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By W. Robert Smith, Marguerite R. Hutton, and Charles E. Jordan

Creating value for clients is a requirement, not an option. In today's competitive environment, clients demand that firms staff engagements with knowledgeable, experienced professionals. Faced with shrinking profit margins and rising client expectations, most public accounting firms question the revolving-door recruitment practices of the past. Today, firms hire fewer accountants and hope to retain more. This means, firms must exercise care in selecting employees and create a work environment that encourages employees to stay.

Research suggests that establishing realistic time budgets and deadlines is one of the most important changes firms can make to encourage staff to remain in public accounting. To set realistic time budgets, firms need accurate data on the amount of time previously spent on tasks. Accountants, however, do not always accurately report this time. The most common form of inaccurate reporting is underreporting, reporting less time than was actually devoted to a task. In addition to complicating the job of setting realistic future budgets, underreporting may lead to a variety of problems related to employee turnover, productivity, and morale.

We surveyed accountants across the U.S. and found that underreporting may be much more common than previously thought. Our survey also developed insight into the motivation for underreporting. Based on our research and the research of others, we recommend a course of action to reduce underreporting. Those firms able to curb this practice will be best able to set realistic time budgets and create a work environment compatible with retaining the best and brightest accountants.

Problems of Underreporting

When underreporting is pervasive, data on the time required to complete tasks in the past is unreliable. For example, if the time budgeted last year at 20 hours for a particular task was reported to have taken 21 hours, it may again be budgeted at 20 hours this year. If the actual time spent on the task last year was 26 hours, the 5 unreported hours may make evaluation of personnel and client profitability difficult. Was the person who performed the task last year inefficient or merely inexperienced? If inefficiency was the cause, did the inefficiency result from inadequate training, or was it the result of characteristics of the individual who performed the task? If the additional time required last year was the result of inexperience, will the person performing the task this year be similarly inexperienced? Should the firm estimate its fee this year based on 26 hours? These are difficult enough questions to answer even with accurate information; they become more difficult when time is reported inaccurately.

In addition to complicating the budgeting and evaluation processes, an environment that encourages underreporting may cause less-than-desirable work output. Research into auditor behavior suggests that many auditors at least occasionally reduce the quality of audit work to meet time budgets. Even if the review process succeeds in maintaining a high overall level of quality in the presence of underreporting, a workload that includes many unreported hours could hardly be expected to decrease turnover or improve morale. Indeed, prior studies suggest that accountants who underreport time are likely to leave public accounting sooner than those who report time accurately.

Exhibit 1 contains an excerpt from an unsolicited note written by a respondent to our survey. In the note, the respondent describes the underreporting problem from the perspective of someone who has worked in the profession for only a few years. The note articulates many of the problems caused by underreporting and the challenges firms face if they are to create an atmosphere that encourages people to stay in public accounting.

Determining the total cost to accounting firms of underreporting is a complex matter and difficult to measure. At a minimum, it includes the opportunity cost for some portion of the unreported hours not billed to clients. It also includes the additional costs firms incur to recruit and train employees to replace those who depart early as a result of underreporting. The psychological and physical effects of underreporting appear to increase turnover and have adverse effects on morale and productivity.

How Much Underreporting and Why

Underreporting was first formally addressed in 1977 when the Commission on Auditors' Responsibilities reported the results of a survey indicating that 55% of the respondents from local, regional, and national public accounting firms underreported chargeable hours in response to time pressure on audit engagements. Other studies published about the same time suggested that underreporting was widespread. However, our results, as described below, indicate that underreporting may be far more extensive today than it was a decade or so ago.

We surveyed 300 accountants in public practice at all levels of responsibility in national, regional, and local firms in 13 cities across the U.S. Of those asked, 63% responded. Management (partners and managers), senior accountants, and staff accountants were equally represented among the respondents. Our results indicate that underreporting is common today.

