What price ethics? Auditors stand to lose earnings in exchange for integrity

Blake and David explore the high cost of integrity in the audit profession, a survey showing that accounting firms are hiring more non-accounting grads, and why it's so hard for AI startups to be straightforward about the human component. Also: How Apple Card will create headaches for bookkeepers, whether Square is doing just enough or too much innovation, and what's new with Xero's updated App Marketplace. In other news, learn about the winners of the 2019 CPA Practice Advisor Tax & Accounting Tech Innovation Awards, and other riveting headlines from the world of accounting and bookkeeping!


Show Notes

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Blake Oliver: As reported in the journal, CPA firms are recruiting non-accounting graduates in record numbers. 31 percent of accounting-firm hires were non-accounting graduates in 2018. So, almost a third of people who are going into accounting firms now did not major in accounting.
This episode of The Cloud Accounting Podcast is sponsored by BQE Core. As many of you know, I'm all about the niches and niche apps. Putting your business clients in the proper niche app is providing them with a 100-percent solution versus, at best, the 85-percent solution of a standalone accounting app. If you have clients that are architects, engineers, consultants, or lawyers, Core is the app for them to best manage their firm, increase their staff productivity, and ultimately increase their profits.
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Blake Oliver: Welcome to The Cloud Accounting Podcast. I'm Blake Oliver-
David Leary: And I'm David Leary. Blake, happy birthday this week.
Blake Oliver: Thank [00:01:30] you. I wasn't feeling that old until I realized I'm only a year away from being Homer Simpson's age, and I started watching The Simpsons when I was Bart's age-
David Leary: It's been a long time. You know how I found out it was your birthday? We got a review.
Blake Oliver: Oh! 
David Leary: The review wishes you a happy birthday.
Blake Oliver: All right, well, I hadn't seen that! 
David Leary: Let me jump in and read this. It's a five-star review. It's from theJuice711. Now, the Juice ... Maybe OJ Simpson wrote your review? I don't know.
Blake Oliver: That'd be pretty cool.
David Leary: It'd be really cool. Let me read [00:02:00] this out here. It said, "Great accounting story coverage! Blake T Oliver and David Leary do an awesome job at dissecting accounting related news and keep me abreast of what’s going on in the industry. I love the banter and each person's unique perspective. The show is so much fun to listen and I tune in every week. I highly recommend this podcast to anyone in this arena. Happy B-Day, Blake!" 
Blake Oliver: Thank you so much for the birthday wishes and that nice review. Really appreciate it.
David Leary: I like how he said "Blake T Oliver ..." He uses your middle initial-
Blake Oliver: Well, that's good. [00:02:30] I've branded myself as Blake T Oliver on all of my social media, so, apparently, it's working.
David Leary: It's working. That's good. 
Blake Oliver: Yeah, I don't want them to confuse me with the other Blake Olivers.
David Leary: Is there other Blake Olivers?
Blake Oliver: There's like 12. I think one's a lawyer.
David Leary: Do you follow all the Blake Olivers?
Blake Oliver: No, definitely don't.
David Leary: I do. I follow- 
Blake Oliver: You follow all the Learys? 
David Leary: -I follow every David Leary, yeah.
Blake Oliver: So, David, I have a story for you. I was watching Mary Poppins Returns with my son, and I learned what "Leary" means.
David Leary: Yes, yes! My kid ... 
Blake Oliver: There's a whole song about it! 
David Leary: Whole song, I know. [00:03:00]
Blake Oliver: Leerie is a lamplighter. Is that true?
David Leary: I don't know. My kids were losing their minds over that one, so maybe, I guess ... I've not seen the movie, but they were just like ... Yeah, they almost lost their minds, and fell outta their chairs.
Blake Oliver: Like positively or ...? 
David Leary: Yeah, but then they were even more excited because they are huge Hamilton fans, and to find out that Lin-Manuel [Miranda] wrote that song [cross talk]
Blake Oliver: Oh, I didn't know that. Well, that's cool.
David Leary: I think so, yeah. I think he scored the whole thing. I have some QBOA news [00:03:30] that personally involves me. I'm trying to be involved with the PTA at the school. So, I volunteered to do all the reconciliations in QuickBooks Online. I made them invite me as their accountant in QuickBooks Online Accountant. So, I get to experience the world now through the eyes of an accountant with a client.
Blake Oliver: Wow. So, you've been in the world of QuickBooks Online for all these years and you've never used it, from [00:04:00] the accountant perspective.
David Leary: Not in real life, if that makes sense. This'll be a learning experience. Who knows? Maybe I'll give ... I'll give an update on this, how it goes.
Blake Oliver: Yeah, let me know if you need any tips and tricks. Happy to help. 
David Leary: If I decide ... This is insane! I'm doing this for free! I should be charging! 
Blake Oliver: You should be charging. Yeah, exactly. Well, that's good. So, I have some news. I got an Apple Card.
David Leary: Is that the credit card thing?
Blake Oliver: Yeah. Remember, Apple decided they're gonna offer their own credit card? They apparently were [00:04:30] sending out invites, and I got one of these invites via email.
