can I visualize it?
PD:For individuals, we use a program that is just a commercial program and it's put out by a BNA and that's the program we use for our projections.
CT:Help me think through that as a consumer benefiting from that. So you could basically do some form of scenario analysis saying like, “Christian, if you would give that kind of asset to your children at this point over the next 10 years, it would save you so much.” You could simulate for me the future. I certainly understand there is no such thing as a typical client, but for a somewhat median in complexity client, how many hours of work is involved in there?
PD:Like I said, the important thing is the planning. We'd like to do that throughout the year. It depends on the situation, but that could be as little as you know, two hours or it could be as much as 20 hours or 25 hours to do the actual planning, depending upon the situation and the transactions that the individual has in a given year. To do the actual return that is pretty much a fixed cost. We could kind of figure out how many hours it would take, but on average, an average return probably takes 20 hours because we do have a review process. It’s not just prepared, it’s also reviewed- a couple different levels of review.
CT: In case you're just tuning in, you're listening to “Work of Tomorrow” here on Business Radio. I'm your host Christian Terwiesch and I have the pleasure of chatting with Paul Dougherty who is a partner at EisnerAmper and we're talking about tax preparation, and Paul has seen his share of tax documents in his career. Paul, what has changed over the last 20 years? If you think about, we've talked about the system, the technology that lets you kind of simulate different consumer decisions on future tax burdens. What technological changes have you seen in your career?
PD:I think the answer that I would look at it from three perspectives. One, is the IRS, one is the client and then, how it impacts us within our firm. So the IRS started, it's probably about 20 years ago, that we've been filing returns electronically. In the old days you used to have a paper copy of return; you'd mail it in. The IRS would then input those numbers into their system. Sometimes they'd make keypunch errors and you might get a notice, but starting in 2000, it shifted and we went to electronic filing. In electronic filing, basically we’re responsible for inputting the data. Then we have to get that form, as I'm sure you're familiar, Christian, the 8879 you have to sign and send back to your accountant. The IRS has kind of shifted some of that keypunch to the firms now. It used to be I mailed the return and I was done with it. Now I mailed the return, I've got to get the 8879 back, but everybody knows that now. So that's one change with regard to the Internal Revenue Service. I would say 99.9% of returns are filed electronically. From the client's perspective, what changed is that a lot of the data, it goes back and forth via email. I always like to meet with my clients, but if I need additional information, they'll send me the additional information in an email. Typically, before I finalize a tax return now I email my clients the draft of the return and go through it with them over the phone. They can take a look at it before it's final. Where we're going in the future, as a firm, is we're starting to develop client portals. This is our first year that we’re using the client portal. Instead of sending a client a paper copy of the return, it's going to be posted to a secure portal where they could go and they can access their tax returns and we could put other information in there and communicate with them through the portal. That's a change on the client side. From a firm perspective, everything is paperless now. So it's interesting when you walk through an accounting office now you're not going to find any file rooms. Everything is done paperlessly and the returns move through the process paperlessly. We have a work flow program, so somebody prepares the return, when they're done with it, they sign off on it and they move it to the reviewer. The reviewer then looks at it, he/she signs off on it and moves it to the final reviewer, the partner. Internally, everything moves paperlessly. Then the other thing that I mentioned earlier is people now have the ability to work from home or they can work from anywhere. They don't necessarily have to be in the office to get their work done. They're able to access all of their files and they're able to communicate internally through instant messaging with each other. We're able to share screens with each other if we're not at the same location. Technology has played a big part in the changes.
CT: If I think about the upstream, the more consultation, the more craftsmanship part of the job before the actual e-filing, do you have systems that help your accountants or the partners to ask the right questions or things that might only apply to a very small fraction of consumers. For example, we bought an electric car last year. Would there be something in your system saying make sure you ask the customer that question because that way there could be a deduction that the consumer might have overseen?
PD:Sure. We have checklists that people can access and use when they're preparing returns. We do have checklists as one source for that, but we also do all of our research now electronically. Years ago, we used to have big libraries with all the tax court cases and all of the statutes and the regulations and the case law and everything. Now everything is done online, all of our research. We would type in electric car and we'd get a bunch of hits on that and we'd be able to do the research that way.
CT: But who prompts a partner or the accountant talking with me to ask about the electric car? Is that is part of the checklist?
PD:That is one of the questions asked. We do have very detailed checklists available for people to use.
CT: So the reason why I'm so interested in the checklist and we've seen certainly a similar thing in medicine. We talked earlier about the fact that if I would go to any one of your 180 partners, I would pretty much get consistent advice. If I think now about going to your competitors, would I get the same advice from them as well? Is there a competitive differentiation or is it basically, I don't want to say commoditized, but at the end of the day if everybody gives me the same advice than it is either a kind of a consumer experience piece that you guys are just nicer, you might be faster or you might be cheaper. But if everybody gives me the same advice, in some sense a product would be standardized.
