Life of an Auditor: Billable Hours
In auditing, and in many companies, the professional staff are judged based on billable hours - how much time they spend working on projects that can be directly billed to the customer.
In January, I wrote a post about what it's like to be an auditor during the time of year where the inevitable inventory counts occur.
This post deals with another important aspect of an auditor's daily life - billing your time. Typically, public accounting firms place a huge emphasis on meeting a certain "target" number of billable hours. Another important statistic that comes along with these hours is realization.
Realization is the percent of hours "billed" to a job that are actually billed to the client. For example, if I spend 6 hours working on a tax return, and the partner spends another 3, let's say that works out to $1,800 worth of our time, given our rate per hour. However, it's fairly typical that we tell the client upfront that their fee will be a flat rate.
In this situation, if the flat fee charged to the client is only $1,200, myself and the partner would have a realization of 67% on this job ($1200 charged/$1800 worked.)
At our firm, we typically expect a realization around 80%, so the above project would have a negative impact on my statistics.
Eating Time
Because of these statistics, many professionals feel pressured to "eat time," i.e. report working fewer hours than they actually did.
Simply billing 4 hours when I actually worked 6 is a terrible way to remedy this issue - although my realization would now go up to the required 80%, my billable hours would then not reflect the amount of time I actually worked. In addition, when budgeting for the job the following year, when looking back at how long it took us, the partner will see that it only took me 4 hours, and then only budget 4 hours into the fee.
My billable hour philosophy
My philosophy is that the most "correct" thing to do is report exactly how many hours you worked on billable work, no more or less. This is typically what firms will tell you is what they want you to do - but you may face pressure from individual bosses to eat your time, which would make them look like better managers on paper.
Don't do it. Even if your realization is poor, I think it is better to show that you sat and worked for the amount of time you really worked for. I also believe that you have more control, especially as a first year, over your billable hours than you have over your realization. Because, due to the nature of auditing, sometimes we just can't charge as much as we work. Those jobs will always have a low realization, and there's not much a first-year can do about that.
Does anyone else work for a firm that evaluates you based on billable hours? Do you think this is a reasonable metric to evaluate professionals?
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May 9th, 2011 - 13:19
Interesting! This is different than how the mechanic at the car dealer bill us. They see what’s wrong, then go by a chart to see how many hours it should take to fix. Then they just bill that amount even if it takes less time to do than the book said. I think an independent shop will bill the actual hours.
retirebyforty recently posted..Chinese-Thai Peer to Peer Lending Game
May 9th, 2011 - 13:40
We pretty much work like the car dealership – except our “chart” of hours is generated by us keeping track of our hours to complete a job this year, so we’ll know how much time it should take us when we go to bill them next year.
Very few jobs end up “costing” us less in hours than what we actually work though – very typical for it to be in the opposite direction.
Kellen recently posted..Life of an Auditor- Billable Hours
May 10th, 2011 - 14:04
Kellen:
Great article. I like the fact you subject yourself to high standards of ethical behavior. It’s not ethical to “eat time”. The issues you brought up in your article go to show why there is such a high turnover rate in public accounting. There’s got to be a way to better forecast the amount of time a specific project ought to take (provided it’s a recurring one or that you can find prior similar projects that were conducted with other similar clients). I can understand that there might be significant variances between actual and budgeted hours when a firm signs up a new client. However, I would expect less variances between actual and budgeted hours as the firm obtains a more comprehensive understanding of a company’s accounting system, operations, tax position, etc….
Furthermore, I don’t even know why some firm managers try to make their subordinates eat hours since most accounting firms do not offer overtime pay.
In any case, this was a very relevant article that you wrote.
May 10th, 2011 - 14:13
@Narcisse – thank you for the thoughtful comment. From your remarks, I wonder if you haven’t been encouraged to eat some hours yourself.
In a perfect world, I think accounting firms could be pretty effective at predicting how much time they will need to work on a client. However, many factors – including the high turnover – make this difficult. For example, last year, 2 experienced staff members were sent out to work on one of our clients. This year, one experienced guy and 3 first years on their first audit were sent out – and the experienced guy had very little experience overseeing other workers, let alone 3 of them. Especially for smaller firms, I imagine that retaining staff would help them be much more effective at completing the work in less time, and also at being able to predict how long that work will take.
May 10th, 2011 - 18:09
Kellen:
I have yet to work for a company where managers ask staff level employees to “eat hours”. To tell you the truth, so far, I have only had an outside look at the public accounting profession. It’s good to have professionals like you provide a more or less objective view of what takes place within the average accounting firm. Employee retention is a big issue in the public accounting industry however something tells me the status quo will remain unchallenged for a very long time into the future.
May 11th, 2011 - 10:10
I haven’t had more than someone suggesting “well it wouldn’t be fair to bill the client for this… maybe bill it to training?” because it took me a long time to figure out how to set up some schedules for an audit. I would say, when it comes to the end of the year and looking at billable hours, if yours are too low and you say “well so and so said I shouldn’t bill this and that” they’ll just look at you and say “well the company policy is to bill the time you worked, so you should have billed it.”
September 15th, 2011 - 08:21
You have to look at the big picture. “Eating hours” is just plain wrong. Billing a client for every minute possible probably won’t endear you either. Offer good service for reasonable fees and your reputation will go before you!
September 15th, 2011 - 08:57
Yes but the client is really paying a flat fee – our “billing time” only shows us what percent of our hours worked we are getting compensated for. If we tell the client the flat fee is $500, but we work enough to “bill” $1,000 – the client will still pay $500, but our “realization” is only 50%, and that tells us that we are probably losing money on that job.