David Leary: Oh, it must be because you're an influencer.
Blake Oliver: Maybe. I don't know. Anyway, I clicked the link and it opened up an Apple Wallet, the app on your phone that has all the credit cards, and all the rewards cards, and whatnot. I have to say, it is the most amazing credit card application experience you will ever have. You go through three screens, and you put in your information, and you get approved right there for an amount, a rate, and it [00:05:00] adds the Apple Card virtually to your wallet on your phone immediately, and you can start using it. You can use it anywhere there's Apple Pay.
Then they send you a physical card that's made of titanium. The way you activate- this card is like literally indestructible. It's thick, and metal, and you activate it by touching your phone to the card, and then that activates the card. There's no number you have to dial. I have to give it to Apple; they've made a terrible experience, a really good one. But [00:05:30] the Apple card is gonna cause accountants and bookkeepers a lotta grief. You know why? No bank feed. 
David Leary: No bank feed. I think I saw a tweet about that already. Somebody said, "This is ridiculous." I think somebody already tweeted about that. 
Blake Oliver: There's no online banking. Goldman Sachs is the bank that is issuing the credit and the card. There's no way to go online and download your transactions. It's all in the phone. You get a summary of your spending and you can make payments and whatnot, but there's not even a way to export it that I can tell. So, [00:06:00] get ready, everybody. If your clients have Apple cards, it's gonna be a big pain in your butt. The interesting thing is it's gonna get more people to use Apple Pay, because if you pay with the card using Apple Pay, not the physical card, but the one on your phone, you get two percent cashback, which is not bad, right?
David Leary: Yeah.
Blake Oliver: If you pay with actual physical card though, it's only one percent. They're obviously trying to get people-
David Leary: Oh ... Nice move, nice move.
Blake Oliver: -to use the virtual card. If you buy an Apple product from the Apple Store, it's three percent. So, I'm gonna, of course, use [00:06:30] it to pretty much only buy Apple stuff, because ... I don't know, I feel like the rewards aren't that great for all the hassle you have to go through, especially if there's no bank feed or anything like that. Apple Pay has limited acceptance; it's MasterCard only, so it won't work at Costco; you've gotta have your phone to pay, if you wanna get all that benefit of the two percent. But, from experience perspective, it's pretty great.
David Leary: It's a start.
Blake Oliver: Yeah.
David Leary: I can go to old tweets I have, from 2011, where they were saying Apple is the [00:07:00] new banks - Apple, Microsoft, Google. These are all the new banks. It's coming true. Why don't we jump into the news? I have a little bit of Intuit news, some California news. We have WeWork news ... I don't know, what kinda stuff you got? 
Blake Oliver: I got layoffs, accounting layoffs at UPS. The AICPA is working to protect CPA licenses with a new initiative.
David Leary: They must've listened to our podcast last week.
Blake Oliver: Yeah, maybe. Who knows? Here's a study that found problems [00:07:30] with audit fees for good auditors. Apparently, if you're a good auditor, you get penalized financially. Then, a shift in accounting-firm hiring; accounting firms hiring fewer accounting majors and more non-accounting majors.
David Leary: Do you wanna start out with Intuit news?
Blake Oliver: Yeah, let's hear the Intuit news. 
David Leary: It was in one email, but two pieces of news - two product lines Intuit is killing, and they both have to do with QuickBooks Online Accountant Edition. One was special app pricing. Essentially, the gist of that was if you were a [00:08:00] QuickBooks Online accountant, it was like having your own little smaller private app store, where you could subscribe to some apps, and you'd get a 20-percent discount on that. The way that model kind of worked was Intuit gets 20 percent of the revenue; the accountant or bookkeeper gets 20 percent of revenue or passes that savings to their client; then the app developer gets what's left. 
Blake Oliver: You also got consolidated billing, right?
David Leary: Yes, and then, that all would appear as a consolidated bill, correct. It was an experiment, and it was super-underutilized. I think they said like less than three percent of all the ProAdvisors were [00:08:30] using it. This is the third time, I think, the Intuit developer team, and Intuit has really tried to play middleman and offer billing. That's the dream, right? You wanna be like Apple. You wanna take 20 percent of every app-
Blake Oliver: Well, and Apple gets 30 percent on the App Store-
David Leary: 30 percent. That's the dream. But I think it makes sense ... I get that. If you're buying a bunch of $4 games on Apple, you don't want a bunch of bills, you just want one stupid bill and just see all that all at once, right? 
Blake Oliver: Yeah. 
David Leary: Think about this [00:09:00] from a bookkeeping standpoint - it's much easier to get separate bills from all your different SaaS vendors-
Blake Oliver: It is.
David Leary: -and to record those into the accounting system than to get one bill, or, mind you, one bill for lots of different clients, and then try to line-item that out? Fundamentally, it doesn't make sense from a bookkeeping standpoint. Never mind, I'm not sure small business owners, or accountants, or bookkeepers, or developers even want it.