PD: Yeah, I would say that when it comes to the planning piece of it, I think you would not get the same advice from everybody. That depends on a number of different factors. And I think, as you said, that's more kind of the art of taxes than the science of it. The reason I say you would get consistent advice is because we do training for our firm and for our people. We have something called EisnerAmper University where we do all of the training for our staff. So a lot of the partners, you would get consistent answers from, but even amongst the partners, we have discussions as issues come up and we will talk to each other and say, here's the fact pattern. What do you think about this? So I think you would get different answers if you went to different places.
CT: That gets me back to what we discussed early on, right? We really have to sit down well in advance to then just make smart decisions. And all we can do is just document for the IRS. Tell us a little bit about how do you learn about your customers and what is right for them? I mean in the extreme case, if you would be part of my family or close friends, you would be with me every day of the year and you could give me much smarter advice compared to the accountant who assists somewhat later and says Christian, you did what this year?
PD:Right. I think you hit the nail on the head. Part of it is just spending time with your clients. I'm talking to them periodically throughout the year, understanding if they've had any major transactions or changes in their life during the year. It's really that part of it is about communication. It an ongoing dialogue with your client.
CT:Have you seen technology change that? I mean, assuming that my tax accountant, I assume he/she would have to trust you to take that role, I could imagine I'm just giving you access to my bank account. And so you just see what am I spending money from, where is money coming in from a rather than me kind of taking my perception of this, I much rather could equip you with access to all of my financials. Since you're smarter and a pro, would that allow you to make better decisions for me?
PD: I don't know if looking at all your financial data would. Sometimes it might be too much information, it might be too costly for us to do that for you. I think we can kind of narrow down what we would want to look at and focus on more. The time may come for that in the future with data analytics and that type of thing. But right now we're not there. Speaking of costly, I mean this isn’t Business Radio until eventually we have to talk about money. So how do you guys make money? Did you get paid by the hour or by a percentage of my tax revenue? What is your business model?
PD:So our business model is typically we'll meet with a client. We’ll look at their prior year tax returns; we'll look at their information, kind of get a sense as to how they're going to provide us that information. Then we work up a budget and we come up with a figure and we would call you and say, look, based on everything that you've given us and what we know, we think your return is going to cost $1,500 to do. Then, if there's any additional work that needs to be done, if there's other issues that come up as we're doing your return, we would call you and let you know that there's additional time being spent.
CT:It's somewhat like a construction company. Is that a fair comparison?
PD:We give a fixed fee typically for compliance work. For consulting work, it's usually rates and hours.
CT:As you get better over time knowing my case more, probably in a couple of years, and we might see some stability in the tax code again. So those future efficiency improvements, they would benefit you in terms of the first year or onboarding a new customer you might even lose money in that year. Do you think about it that way, that you're investing in more like a lifetime value of a customer?
PD:Yes, that's exactly how we think of it. The first year we tend to spend more time because we have to learn the client, we have to learn how they keep their records. We do make an investment in the initial year and then hopefully that smooths out over time.
CT:Paul, you mentioned the role and the emerging role of data analytics and statistics and AI. How is that playing out right now? We talked about the last 20 years and none of us here has a crystal ball, but if you think about the trends that are kind of emerging at the moment, we think about the next 20 years in tax accounting. What do you see?
PD: I think what I see in the future is a couple of different things. One is, and they're starting for individual returns, there are companies out there now that have these smart scanners. So basically you scan the information and it will automatically populate the tax returns and those scanners are getting better and better over time and they're able to read a lot more information. Where those scanners have some difficulty is if there's handwritten notes or something like that where it's harder to interpret. But most of the government forms, if you get a W2 or 1099, or K1, or 1098, they scan and they go right into the return. So I think that's one area where we're seeing a pickup in efficiency. I do think another area is process automation. So we're starting to try and automate more things. For example, if we're doing a business return, we can code the general ledger so we could import that directly into the tax return so it doesn't have to be touched by an individual. I think that's something that's here as well. That's on the compliance side. I think in terms of the planning side, we're going to see more cognitive type of programs like artificial intelligence. Our firm has started working with IBM Watson on the accounting side. For example, there was a new pronouncement that came out on revenue recognition and we kind of went through the process with IBM to train it, how to read contracts and identify issues with regard to revenue recognition. We just started doing that on the tax side. I've been tasked with doing that on corporate tax, so that's going to be one of my projects after, after busy season.
CT:If you think back through your career, would you do it all over again? Is the profession a calling or would you say well, I really should have started a company like TurboTax and become a technology person.
PD:I would do it all over again. I love my job. I love what I do, so I would definitely do it all over again.
CT: What a great ending! That is Paul Dougherty, partner at EisnerAmper. Thank you so much, Paul. We need to take a short break right now. When we come back, I will work on my second guest for today who is going to be Varun Krishna, vice president at Intuit, the maker of TurboTax. You're listening to Work of Tomorrow. I'm Christian Terwiesch and this is Business Radio powered by the Wharton School here on Sirius XM. We’ll be right back.
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