The 4 Dark Clouds Hovering Over Cloud Accounting Software

 Frank Stitely, CPA for Stitely & Karstetter PLLC / CPA Trendlines writes: Cloud accounting software revolutionizes our relationships with our clients, enhancing our ability to provide real-time and forward-looking tax and accounting services. At the recently concluded Sleeter Conference in Las Vegas, cloud vendors promised zero data entry, the editing of transactions in spreadsheet format and seamless integration with best of breed third-party applications.

They didn’t mention, however, that their programmers redefine accounting principles by sacrificing sound internal control at the ease of use altar. Before launching your clients into the accounting cloud, evaluate the risks currently ignored by many, if not most, cloud vendors.

Risk #1: Zero data entry

At the Sleeter Conference, one cloud vendor opined that hooking into bank data feeds means your bank account is always reconciled. If you define bank reconciliation as comparing what happened in your bank account to what you believe should have happened, you are never really reconciled. You are just abdicating control of your bank account to anyone with access to your routing and account numbers.

Do you really believe your clients’ bookkeepers will closely review every transaction in a bank feed? Ten years ago, we caught a bookkeeper transferring money from his employer’s account to his own using ACH transfers. He classified dozens of small transactions as materials expense. Without the enforced discipline of a real bank reconciliation process, these transactions slide into the general ledger through a bank feed unnoticed. Credit card transaction feeds are another huge risk.

Risk #2: Transaction date cutoff

Wave your green eyeshade and raise your AARP card if you remember the concept of accounting periods.

Dozens of times each corporate tax season, we anxiously print a client’s prior year balance sheet to reconcile retained earnings only to have Lucy snatch the retained earnings football from under our Charlie Brown-like hope that retained earnings will tie out this year. And that’s with the locking date feature in QuickBooks available. Many cloud accounting packages have neither formal accounting periods nor locking date functionality. Charlie Brown doesn’t stand a chance – ever.

Imagine an IRS audit where you provide your client’s accounting data to the examiner, and the balance sheet in the audit period no longer matches schedule L on the 1120S form. Welcome to the new world, same as the old world, only the software ensures you can never solve the problem, even for a client with a competent bookkeeper.

Risk #3: Segregation of duties

How are most frauds either prevented or detected? Segregation of duties. When one person performs incompatible duties, fraud results. Our small business clients have trouble ensuring sufficient staff to accomplish segregation. Many cloud accounting packages make segregation impossible, even with sufficient staff, through insufficient password security. Defining user access on a screen-by-screen basis is the exception rather than the rule in cloud packages. When your A/P clerk has access to your bank reconciliation, deleting evidence of theft is easy.

Risk #4: Third-party applications

Veterans of the mid-market accounting software world of the 1990s remember the Wild West world of third-party applications. Since MAS90 didn’t have a point of sale module, a dozen small programming shops produced POS modules, with almost universally bad results. One package took ten years off my life. POS stood for “Piece of S…”

What happened when your third-party vendor went bankrupt or couldn’t afford to upgrade the application for the latest version of the accounting software? You got a thorough and well-deserved verbal thrashing from a client. More importantly, you didn’t get paid.

In the cloud accounting world, version updates are continual. At the Sleeter Conference, I asked one cloud vendor what assurance clients have that third-party vendors will keep up with version updates. He responded that even if the third-party vendors didn’t stay up to date, since the accounting package API would never change, the third-party software would still work. Well, maybe the API won’t change in every version update, but I can absolutely guarantee you, the API will change eventually. When it does, your client’s mission-critical job cost system will vanish like a morning fog in the spring. A happy phone call from your client awaits you.

The cloud accounting world depends on third-party applications. Few vendors have developed advanced job costing or inventory features yet, so they tout the virtues of their independent developer networks. Do you, as a CPA, know enough to pick the choice prime rib applications from the deli turkeys? I don’t, and I don’t believe the major cloud accounting software vendors do either.

Manage the risks like the pro you are

Given the four risks above, you can still craft an effective cloud accounting solution for your clients. And, you may be the only one qualified to assist them. Keep these principles in mind.

First, go deep rather than wide. Knowing one package well helps your clients better than knowing a half dozen a little. By specializing in one or two packages, you’ll learn the strengths and weaknesses of each application. You can then compensate for the weaknesses.

Second, demand consideration and acknowledgment of the special risks of the cloud by your cloud vendor. Four packages lead the way in mitigating the risks above: QuickBooks Online, Intacct, NetSuite and Xero. None is perfect, particularly when it comes to dependence on third-party applications, but each of these vendors addresses the risks in some manner. They are the industry leaders. Selecting the wrong vendor will torpedo your outsourced accounting practice. Imagine asking your clients to switch software again after you learn you made a bad choice.

Finally, the cloud isn’t coming. The cloud is here. We must push vendors to make internal control and third-party application reliability top priorities. What client cares if the software is easy to use, when his bookkeeper has just drained his bank account? Despite the confident talk, cloud accounting vendors know their products are far from complete. As a CPA, direct your clients to the silver lining cloud solutions and let the packages that promise our clients nothing but storm clouds vaporize into thin air.