Blake Oliver: The model, like the App Store, with Apple, only works if you have to go through the App Store. You [00:09:30] cannot pay for these apps otherwise. What Intuit built, you could go both ways; you could purchase directly, or you could go through the Intuit Store. Of course, the developers are gonna want you to pay directly, because they make more money; they don't have to give Intuit a cut. So, they have no incentive to send you to that store. So, I think that probably would be a reason.
David Leary: I think, for developers, the theory is it's right there inside of QuickBooks Online Accountant; it's right there in front of the accountant's eyes. They get 20 [00:10:00] percent off [cross talk] but I don't know if that ever happened.
Blake Oliver: The question is how much was this actually promoted? How much did they actually put it in front of the ProAdvisors?
David Leary: It's pretty in front, when you're inside of QuickBooks Online Accountant. It's pretty front and center. It's very obvious this program exists. So, it just didn't get the traction. It was an experiment.
Blake Oliver: So, they're killing that. What else are they killing? 
David Leary: They're also killing ... They announced this, I think, at QuickBooks Connect, last year, about a QuickBooks Online- or Online Accountant Edition that integrates with Slack.
Blake Oliver: A Slack [00:10:30] integration for accountants to get their notifications sent from QBOA into Slack.
David Leary: Into Slack, and their conversations with their teams. I think it may have even had some ability to possibly interact with clients. I don't remember the details on it, but less than one percent ... Less than 0.1 percent of the QBOA firms were using it, so it was completely underutilized. But if you remember a couple episodes back, we were talking about how Microsoft teams is bigger than Slack, now. 
Blake Oliver: Slack- in that survey that CPA Trendlines did, that we talked about, on [00:11:00] instant messaging?
David Leary: Yeah. 
Blake Oliver: Slack didn't even show up. It wasn't even reported as significant. First of all, most firms aren't using IM, and then, the ones that are, are using primarily Skype and Microsoft, which would include Microsoft Teams.
David Leary: Like we were saying, most firms are using Office 365, so Teams is naturally going to get traction.
Blake Oliver: Yeah. 
David Leary: It's kind of a mess, right? I get it ... Like 12 months ago, 18 months ago, the coolest kid in [00:11:30] the world was Slack. It's one of those, probably- a product manager or somebody chased that. It was a cool, slick, awesome attention-getting thing. But maybe if there was surveying of the customers, or really looking at the base, you probably would've built something for Microsoft Teams. Who knows? Maybe eventually they do. So, that's also getting pulled out of QuickBooks Online Accountant. Two experiments that Intuit did failed. The nice thing is they're communicating about it throughout there; they were very clear with the numbers, and really [00:12:00] justifying why they had to pull the plug.
Blake Oliver: I got some news on the Xero side. They had an update. So, Xero- I think we talked about that they rejiggered their marketplace. They came out with a new version of it. The app marketplace they've got. Sholto McPherson over at Digital First did a nice write-up on what has changed and improved, specifically. So, it's easier now to search apps by industry vertical. It's also easier to see the up-and-coming apps, like the new ones that are really hot. The app partners [00:12:30] can now update their own profiles, rather than having to send them to Xero, so we're more likely to have more up-to-date information, because Xero is not gonna be updating on behalf of the apps- 
David Leary: Oh, wow! I did not know that was ... 
Blake Oliver: Yeah, they're using a content- 
David Leary: -the process before. 
Blake Oliver: They're using a content management system called Contentful, now. My favorite thing, though, is the last item, or one of the last items that Sholto highlights, which is the profile of each app now shows you how it interacts with Xero and what data goes [00:13:00] which direction. The example is A2X, which is a tool that syncs Amazon sales to Xero and vice versa, so it shows accounts going both directions - that's a bi-directional sync, and then it shows currencies going from Xero to A2X. It shows invoices going from A2X to Xero; tax rates go from Xero to A2X; tracking categories from Xero to A2X. And I love that simple diagram, because it gives you such a good idea of what will actually be syncing through the API.
David Leary: The interesting thing is, in [00:13:30] theory, a diagram like that could be automated - the creation of those, and every single app on every single app card could have those. What the platforms have the ability to do - QuickBooks Online, and Xero - is see the API calls an app is making and which way the data's going. In a way that should just be a default on app cards, instead of putting it ... I've seen some developers create a slide of that data themselves to try to show people what they do, but there's no reason that shouldn't just be kind of public information - here's the API calls this app makes. I have [00:14:00] app news about Square.
Blake Oliver: Okay. 
David Leary: So, Square- they've had an API, but it's very just a payments-type API. If you're a developer, you could use their API to take a payment in your app, essentially. Now what they've done is they actually now have an orders API. What that problem solving for- have you ever gone to pick up some Chinese food somewhere, and you get there, and the person at the front counter has 10 tablets?
Blake Oliver: Yeah.
David Leary: All right, maybe not 10 ... Seven tablets at the front [00:14:30] counter, because he has a tablet for his Uber Eats, and DoorDash, and Postmates ... All those services have all these tablets. Then he's gotta print out the order and [inaudible] it back to the kitchen, where he has to take those orders and type it into his Square cash register to get the order processed. So, they have an orders platform, so all these third-party delivery/ordering services now can just write their orders straight to Square, so you don't need any of those tablets anymore. It all just goes straight into Square [cross talk] point of sale. 