As Exhibit 2 shows, 89% of all respondents said that they underreported time during the most recent year. Respondents at all organizational levels said that they underreported. About half of the respondents said that they disapprove of underreporting. Seniors and staff accountants were slightly more likely than managers to disapprove of underreporting. All firms in our sample had policies against underreporting, but 48% of the respondents said that underreporting was easily accomplished. Only 1% indicated that underreporting was difficult. Most of the respondents, 90%, were never explicitly asked to underreport, but 57% said that they were implicitly asked to underreport on a frequent or occasional basis.

Most accountants probably do not keep accurate records on the amount of time they underreport. It also may be that firms, or those working for firms, do not intend their actions to be implicit requests to underreport. To some extent, emphasizing the accuracy of the statement made by those who responded to our survey misses the point. For purposes of employee retention, accountants perceive these things to be true, and they act accordingly.

Exhibit 3 shows the benefits accountants said they expect to receive from underreporting. Most accountants expect underreporting to help them progress in their careers, and they do not appear to receive much personal satisfaction from underreporting. They underreport merely to get ahead professionally.

From the information we obtained, the picture that emerges is remarkably consistent across firms and across levels of responsibility. Accountants believe time budgets are often unrealistic, but they believe they must meet time budgets to advance professionally. Accountants believe underreporting is wrong but easily accomplished. Accountants are not explicitly asked to underreport, but most believe underreporting is requested implicitly.

To Reduce Underreporting

Firms must recognize that the work environment plays an important role in retaining competent professionals. After making a commitment to a more hospitable work environment, accounting firms must be open to change and willing to experiment.

Employees must be convinced about any commitment to change the work environment. New employees, for example, should receive convincing signals in the form of written material, spoken words, and actions that underreporting is not desirable. Given the pervasive nature of underreporting in the past and the strong desire of most accountants to be correct and, just as importantly, to appear correct, firms must provide clear, consistent information on the importance of accurately reporting time. To be convincing, firms should create an environment that makes underreporting difficult. One simple way might be to have senior accountants, as part of the periodic evaluation process, ask staff accountants if they underreport, and have senior accountants discuss with staff accountants why underreporting is

Firms should experiment with more objective and accurate methods of setting time budgets. For example, some firms might take a statistical approach to the budget-setting process. Formulas might determine the time budget for many tasks based on known client facts. Another approach might be to have more than one person independently estimate the time required to perform tasks. Either approach would reduce the bias present when the person, who often has something resembling a financial interest in the task at hand, estimates the amount of time required to perform a task. Some firms might even wish to establish new budgets after a task is performed and all facts are known. This would allow personnel evaluation to take place with the benefit of hindsight.

Finally, firms should assess the need for time budgets on each organizational level and for each activity. For example, consider avoiding time budgets at the staff accountant level. When budgets are necessary, make the budgeted amount of time available only to the senior accountant. Staff accountants could still report the actual time spent on activities, but the temptation to underreport to measure up to a budget would be eliminated.

To be competitive in today's environment, many firms believe employee retention is crucial. Research tells us that realistic time budgets are valued highly by staff. Reducing unreported time is the first step in establishing realistic time budgets and creating a work environment conducive to employee retention. *

W. Robert Smith, PhD, CPA, is an assistant professor and Charles E. Jordan, DBA, CPA, an associate professor at the University of Southern Mississippi. Marguerite R. Hutton, PhD, CPA, is an associate professor at Western Washington University.



I believe the practice of eating time is widespread, especially among new hires or interns who want to get hired after the season is over. Last year I watched an intern work almost 80 hours in one week. Yet on his time sheet, he reported 54 total hours (charge and administrative). He had worked like that through the entire season. And it was no surprise when he was invited back as a permanent hire after [graduation].

In the prior season, we had another intern who was logging a lot of hours off the books. She was hired permanently when the season was over. She is no longer with our firm as she could not keep on "eating" the amount of time necessary for her to look good. She suffered from burnout and began to miss days and leave the office early...

I have decided that it is probably best for me to pursue a career [elsewhere]. ... I prefer not to work ... this hard and eat time to get ahead.



Percent of Unreported Time

Totals may include a small rounding difference.EXHIBIT 3




Michael Goldstein, CPA
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