Blake Oliver: Interesting! You know why this is really interesting to [00:15:00] me? Because when I was in public accounting, one of my clients was a company called Ordermark, which is based here in L.A. that was founded by the heir to Canter's Deli, which is an institution here in L.A. It's like THE deli. This guy, Alex Canter, started Ordermark, and it does exactly that. It ingests all of your orders from all of these different ordering platforms and spits them out onto one receipt printer in your [00:15:30] restaurant.
David Leary: I think that's super important, because I was talking to a restaurant owner about this. It's bad enough all these companies are taking 20 percent off the top of the revenue, but then, it's super-inefficient for the restaurant owner to deal with this. To have it just go straight into Square is really, really, really efficient, and amazing. 
Square has a developer blog post about this, but it's really starting to become a bigger play by Square, where they're moving beyond payments, and they're gonna be the center between orders and your accounting system. So, all the customer [00:16:00] interaction that takes place from the order to when you post to the accounting system, Square's gonna try to be the middleman on that. Think about your CRM a little bit, online marketing a little bit, the payment [cross talk] 
Blake Oliver: -this is the thing about Square. I see new features coming out, like multiple new features, every single month and quarter from Square. They are developing so much stuff, so fast, and I'm wondering if they're gonna get to a point where they have simply built this bloated suite of offerings that they just cannot optimize [00:16:30] any- because they're just spread so thin. They're doing payroll. They're doing this order thing. They're doing online stores. It's everything. How can they keep up?
David Leary: It's interesting- it's funny because the same person who founded Square founded Twitter, and Twitter's constantly trying to do other stuff, and the only thing it does well is Twitter. But Square's had some success doing other things and getting out of just that little Square payment-dongle thing.
Blake Oliver: Well, I guess they can do other things, because they make so [00:17:00] much money from their payments platform; just huge amounts of volume. It's okay if they do a bunch of other stuff that doesn't actually make any money. It's like the Google model. Google makes, I don't know, 90 percent of its revenue from advertising, but then they go out and do all this other stuff that really doesn't actually generate profits for the business.
David Leary: What Square's doing, by doing all of this, it's keeping ... If you're using Square as your payments provider, and you're paying ... I don't know what the Square rate is; is it 2.9 percent? [00:17:30]
Blake Oliver: No, 2.75. 
David Leary: 2.75. Then, the typical merchant account salesman comes by, and goes, "Hey, we're gonna give you 2.5 percent!" You're not gonna switch because that EDC terminal for scanning credit cards doesn't do zero percent of what Square does for you in your business, and people will never switch.
Blake Oliver: That's a very good point. A very, very good point. I guess that's the same Google model, too, right? By offering all these other things, they keep you in their ecosystem, where they can advertise to you.
David Leary: Yeah, like an [00:18:00] Apple credit card.
Blake Oliver: Exactly. One last- I’ve got one last story on apps.
David Leary: Okay. 
Blake Oliver: We missed this. We didn't cover this. We were at The Accounting Show - Los Angeles, and CPA Practice Advisor gave out their 2019 Innovation Awards at the event. I thought we should mention the apps that won.
David Leary: Oh, absolutely.
Blake Oliver: Here they are. Biller Genie won. They're a full-time automated accounting assistant that helps small- and mid-sized businesses work smarter and improve cash flow by standardizing and automating invoice [00:18:30] procedures and follow-up initiatives. I have actually not seen Biller Genie. Are you familiar with them?
David Leary: I have not. I mean, I have not used the app, but I'm familiar with ... I think I'm familiar with all these apps, because I helped launch them on QuickBooks [cross talk] 
Blake Oliver: Got it. Automated invoicing ... BQE Software, sponsor of the show, won for BQE Core Intelligence AI, which we featured in a previous episode. If you haven't heard that interview with Shafat from BQE, definitely check that out. Chata.ai - an [00:19:00] artificial intelligence app for financial professionals that uses natural language understanding to find insights in their financial data - won. That's an interesting one. It's natural language processing across your business data. Have you done this one? 
David Leary: Yeah, so think about like if you want to do a SQL query, you'd have to understand how to write the query in SQL language. Well, this way, you can just type it in normal language, or just say it out loud, [00:19:30] and then it's going to go and get that data out of your accounting system.
Blake Oliver: So, speaking of searching, Checkpoint Edge from Thomson Reuters is a winner. They use "artificial intelligence, machine learning, and cognitive computing technologies to search Checkpoint, IRS.gov, AICPA, EY, and Deloitte, and other sources simultaneously." So, helping tax professionals find answers to their questions without having to do all those complicated searches. 
David Leary: They're kind of offering a niche [00:20:00] search service, so you don't have to go to Google. You can use theirs, and it's just gonna be faster and more detailed.
Blake Oliver: The way it used to work was you had to use Boolean searches, so you had to really know how to format your searches using syntax and whatnot [cross talk] that's how Google used to be, too, right? 
David Leary: -this is by what I was talking about with Chata.ai.
Blake Oliver: Exactly. Similar thing - natural language for searching, and then you get the guidance you need. 
David Leary: Got it. 
Blake Oliver: Jirav won for their Financial Planning and Analysis in the Cloud service, "which connects financial and operational data to [00:20:30] help accounting firms and finance professionals create tailored budgets, plans and models quickly. In a highly intuitive point-and-click interface. Jirav has kind of been hot at a lot of the accounting shows recently. It's like those dashboard applications. There's a number of them. You've got Spotlight, Featurly, Fathom ... But Jirav goes further in that it allows you to build these sophisticated financial models that normally you'd have to use Excel to build.
David Leary: Yeah, so I think you're gonna ... If you compare and contrast LivePlan, which [00:21:00] was two episodes ago, we talked about LivePlan ... It's really in the language of a small business owner. Jirav's really going up bigger, and mid-sized, and- 
Blake Oliver: Jirav is built for financial professionals. Actually, that's a very interesting contrast to LivePlan, which was built originally for business owners. Jirav does that modeling and planning, but at a very sophisticated level. You can create a model, where your number of salespeople drives your revenue, and you can say, "All right, if I hire [00:21:30] two salespeople in September, how is that going to change my revenue over the next 12 months, based on how quickly they ramp up? And, oh, by the way, every time I hire somebody, all these other costs waterfall through my expenses." You can build a really sophisticated model, where the drivers are like that.
David Leary: You wouldn't drop a client there. You'd be in there doing that, either with client, or [cross talk]
Blake Oliver: Oh, yeah. Clients would have no idea how to use it [cross talk]
David Leary: -the CFO, at that point. 
Blake Oliver: This is really for folks who are doing virtual [00:22:00] CFO/controller planning stuff.
David Leary: For much bigger companies, or mid-sized companies [cross talk] 
Blake Oliver: Yeah, but for CPA firms offering those services.
David Leary: Services, got it. 
Blake Oliver: The last winner of the 2019 Innovation Awards is XCManalytics as a Service, "which allows firms to measure real-time productivity to make business critical decisions and improve performance by using and aggregating real-time firm data into standard benchmarks, charts and graphs."
David Leary: So, it's like a dashboard play just for accounting firms. 
Blake Oliver: Yeah, the internal metrics like-
David Leary: Internal metrics. 
Blake Oliver: -realization, [00:22:30] all that stuff for firms that love the billable hour.
David Leary: Got it, got it on that one. 
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David Leary: I have a company that's not gonna get an Innovation Award.
Blake Oliver: What's that? 
David Leary: Here we go again, another AI startup fraud.
Blake Oliver: Oh, yeah. We talked about this months ago - that venture capital firm in Europe, MMC, issued a report that found that 40 [00:24:00] percent of companies that claim to use AI are actually faking it, that they don't actually have AI. So, what's the latest?
David Leary: This article was in The Verge, and there's the title of the article, "This AI Startup Claims to Automate App Making, but Actually Just Uses Humans." Essentially what this app did, they took in 40 million- I'm sorry, $30 million dollars in VC money, claiming that they had this AI that would create apps. So, if you need an app created, Blake, you could contact this company, fill out a website, and you'd magically get an app out on the other end. 
Blake Oliver: Oh, that sounds great. Sign [00:24:30] me up!
David Leary: When they pitched this, apparently, they said they were 80-percent there, and then, really, they don't have any AI at all.
Blake Oliver: What's the name of it?
David Leary: It's called Engineer.ai. 
Blake Oliver: Engineer.ai. Okay, so I wanna create an app. I tell it what I want, and it uses AI to splice together the code. That sounds a little bit suspicious to me already.
David Leary: Well, the process was like, "Hey, I need to hire an engineer to build an app. I don't need do that. I could just use Engineer.ai." That's the premise. 
Blake Oliver: So, what were they [00:25:00] really doing?
David Leary: They had basically a little bit of AI to customize, and just quote you a price, based on what features you wanted. Other than that, they basically were using human-powered engineers to do that. The nice takeaway in this article is he ... They do touch on all the stories we've talked about before - the Siri using humans, and Alexa using humans, and all that type of stuff. They had a nice conclusion at the end here, which I'll read.
"But the point remains, humans are required to help AI improve, even when companies are loath to admit it and aren't always transparent [00:25:30] with customers when another person is, in fact, involved in the process. In this case, a whole class of new startups appears to be using AI hype to build new technologies they may not be capable of - or even intent on - actually providing, both because it may be too difficult and because it's easy to pretend otherwise. And these companies are getting more money for it as a result." That's the problem, I think. Companies know that they're gonna get [00:26:00] money if they claim they have AI, so they're claiming they have AI, when they don't have it.
Blake Oliver: Well, and they're going to use the money that they're raising to build that AI, but then they find that, "Oh, it's a lot harder than we thought." I think that's what's happening a lot of the time. I don't think it's complete fraud. I think it's just they're ... It's aspirational. It's growth hacking, right? "We're gonna fake it til we make it."
David Leary: But you'd think after the whole Theranos thing, VCs would just be more keen to this, at this point, or is it just this constant chase- 
Blake Oliver: Oh, no, I think Theranos just made everyone feel like they can get [00:26:30] away with it, right, because-
David Leary: Oh! The opposite happened. I believe you.
Blake Oliver: Yeah. 
David Leary: Got it. Got it. Got it. That's the model. 
Blake Oliver: That's the model. 
David Leary: That's what you wanna follow. Okay, got it.
Blake Oliver: So, I've got some follow-up stories that are related to what we discussed last week with Ben Wann. If you haven't heard that episode, by the way, go check it out. Ben Wann reads a hilarious letter that he wrote in the voice of the AICPA, conceding that the CGMA was a mistake. We talked, on that [00:27:00] episode, a lot about the CPA numbers, the value of the CPA, the future of the CPA, why fewer students are going for the CPA license after they get their accounting degrees. I wanna follow up on that with some numbers.
This is an article that appeared in the Journal of Accountancy called "Report Finds Shift in Accounting from Hiring," which I think is kind of a very understated headline for the stats in the survey. As reported in the Journal, "CPA firms [00:27:30] are recruiting non-accounting graduates in record numbers. 31 percent of accounting-firm hires were non-accounting graduates in 2018, which represents an increase of 11 percent from 2016." So, almost a third of people who are going into accounting firms now did not major in accounting, which I think is interesting, as somebody who majored in music, and then got into accounting. I think there's actually a lot of benefits to being a non-accounting major.
David Leary: Diversifies the thinking, for sure, at these firms.
Blake Oliver: So, [00:28:00] we've got more non-accounting grads. Meanwhile, those CPA firms hired about 11-percent fewer accounting graduates in 2018 than in 2016, and that's 30-percent fewer than in 2014. So, they're hiring fewer accounting grads, more non-accounting grads. My question that I posed on LinkedIn is what does this mean? Does this mean that academia, that the people running accounting programs in schools are failing, that they're not educating the accounting [00:28:30] students in what they need to know to be successful in CPA firms? Is that potentially what is going on?
There was a lot of commentary on this post. I liked what Paul Meisner said. He said, "Interesting discussion. Not sure how the U.S. is, but we have had these studies in Australia. The studies have collected data predominantly from larger firms, which are increasingly becoming multidisciplinary. So by nature, these firms hiring outside traditional accounting grads reflects normal business rather than some worrying trend. A [00:29:00] reduction in grad hiring overall here has been attributed to automation of data entry and outsourcing." I'm still not totally sure what's going on. Is it that the accounting major is not as valuable as it was; that it's not preparing people properly? Or is it simply that accounting firms themselves are doing more than just accounting these days? I think it could be both.
David Leary: No, I think definitely accounting firms are doing more than accounting.
Blake Oliver: But then, the question is, if the whole point of majoring in accounting is to go work in [00:29:30] an accounting firm, or to do accounting, then maybe the curriculum needs to change. If CPA firms are having to go outside of the accounting majors to find who they need, then there's something wrong. We're not teaching people technology. We're not teaching people data analytics.
David Leary: Isn't that what's your 150 credit hours to get your CPA should do is you go take a bunch of other disciplines?
Blake Oliver: You would think that, but there is no requirement to study anything specific to get those extra 30 hours, [00:30:00] so a lot of people just end up, like me, doing bullshit classes to get the credits, because I don't have time to go major in data analytics or something like that. I'm just gonna go to a community college and get the credits I need to sit for the exam.
David Leary: Got it. 
Blake Oliver: Yeah, don't get me started on the 150-hour rule.
David Leary: That was last week's episode. 
Blake Oliver: Yeah. That's interesting, right? That's a big change in the accounting world. I've got some more accounting-related stories here. There's a lot of news in the CPA world this week. There was a story [00:30:30] in Accounting Today, titled "Companies Penalize Audit Firms for Flagging Their Own Weaknesses." There was a study, a report that was issued or presented, I should say, at the American Accounting Association's annual meeting in San Francisco this past week.
The report was entitled "Don't Make Me Look Bad - How the Audit Market Penalizes Auditors for Doing Their Job." This is the crazy stat. If you are a good auditor, and you do your job, and you [00:31:00] report a material weakness in internal controls over financial reporting for one of your clients - if you do that in the course of a year, you will see your average fee total in the following year grow by eight-percent less than it would have been if you had not issued a material weakness. So, if you overlooked the material weakness and just didn't happen to report on it, you would benefit with an eight-percent increase in revenue.
David Leary: It's interesting, I saw a headline today, and I didn't really read [00:31:30] more of it, but apparently people are saying that G.E. might be a bigger fraud than Enron, and it goes back years, and years, and years, and years [cross talk] 
Blake Oliver: -yeah, I saw that news, too- 
David Leary: -how this happens ... Whoever was the auditor of G.E. just ignores it, because eight-percent revenue, your growth revenue ... Eight percent from G.E. is a lotta money.
Blake Oliver: It's a huge client of KPMG. By the way, KPMG has been auditing G.E. for 110 years. A 110-year relationship [00:32:00] there. So, what do you think the odds are that whoever is managing that relationship at KPMG really, really, really doesn't wanna find anything wrong with the financials, or internal controls? Same thing with Enron, right?
David Leary: Yep. 
Blake Oliver: This is the crazy thing about auditing is the solution to all of this is always where it seems to be that the people in the profession say, "Oh, we need to take more ethics courses, or we need to put in an oversight board to make sure that auditors are doing their job." Maybe I'm stupid. I've never been [00:32:30] an auditor, but it seems kind of obvious to me that the problem is that auditors are hired and paid by the people they're supposed to be auditing. Auditors are also supposed to maintain independence in both fact and appearance. But you cannot be independent, when you are getting paid by somebody. You can't be independent from them. That's a financial relationship, and the bigger the financial relationship, the less independence you have.
David Leary: And then the relationships are deeper and deeper. It's not just, "Oh, we're doing their audit." I [00:33:00] might have a whole team doing consulting with them [cross talk] 
Blake Oliver: Yeah, it's possible. Well, there's limits now. Yeah, you may have other business, but even the audit engagement, itself, may be gigantic. This study doesn't even talk about all that other stuff. It just shows that if you are an auditor, and you find a material weakness in internal control, the word gets around and then you're less likely to get hired by other firms. There was a specific example cited. 
They didn't name the firm, but they mentioned a firm in San Francisco. [00:33:30] It was a Big Four office in San Francisco. In one year, one office issued no material weaknesses in the 12 public audits it conducted, while the office of another Big Four firm in the same city reported one material weakness in 26 public audits. The following year, the former firm issued 14 audit opinions, an increase of about 17 percent. So, the firm that didn't find any weaknesses had 17 percent more audits. The firm that [00:34:00] found the material weakness? They had a drop in business of 20 percent. They only issued 21 audit opinions.
David Leary: Of course, because if you're gonna go with - I'm gonna use the word - incompetent auditor, if you think you might have some problems of their books, because that guy's not gonna find them, of course, that guy's gonna get more business.
Blake Oliver: I think of this as like what if teachers had students grading their own papers, or what if, as a student, you hired another student to grade your paper? Who are you [00:34:30] gonna hire to grade your paper? Your buddy, who's gonna go easy on you, right? 
David Leary: True. 
Blake Oliver: It's just a disaster [cross talk] 
David Leary: It's so simple. It's actually so simple, it's insane.
Blake Oliver: The system is just set up to fail ... Until we figure out how to fix this, nothing's gonna work. It's all incentives. It's just the wrong setup from- the foundation is flawed.
David Leary: Just wait til Bernie Sanders, and Elizabeth Warren hear about this.
Blake Oliver: I think this is one of those issues that should not even be politicized in the sense that it's a political- it [00:35:00] can be a political issue, but it shouldn't be ... It should go across party lines, because it just doesn't even make sense, you know?
David Leary: Mm-hmm. 
Blake Oliver: Yeah, so that's my CPA World- AICPA-auditor news for the week.
David Leary: You wanna know what else doesn't make sense to a lot of people?
Blake Oliver: What?
David Leary: WeWork. So, are you familiar with WeWork?
Blake Oliver: Yeah, I had an office at the WeWork on Hollywood Boulevard here in L.A. for at least three years.
David Leary: I think maybe, for some of our listeners may not know, WeWork as a coworking space. They've actually changed [00:35:30] their name to just "We"-
Blake Oliver: Which I find really, really weird [cross talk] That's like Alphabet and Google. I can't get used to calling Google Alphabet. 
David Leary: A coworking space is a place for people- you pay a monthly fee. and you could sit down and use a desk, or you could have a permanent desk there, and you can work. There's, in theory, other like-minded individuals hanging out in that place, and there's coffee, and maybe there's a keg for a beer to drink on a Friday night.
Blake Oliver: They got rid of the free beer, though. They used to have free beer on tap at the WeWorks, and they don't have that anymore.
David Leary: There's a lot of local independent ones all over the country. WeWork is [00:36:00] the McDonald's. Would that be a ...? 
Blake Oliver: They're just massive, right? They're gonna be going public.
David Leary: Correct. There's a really interesting thread by Jason Andrews of Stark Naked Numbers. It's a LinkedIn thread, so we'll post it in there, because there's a big discussion about this. But the numbers just don't make sense. People are tossing out comments like, "Is this the next Theranos?" "The expenses are 2X the revenue."
Blake Oliver: I haven't dug into the financials, but I took a quick peek at this screenshot of the financials [00:36:30] in the IPO filings. So they've got 2016, 2017, 2018 there. Then you can see the six months ended June 30, 2019. The operating expenses, the OpEx, is humungous! It's double- for the first six months of 2019, it's double the revenue.
David Leary: Yeah, and they- half saying that they're a real estate company, but really, they're like a state of consciousness, or like a generation of interconnected, emotional, intelligent entrepreneurs. It's [00:37:00] just really weird speak. My two cents is I think they're super-disruptable. If you think about Starbucks- because, essentially, if you go to WeWork, you sit down, you get your coffee - you have unlimited coffee - you sit at a desk, you do some work, you have some Wi-Fi; maybe somebody you know, you talk to them; you run into somebody you know. It's like sitting in a Starbucks. If Starbucks offered, for 99 bucks a month, a coffee subscription, and had a few cubes, maybe with an extra monitor, maybe one soundproof phone-call booth, it's game over. I [00:37:30] feel like Starbucks could destroy WeWorks in two seconds. 
Blake Oliver: I'm not so sure about the Starbucks idea, but I do agree with you that it's not a particularly sticky business model, because these are memberships. When I had my office at WeWork, I paid a monthly fee to have my dedicated office space. You could also just have a desk in an open area, or you could have a hot-desking membership, where you just go in, and you get assigned a different desk. They're all different prices. There's different sizes of offices. The key is their memberships that are month-to-month. I [00:38:00] could cancel this month and pay- I think I could just pay for September and be done, because it's August now, which goes to your point that it wouldn't be that hard for me just to go to some other coworking space and sign up there, because there's not a lot keeping me at the WeWork other than the convenience of it.
David Leary: Yeah, and that's my argument, because I've rented desks at coworking spaces before. You're paying $300 a month for a desk. Sometimes, I'm like ... I don't know [00:38:30] if this experience is much different than working in a Starbucks or someplace else with Wi-Fi [cross talk]
Blake Oliver: I had my own locked office. The Wi-Fi was gigabit ethernet, super-fast. They have a printer there that you can use on demand. There's a lot of benefits to it, and I really, really liked my WeWork experience. But these losses are crazy. I mean, you could argue they're acting like a startup, so they could, at any point, raise rents, or raise membership fees, and reduce operating expenses, and become more profitable. Regardless [00:39:00] of that, my biggest concern is- or the one that I brought up on social media is if these memberships are all month to month, and WeWork is signing 10-year, 20-year leases on these office buildings, if there's a recession and they lose their members, they're screwed, because the members can just- they can't afford their memberships anymore, they just cancel-
David Leary: For sure, they'll go to Starbucks.
Blake Oliver: Exactly. But then, Danny Crichton, who is the Extra Crunch Executive Editor at TechCrunch, was kind enough to reply [00:39:30] to me and explain that, in the S-1, which I didn't read, WeWork emphasized how they increasingly have large enterprise customers who sign multi-year deals, which is interesting, because when I was at WeWork in- I think I ended my membership in like 2015-2016. It's been three-four years ... When I was there, I don't recall seeing hardly any enterprise type customers; no Microsofts, no Googles. It was all small startups. It was all independent people. Apparently, WeWork says [00:40:00] that now up to 40 percent of their memberships is large enterprise companies that are renting space for their employees, and these companies have multi-year deals with WeWork.
David Leary: It's kind of like what happened to South by Southwest. South by Southwest was young entrepreneurial people connecting. Then, all the enterprise companies discovered it, and now South by Southwest is a big festival of enterprise companies dropping millions of dollars, advertising to each other.
Blake Oliver: That's a great analogy. So, that's all I got this week.
David Leary: If any of you work at WeWork, [00:40:30] run your accounting firms from WeWork, be interested to know your thoughts on that, in comparison ... Could you do this at a Starbucks? Would it be more convenient? What happens if they double your rent tomorrow, because now that they're a public company, they're accountable to shareholders?
Blake Oliver: And are you seeing, as WeWork claims, this larger enterprise segment using WeWork? Because, if that is true, then I have a lot more confidence in WeWork than I would if they were just marketing to small startups, and small firms.
David Leary: If anybody has information about WeWork, and they wanna contact you, Blake, what's [00:41:00] the best way?
Blake Oliver: I am on Twitter. I am @BlakeTOliver. And you're also welcome to connect with me on LinkedIn. If you do, just make sure you add a note to that invite, so I know who you are and where you came from. How about you, David?
David Leary: Contact me @David Leary on Twitter. You can also contact me on LinkedIn. I'm totally fine with the blind connections with no notes.
Blake Oliver: Yeah, you just accept all of them? 
David Leary: I accept all of them.
Blake Oliver: Well, that's how you build up those connections so that you can be defined as an influencer, David.
David Leary: Well, this is how I know who all the [00:41:30] accounting coaches are.
Alexa: Sorry, I don't know that one. 
Blake Oliver: Oh, Alexa just decided to charm in ... Chime in ... 
David Leary: And on that note, bye, Alexa- 
Alexa: Sorry, I'm not sure about that. 
Blake Oliver: Yeah, she has to work on her understanding of the podcast.
David Leary: Well, a human has to go process what I just said now.
Blake Oliver: Yeah, exactly.
David Leary: And give you the response.
Blake Oliver: Well, David, great speaking with you. And I'll see you again next week.
David Leary: Later.
Blake Oliver: Bye.

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